GM Ventures Growing Up—A Quick Look at How it Operates and How Deals Work

5/24/11Follow @bbuderi

General Motors launched its first venture capital fund—GM Ventures—last summer. We covered the news, and in December, still early in the $100 million fund’s life, I did a Q&A with GM Ventures president Jon Lauckner. At the time, the fund had invested in just two startups—battery maker Sakti3 and Bright Automotive, which offers a new approach to hybrid electric vehicles. GM Ventures was really just getting going—and Laucker was limited in what he could tell a reporter.

Now, things have changed somewhat—and the fund is definitely heating up. It has closed four deals—with Powermat (wireless charging technology) and Envia Systems (materials for increasing the storage capacity of lithium ion batteries) joining the initial two. Four more have been approved and should be announced relatively soon. Another pair of GM investments that predate the founding of GM Ventures, Coskata and Mascoma (both biofuels companies), were also transferred over to Lauckner’s charge. All told, GM has put about $30 million into those six companies, with investments typically running between $3 million and $7 million per deal. And Lauckner says a half dozen or so more deals are in the works.

Meanwhile, the GM Ventures head and his colleagues seem to have settled into a groove. They are swamped in deal flow—more than 350 prospective deals have already crossed Lauckner’s desk—and finding that being associated with GM gives the firm some real leverage that not even the best traditional venture funds can match. This includes the ability to help startups evaluate their technology on highly sophisticated equipment in one of GM’s vast R&D operations, and to offer a mega customer in General Motors if things pan out.

I recently sat down with Lauckner in GM Ventures’ headquarters in Detroit’s Renaissance Center. I’ve long been fascinated by corporate venture arms—most of which quickly fade away due to such factors as shifting priorities within the parent company and the difficulty of adapting to changing conditions in the fast-paced startup world. The presence of a corporate investor like GM might even discourage orders from rival automakers looking at a portfolio company’s products or technology, for instance.

In short, it’s early days for GM Ventures. But Lauckner believes he and his team have some special things going for them that give the fund great power and, presumably, longevity. Some are quite different from what traditional venture firms bring to the table—and, if he’s right, provide an added dimension to the innovation ecosystem that should help get new technology to market, faster.

Lauckner and I spoke about the mandate for GM Ventures and how it evolved, what the firm looks for in startups, and how deals actually work. Here are highlights from our conversation.

Why GM Ventures? Why Now?

“After we came through bankruptcy, the order was this is a new General Motors and we need to do things in a different way,” Lauckner says. The world is also different. “The cycle of how long a technology lasts is getting shorter and shorter,” he says, and it was readily apparent that even a gigantic company like GM couldn’t keep up with the pace of change all by itself, and certainly couldn’t develop everything it needed to stay competitive in house.

Those two realities are embodied in GM Ventures. The idea is not to go out and just make money for GM by finding the next Facebook, say. The mandate is to invest in companies that give GM a leg up on creating the next generation of cars and trucks—making them safer, more efficient, more user friendly, more cost-effective, and all the rest. “It’s the idea that we’re creating a competitive advantage for the company,” says Lauckner.

Profile-Raising Deals

A deal with GM Ventures, much like an investment from a top-tier venture firm, can put a young company on the map in a big way, Lauckner argues. “We can raise the profile of a startup quite a bit,” he says. “If we’re very interested in the technology, I can almost assure you other people will take an interest in it.”

Test, Baby, Test

Lauckner says GM Ventures can help startups it invests in gain entry to GM’s tech center, where they can use the world’s most sophisticated equipment to test, evaluate, and develop their technology. “That’s something an individual venture capital firm can never bring to a company,” he says.

For example, GM keeps a registry of the performance of a variety of vehicle batteries. That means that a battery startup backed by GM Ventures (it has invested in Ann Arbor battery maker Sakti3, though Lauckner didn’t refer to the startup specifically) can test its batteries against those of other companies. GM keeps the identity of the benchmark companies secret so as not to violate confidentiality agreements. However, says Lauckner, it can use the test results to identify the top four or five things its portfolio company needs to work on to be competitive. “That’s hard to come by,” Lauckner says.

GM as Investor—and Customer

This is a key point Lauckner believes sets GM Ventures apart—and he said the same thing in our earlier interview. “What we’re doing that’s different, we’re combining money with the idea that we want to be a customer of the company,” he says. “If we decided to invest in the company, it means that there is a high probability that we will use the company’s products.”

How a Deal Works

I pressed Lauckner for specifics on how a deal with a startup might work. To answer, he gave a basic deal scenario. “Sometimes a company already has a product in the market—but not for automotive use. In other situations, the company is still working on commercializing its technology and finding its first customer,” he says. In either scenario, a typical deal might have the startup and GM agree to jointly develop the technology for vehicle use, including such things as “hardening” or modifying it to meet automotive requirements.

The agreement would further specify that if the development of the technology worked out, GM would employ it in its vehicles and get a short period of exclusivity. In some cases, says Lauckner, “GM might get a special price to partially offset the higher cost of the technology before demand ramps up. The point is, a commercial agreement where GM steps forward to be a high-volume customer, when a company and its technology are still at a very early stage, is an additional source of value besides the investment itself.”

Biggest Surprise

“I’m surprised by the sheer depth and breadth of technology that’s out there with potential application to automotive. It’s amazing how much is out there,” Lauckner says. He calls it “very encouraging” for the future.

Bob is Xconomy's founder and editor in chief. You can e-mail him at bbuderi@xconomy.com, call him at 617.500.5926. Follow @bbuderi

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