Corporate Innovation/Interview/

Inside the new $300m BMW iVentures fund

How the German carmaker went from "dumb money" to top quartile performance over 7 years.

By Maija Palmer

Sohaila Ouffata, MD of BMW iVentures Europe

Sohaila Ouffata, managing director of BMW iVentures Europe, has been on a steep learning journey over the last few years.

BMW started systematic corporate investing in 2011 with sporadic deals done from its balance sheet and was battling a reputation of being just corporate “dumb money” trying to muscle in on VC deals.

Meanwhile, Ouffata, who joined in 2014, has also been finding her place in the male-dominated VC industry as a woman of Moroccan background.

Luckily things panned out. Early investments in companies like EV charging network operator ChargePoint and location app Life360 resulted in good returns as the companies listed on the stock market.

By 2017, iVentures was spun out as its own independent corporate venturing arm with a €500m fund to spend as it wanted, with no vetos from the parent company. The fund invested in a number of deeptech companies, including parts manufacturing platform Xometry and AI-chipmaker Graphcore, many of which now have unicorn valuations.

“Two portfolio companies have gone public and seven are preparing to. Normally you have just one or two stars in a portfolio, this performance puts us in the top 25% of our vintage year,” says Ouffata. It has helped silence some of the VC critics that had initially baulked at coinvesting with a corporate.

“€300m is the fund size we feel fits for our investment targets.”

iVentures has been through a recent period of change, though. Ulrich Quay who led the firm since inception recently left, together with Tobias Jahn, managing director in Europe for the last 4 years. iVentures has just raised a new $300m fund, moving to a more explicit focus of investing in sustainability, something that Ouffata began championing two years ago. She sat down with Sifted to talk about iVentures’ new direction and what she has learned about CVC investing:

What is behind the BMW iVentures move into sustainability investments?

Sustainability is key in our third wave of investing. When we started in 2011, our focus was on new and digital mobility companies. The second wave was deeptech with a strong focus on themes such as autonomous driving and industrial tech. Two years ago, we started to discuss the future impact of sustainability on our investment practice industry and economy. Back then we already clearly perceived a change in consumer mindset, increasing regulation around sustainability and the steering of all financial asset classes by ESG criteria. We, therefore, anticipated this substantial shift to sustainability and have been focusing on companies with a clearly sustainable approach and vision.

All of the big Fortune 500 companies have made their carbon neutrality goals public. As a consequence, they may adapt their business model and also undergo a transformation process, i.e. by implementing new carbon-reduced technologies and by changing their work-flows and processes in the value chain.

Sustainability investing is not about charity but focuses on responsibility. We want to find purpose-driven tech companies with a sustainability focus and invest successfully. We are still looking for innovative, cutting-edge companies creating unique technologies. We invest in companies that have reached a product-market-fit already, address a large potential market and have a top-notch team that is strong in execution.

What are some of the technologies that you are investing in?

One company we have invested in is Natural Fibre Welding — 100% natural, plant-based and recyclable alternative to leather, yarns and foams. They have managed to produce high quality plant-based leather, which feels like a premium product. It can go into cars but also be used in other industries such as fashion.

Another very exciting company is Boston Metal. It is creating sustainable steel at affordable cost. They produce steel out of renewable electricity, at a high quality and cost competitive to regular steel. This is relevant to the car industry because 53% of a car is steel. If you can lower your CO2 footprint there it can have a big impact.

Another company is Purecycle, they produce virgin-like-plastic from recycled waste. The problem with plastic recycling currently is that the quality is very poor, it is a very dark plastic that you cannot use for many products. But Purecycle has developed a chemical process where they can produce a high quality recycled plastic that is transparent or white. There is no smell and it can be used in daily items like shampoo bottles. There is about 140 kilogrammes of plastic in a car so this is relevant for OEMs.

Another example is Prometheus Fuels. They produce carbon neutral fuels from atmospheric CO2. They capture carbon and use a chemical process to turn it into ethanol and finally into gasoline. Synthetic fuels are very interesting because no matter how fast we will switch to electric vehicles, you will still have enormous amounts of cars with internal combustion engines on the road for some time. Synthetic, carbon neutral fuel technologies are not new but in the past, they weren’t cost competitive and energy intensive to produce. Prometheus have managed to get the cost to be comparable to standard gasoline, which makes it attractive for the mass market.

Would you invest in technologies not directly linked to cars?

