When people hear the term “Venture Capital,” they often envision a Silicon Valley startup working on some technological innovation and receiving a cash infusion from the venture capitalist. While this is often the case, it’s not just limited to this part of the technology space. Automation for process, hybrid, and discrete manufacturers and producers also includes innovative startups and early-stage companies in need of capital.

Why it Matters

Innovation does not just happen among the primary automation suppliers. Innovative ideas need nurturing and time to prove their value. Companies like Emerson can help provide capital and expertise to nurture these innovations happening in these early-stage companies. This is where Emerson Ventures comes in.

I’m joined by Emerson’s Thurston Cromwell to discuss Emerson Ventures and how it helps drive innovation forward.

Three Takeaways from the Podcast

• Emerson Ventures enables access to innovation and fosters its commercialization
• The unique approach of working closely with the Emerson businesses first to identify innovation opportunities that solve real problems enables greater success in collaboration with early-stage companies
• Collaboration between Emerson and the company receiving VC funding is enhanced because with an invest first, partner second strategy, the individual business has been part of the entire process and is best suited to consult and advise

Give the podcast a listen and visit the Emerson Ventures section on Emerson.com to learn more.

Transcript

Jim: Hi everyone, this is Jim Cahill with another Emerson Automation Experts podcast. Innovation needs capital to convert ideas into action and results. Private venture capital plays an important role in fostering this innovation. Today, I’m joined by Thurston Cromwell to discuss Emerson Ventures, whose mission is to advance emerging industrial automation technologies through early-stage venture capital investment.

The focus is on supporting industrial software solutions and startup founders with the potential to solve real manufacturing and production automation challenges, and on fostering partnerships to gain strategic insights into emerging industrial technologies, adjacent markets, and industrial disruptors. Welcome, Thurston.

Thurston: Thanks, Jim.

Jim: All right, let’s kick things off by giving our listeners a little flavor of who you are and what is Emerson Ventures’ role inside Emerson when it comes to backing and shaping the next generation of industrial automation startups.

Thurston: Sure. Emerson Ventures was born about five years ago when our leadership saw the need and opportunity for us to form a corporate venture arm that could help our businesses gain access to innovation via the route that currently wasn’t available. There’s a ton of innovation that goes on at Emerson and that can happen and new product development, R&D, iterations on current products, but there’s a unique opportunity for us to invest in and partner with early-stage technology companies that are of high strategic value and interest to our businesses and allow that to be a different conduit by which innovation can come into Emerson.

That’s why the mantra of Emerson Ventures when we started it and still to this day is access to innovation and how we encourage all of our businesses to think about the venture initiative when considering our great businesses.

Jim: That seems like an important aspect that not everything is developed internally, but we’ve got our eyes out for what’s going on there externally. So, can you paint a picture of what industrial innovation means at Emerson today on the plant floor, like in the control room, and inside Emerson Ventures? And why does this moment feel different from past waves of automation?

Thurston: Well, I’m not sure it necessarily feels different than past waves of innovation and opportunity and automation. Obviously, the AI mega trend is before us and part of everything that’s being considered by both our businesses and the startups we’re either currently partnered with or thinking about partnering with. So that, to your question, I guess there probably hasn’t been that big of a wave crashing at one time so seismically. So good point there.

But as far as our process is concerned, whether it’s AI related or not AI related, The process really hinges on our businesses, our businesses’ great brands, and their positioning the market, their positions as stewards of industry, and us having a very unique perspective on what could be needed or provided for in the market that would be supplementary to what we have, that at the end of the day could help an Emerson business now or in the future better serve a customer.

When we have initial discussions with our businesses about early-stage companies that may be of interest to them, we always start with that initial litmus test, which is, are they of strategic interest? And then sometimes I’m asked, “How do you define strategic interest?” And it’s that litmus test that I just mentioned, which is, could they help you better serve a customer? And if we keep the construct that simple, it helps us get to the right answer of, this could be interesting, this probably isn’t interesting pretty quickly.

