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Venture Capital

7-Eleven’s Venture Firm Gets a Brain Freeze

Venture arms of companies are making more deals than ever. But what happens when the principals of those units leave?

Silicon Valley startups were redefining convenience, and 7-Eleven Inc. executives were nervous.

Instacart Inc., Postmates Inc. and others were winning customers with their hassle-free mobile apps, enabling people to order, pay for, and arrange delivery of milk and other must-have items without ever leaving their couches. The new companies had greater inventory—the startups don't physically stock the items themselves—and delivery times of mere minutes in some cities.

"We thought, 'Hey, we want to get close to these companies,' " said Rob Chumley, a 7-Eleven vice president who created the strategic investing group 7-Ventures LLC. in 2013. He and co-founder Raja Doddala made regular pilgrimages from Dallas, their headquarters, to the Valley to strike partnerships for 7-Eleven with DoorDash Inc. and Postmates. They also backed a half-dozen startups.

Chumley said when he started the group, it was tough to establish credibility. "Nobody wanted to talk to us," he said, of the early meetings he had with venture firm partners and startup founders in California. "It was like, 'What? 7-Eleven has got to be one of the lowest tech experiences out there.' "

Now, the group faces a crisis: Chumley left the company late last year, and Doddala departed in March. 

A 7-Eleven spokeswoman confirmed the departures to Bloomberg but declined to say whether the venture arm was ceasing operations, how many employees remained in the group and whether replacements were being sought. There's other turmoil at 7-Eleven's owner, Seven & i Holdings Co.: Its Chairman and Chief Executive Officer Toshifumi Suzuki stepped down earlier this month. 

The exit of two investors in a corporation of more than 10,000 is rarely a cause for pause, but corporate venture is different. Teams are small: 75 percent have five or fewer employees, according to the 2016 Global Capital Venturing report. Most units report directly to the chief executive officer or chief financial officer. Those employees typically spend several years building relationships and studying their industries to become known as the company's startup point person interested in specific technologies. When these investing partners leave a company, their connections and knowledge usually leave with them.

"Venture is a relationship business. The heads [of investing] become the public face of the brand," said Toby Lewis, head of research group Global Corporate Venturing Analytics. Lewis declined to comment on any specific corporate venture groups but said in general when the heads of a corporate unit leave, "it's a big deal."

Traditional venture firms have it easier. They have more partners and associates who can pick up responsibilities, and the firm's strategy of investing for financial return requires little interpretation.

The shakeup at 7-Ventures is unlikely to cause major pain in the startup or venture world. The group backed loyalty rewards app Belly Inc. and key printing startup KeyMe Inc. during its short tenure, and the amount invested in each is small. Business as usual continues at these startups which each have a half dozen other investors besides 7-Ventures. But as corporate venture investing reaches a frenzy unmatched since 2000, the 7-Ventures departures could serve as an interesting test case on whether a newly minted corporate venture brand can survive when the torchbearers leave.

Fearing startup competitors, established corporations have plowed billions into fledgling ideas in recent years. The number of corporate investment deals has doubled in the last five years. In that time period, the number of companies with venture units increased 79 percent; there are now 801, according to GCVA. 

More non-tech companies are creating corporate venture arms, hoping to stay relevant. Sesame Workshop, the creators of Sesame Street, Jet Blue Airways and Campbell's Soup have all created standalone venture investing programs this year.

Unlike partners at mainstream venture firms like Sequoia Capital and Benchmark, corporate VCs aim to connect their company's strategic goals with the ambitions of startups. At Sesame Workshop's fund, managers said they'll target education, nutrition and community-oriented startups. JetBlue's focus is geolocation, big data, virtual reality and artificial intelligence. And for Campbell's Soup, this means finding and funding healthy food startups.

"The theory is that by acting as an investor you will be able to see an Airbnb or an Uber on the rise in your industry," GCVA's Lewis said. "The risk that corporations talk about is of being the next Kodak or Blockbuster."

The risk that companies don't talk about—at least not publicly—is what happens to those programs when the leaders of them leave.

The Walt Disney Co's venture group Steamboat Ventures sliced the pace of its dealmaking by more than half after two of the three Los Angeles-based partners left the firm in 2012. Steamboat Ventures, which said it was refocusing on startups in Asia, did one deal in 2015, and none so far this year, according to data compiled by Bloomberg.

A few months after Intel Capital's Arvind Sodhani left the company, new President Wendell Brooks began the process to sell as much as $1 billion of shares it holds in hundreds of companies, people familiar with the matter told Bloomberg in March.

In 2001, Hewlett-Packard's dealmaking slowed to a trickle for 13 years after a leadership change. In 2014, with a roster of new investing partners, including longtime venture capitalist Ray Schuder, Hewlett-Packard Ventures formalized the program and started anew. It has bankrolled about a dozen companies during the past two years, including software company hardware incubator Playground Global LLC. and mobile platform company Mesosphere Inc.

While 7-Eleven isn't saying what's next for its venture group, other corporate investing arms that have experienced executive turnover say the transition is hard.

"Taking over relationships takes time," said Mikihiro Yasuda who heads U.S. investment efforts for Japanese mobile operators DeNA Co. Since Principal James Riney left seven months ago to lead 500 Startups Japan, the three-person group has worked overtime to maintain existing relationships with companies it has backed and continue courting new ones. They're still looking for Riney's replacement, Yasuda said.

"This business is human to human," he said. "It's not something you can transmit in an e-mail."

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