Yes, for example we invested in Turntide Technologies — a producer of cost-and energy efficient electric motors. These motors are used for example in HVAC systems for the heating and cooling of buildings. There are millions of these motors around the world but there hasn’t been a lot of innovation around them. Turntide added a software component that allows the motors to run very efficiently and therefore contributes to massive energy savings.

Around ten years ago, autonomous driving was the next big thing — and predicted to come to market around 2020. In the meantime, its complexity has become obvious and expectations in the market have deeply changed.

Does anything else change with this new fund?

No. We’re still focusing on Series A and B and we still have BMW as the sole LP.

The fund is smaller than the previous one you raised. Given the success of the last fund were you not tempted to go bigger?

The size of your fund always correlates with the stage you invest in. Nobody would invest out of a $500 million fund into lots of seed-stage companies. So €300m is the fund size we feel fits for our investment targets.

Did the car industry make a mistake in pursuing autonomous driving so aggressively — something they are now having to pull back from?

There were a lot of autonomous driving deals that we never touched because the valuations were crazy and because our BMW engineers were able to evaluate the technology and tell us that the technologies weren’t quite what the companies were pitching. Around ten years ago, autonomous driving was the next big thing — and predicted to come to market around 2020. In the meantime, its complexity has become obvious and expectations in the market have deeply changed. In certain areas — i.e. on limited highway distances, autonomous driving will be possible in the near future but widespread autonomous driving will take a lot more time to happen. It’s a very, very capital intensive space, so if you don’t have almost unlimited access to capital, it’s kind of impossible to finance this through your own cash flow.

But I would always say autonomous driving had an extremely important influence on the whole industry. We have seen a substantial shift to digitalisation also fostered by autonomous driving. It forced a more open mindset and more partnership-oriented activities in the automotive world. The problem was so huge you had to rely on partnerships and it has transformed the carmakers’ way to cooperate with suppliers and competitors. This mindset is changing. We need to become even more open and willing to work with startups, and treat them in a way as equal partners.

You create strategic value by investing in the best-performing companies, in the outliers that are truly shaping the future of the industry.

How does iVentures work together with the BMW parent company?

We try to share what we learn about new market areas more widely. We create deep dives and short market reports, we create watch lists of companies that we want to follow and we distribute our deep-dive reports very widely in the BMW Group organisation. We host knowledge calls where we share these, and are present at management’s meetings where I encourage people to share that knowledge.

What advantage do you get back from the BMW relationship — apart from the funding?

Our CVC team, both here and in the US, are based at BMW tech offices where there are a lot of engineers that do trade scouting as their main job. We collaborate with them as much as possible, particularly consulting with them on tech diligence.

As an automotive company we also have the capacity to verify technologies and test technologies in real word setups, and can detect when a startup is really ready to invest in. It is part of the due diligence.

Should a CVC fund have a financial or strategic focus?

My philosophy is that you create strategic value by investing in the best-performing companies, in the outliers that are truly shaping the future of the industry. Not by investing in a bunch of companies, which may be super relevant for one particular business unit but are not driving the change in the entire industry. This is why I always argue that corporate venture funds need to have a financial focus too.

Also, you can’t be on the cap table with completely different goals to the other investors. The founders want to maximise the returns of the company, the investors want to maximise the return of the company. You can’t be there just wanting to maximise your individual corporate agenda, which, by the way, often changes when the management at the corporate LP changes.

What have been some of the hardest challenges at BMW iVentures?

There is a big difference in attitudes between US and European VC. Silicon Valley-based investors loved working with us from the get go. They were super pragmatic and said “Ok, we’re about to invest in deep tech, such as autonomous driving, with absolutely no understanding of the space. If BMW iVentures does due diligence and they do the deal, we’ll coinvest with them.”

“I absolutely don’t look like an automotive person.”

They saw the core competencies that we have very clearly. But a lot of European investors saw us a new kid on the block when we started. They didn’t buy the idea of us being an independent fund with financial targets. Following the performance of our portfolio, those discussions changed completely, we don’t have those conversations anymore.

On a personal note, I’m a female VC — I absolutely don’t look like an automotive person. I would love to see more diversity in the industry. Tons of studies show that women invest differently, they have a longer trajectory and focus more on the impact on society.

Maija Palmer is Sifted’s innovation editor. She covers deeptech and corporate innovation, and tweets from @maijapalmer

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