Jim: That sounds like a great filter if you just do it because it sounds cool, but maybe not owe that much value to customer, we’re just kind of wasting everyone’s time there. So that seems like a real logical thing to do. Emerson has committed significant capital to Emerson Ventures to advance industrial software and enabling technology. So, how do you decide which themes are must-wins versus nice-to-watch on your investment roadmap?

Thurston: Well, the nice thing about our program, and once again, the benefit of keeping it simple is we rely on the expertise, the knowledge of our businesses as the start of the flywheel for our process. So we would be in terrible shape if it was Thurston out there just on our own with our little team trying to turn over rocks and see if anything is interesting and is going to solve a technology problem for Emerson. That would be a disaster that would go down in flames pretty quickly.

So the nice thing about our program is our process starts every quarter with the technology and strategy leaders of our business groups that are advising me and our team as to, at that given moment, that given quarter, what meets that, what have they identified on their strategic technology and innovation roadmaps? What have they identified as being technologies of interest that could best be served by the venture model?

And we’ve been working with our business groups long enough that they know what fits that paradigm, and they can give us really good direction of what to go look for. And then we go out and do our research, make our contacts, work our network, and try to come back to them with a spectrum of opportunities that fit the mandate they’ve given us.

Jim: Yeah, that makes sense that you have the people out there looking for it and feeding and you supply the process on how to, look at that opportunity and assess it and that kind of thing. feel the same thing if I tried to be the expert of all things and podcast about it. That’s why I have guests that are very brilliant in their areas.

When a founder in industrial or energy automation asks, “Why take strategic capital from Emerson versus a traditional venture capital firm?” What is your candid answer today and how has that answer changed as this technology that all around is accelerating?

Thurston: Whereas we’ve had the former Emerson Ventures initiatives in place since 2021. Prior to that, we had done a few one-off venture-style investments dating back probably to 2018. And over that time, you make a good point, the perception of corporate venture has evolved a good bit. In the old days, corporate venture arms were perceived as being clunky, unwieldy, taking forever to make a decision, taking forever to get to a closing table. And then in some instances, coming with an unrealistic set of demands and expectations as to what they should get beyond just being a good partner to the company with an equity position on the cap table. And 10 years ago, I think corporate venture kind of had a pretty dodgy reputation. And most founders probably said, “You know what, the pain isn’t worth the benefit.”

And I think corporate venture has matured a lot over at least the last eight years I’ve been heavily involved. And I think now, especially given some of the fluctuation in the venture market over the past few years and some struggles that traditional financial VC firms have had, a lot of zombie firms out there that have depleted their capital but are still around because they haven’t had the exits to return capital to their limited partners. I think founders are realizing the benefit of sophisticated, well-structured, efficient corporate venture arms.

And then I think in the unique category of industrial technologies where we play, we even have a greater advantage and a greater value proposition that we can present to founders because the customers that we have are probably some of the least likely organizations to adopt unproven early stage technology by immature companies that don’t have the backing, the balance sheet, the experience to be perceived as a sure thing for delivering the technology or the value proposition they’re promising.

So one of the things that we can sort of uniquely do is, especially through our model, which is invest first, partner second, if we can get to that partnership level and we can be the conduit by which the early stage company can find access, they’re in markets, then in the industrial space, we really do provide a differentiated value proposition.

Jim: Yeah, you’re right. Just given our industry, patience is required and our customers there aren’t going to just jump at this flavor of the month or something because of the seriousness of the business we’re in controlling processes. It’s very, you know, it takes that kind of patience.

Thurston: I always joke that the bar for, three guys in their pajamas who have written some code that’s going to go on your phone and be a silly game or app is at one level. If those three guys want to write some code that’s going to go into a refinery, it’s a whole different level.

Jim: Yeah, that takes a little bit, a lot more there, I’d say. So I guess for our listeners, walk us through the moment you first get excited about an industrial automation startup. What signals in the technology, data architecture, deployment model make you think this can really change how plants or assets run?

Thurston: Well, going back to our process, we’re usually engaging with those companies after having the directive from a business unit to find X, Y, or Z. And once we think we have found that, once we’ve had that refinement of our hunt with our businesses, and once we’ve engaged a few players in that space, we’re always because we start with the premise of looking for a technology or a solution that will solve a problem, we’re not necessarily just taking what I like to call screeching missiles of inbound opportunities and trying to scurry to figure out if we can find a business that might think this is interesting.

So as a result, having flipped the process probably much differently than other, certainly financial VCs do, we kind of start at the beginning with an ecosystem and then we start comparing the criteria that our business leaders have defined for us as the differentiating criteria. And then we start measuring them against each other and through a series of technical calls that include the subject matter experts, we can start comparing and contrasting.

And it’s funny, even for me, a non-technical person, when you hear something interesting and unique for the first time, and you’ve heard three groups of people try to solve a problem one way, and it all sounds the same, and then you hear one where someone’s coming forward with something that sounds really unique and interesting. Even if I don’t understand the deep technical aspects of it, your ears do perk up and you kind of say, that’s interesting. When everyone’s going this way, they’re going this way. appearing to come to a much more elegant solution.

Jim: Yeah, that sounds like the essence of innovation, that one that’s zagging while everyone else is zigging on it. So that’s at least, yeah, got to perk your interest that it’s that different. Got to be something there. You invest in areas like Industrial Internet of Things (IIoT), edge computing, and AI for operations. Where do you see the biggest current automation gaps in the field and what kind of founders or technologies are best positioned to close them?

Thurston: That’s a difficult question. You know, The companies in our portfolio that are the most successful and have the founders that are the most, or at least succeeding early in solving those problems, are the ones that have very close proximity to either companies like us, including some of our competitors who maybe who actually are co-investors in several of our portfolio companies, and they’re actively engaging that feedback loop. with their strategic stakeholders, whether they be investors, customers, or partners. And those are the ones that have sort of the nimbleness that allows them to adapt to the product market fit challenges that are almost evolving on a daily basis, especially in this era of accelerating technological change.

The companies that may have more challenges in that regard are the ones that may have tremendous subject matter experts as founders, great technical leadership, and who go into a bunker and say, “I think I know what the market needs. I’m going to build it.” And when they come out of the bunker, it may be a complete finished product, but the hockey puck has moved to the other end of the ice. And all of a sudden, they’re trying to adapt what they’ve built to where the market is. And that’s when I think some early-stage companies struggle with that lack of adaptability and that feedback loop.

Jim: Yeah, I think that start to finish and not iterate or get any feedback along the way is a risky path to go because you’re right with the way things move so quickly, you may totally miss the opportunity by trying to have it finished and perfect there. For early-stage teams building IIoT edge AI or control technologies, What do they most often get wrong in how they frame strategic value to Emerson? And what would you coach them to make the story resonate?

Thurston: You know, I think understanding Emerson’s businesses. If you were going to pitch Emerson Ventures and seek our, what I like to call us as a value-add strategic investor, what you should probably start with is understand what Emerson business is going to be the excited partner is going to raise their hand and is going to engage with you once the Emerson Ventures investment is inked and done. And I’ll explain a little bit about our process and maybe that’ll make a little more sense. When we make an investment, we do so from the very beginning in partnership with an Emerson business. They do that initial strategic value assessment. They participate in early-stage technical deep-dive calls with a potential target.

If everything’s going well, their first level of in-depth assessment is the completion of our standardized strategic scorecard. If that scorecard comes out well, and it gets the right support from our investment committee, then it gets greenlit for the production of the strategic rationale deck. That is what gets the preliminary approval to move forward with diligence and move forward with an eye to closing an investment. But once that investment process is done, that same technology, strategy, marketing, leader who was side by side with us through the entire process is then the person that we appoint to be our lead contact for the business.

We generally ask, we never really ask for membership on the company’s fiduciary board. That’s not part of our model. But what we do ask for is a role on their observer or advisory board. And there are a lot of folks and traditional VCs and others that may be on that board, but the person we appoint as the Emerson Ventures representative is that person from the business unit who has been through the whole process with us and who has raised their hand from the very beginning to be the champion of the investment.

And then that person is charged with executing the thesis under which the investment was made which is comprised of a few points of how do we hope to gain value from the investment in partnership and what are we willing to do as a commitment to foster and support the early-stage company through their growth and development. And that’s really incumbent upon our observer board representative. So going back to your original question, if you ask me “How can an early-stage company interested in Emerson as an investor and partner think about us for the maximum benefit?” Start with thinking about, what Emerson business would be the great partner if they ended up investing.

Jim: Yeah, that makes sense. And I think having that deep investment in the advisory level from the business, it really helps flesh it out and see, this really is something to pursue, put money behind and foster the innovation.

Can you share an example where Emerson Ventures helped a startup turn a novel automation concept into a scaled deployment with real industrial customers?

Thurston: Yeah, it’d probably be easier to think of the instances where we haven’t had some measure of significant strategic commercial partnership. I think we’re batting 80% plus under that model. It doesn’t always happen day one. In some cases, it doesn’t even happen year one. But because of our model, because of the involvement of who we appoint to the observer board, it is the rare exception that we don’t reach some form of strategic partnership.

Now, that can span a broad spectrum. One, and it really is dependent on sort of the stage of the company we’re investing in. We consider ourselves stage agnostic. So we will invest in a seed-level company that is taking their first institutional money at a prototype level of a product, all the way up to a series B for our first check, which is a mature company with significant revenue that’s really sort of hitting that growth curve.

So we partner in proportion to where the company is. But at that early-stage level, it could take the form and has taken the form of non-recurring engineering dollars that would help an early-stage product meet test configuration specifications of what that sponsoring business thinks is the potential if the technology works. And it can meet the need that they’ve identified, all the way to a proof of concept that, in most cases, is usually a paid proof of concept.

And then at the far end of the spectrum for those mature companies, the ultimate most successful form of partnership is the channel partner or reseller relationship, where we are OEMing or selling through our channel, and as a complement to an Emerson suite of products.

Jim: Yeah, it sounds like that the rigorous process on the front end allows you to, bat 800 and getting it to a point and getting those ones that go all the way to our resellers on it. That’s those are the home runs out there. I guess if you could give one piece of advice to a lead venture capital firm who wants to bring a corporate investor into an industrial automation deal without slowing down the innovation pace or the closing timeline, what would that advice be?

Thurston: Well, this probably is going to sound self-serving, but I’d recommend looking for a partner that has a model similar to ours. A lot of corporate VCs operate as sort of an encapsulated or autonomous entity that flies under the banner of the corporate parent, but at the end of the day, makes their investment decisions very similar to how a financial VC does. They say, ” Okay, this has great return potential,” which is also a key factor for us.

And we’re going to go ahead and make the investment. And then we’re going to hope that we can entice a business unit to in some way partner with this portfolio company. That’s a model. And, you know, but I think it is far easier and far more efficient to have already identified the business unit that wants to find the right technology in the realm they’ve identified, has been on board through the selection process, and has helped identify the horse that we think will be the best bet, and that has gone through our process and has committed to be involved with the company on the observer board level.

It’s way easier to call that person and say, hey, we have this idea for taking the partnership in this direction than picking up the phone and trying to introduce a company that your business people have never heard of and convince them that it’s the greatest thing since sliced bread.

Jim: It just seems like the decentralized approach from the businesses that are closer to the customers and knowing what they need and maybe perhaps that we don’t quite serve right, to identify those needs that it would be nice to get, would be a far superior model to, kind of the think tank out there, highly centralized and, we got a great idea and try to push it to one of the businesses in there. It just seems like, I mean, you’ve hit upon the right model that will produce that 800 batting average.

I guess looking across the Emerson Ventures portfolio, what behaviors or decisions distinguish the industrial founders who turn a technical breakthrough into a durable automation business from those who stall after a few promising proof of concepts?

Thurston: You know, I think I’ll have to go back to my previous answer and say the ones that have that feedback loop with stakeholders and customers and are iterating, they’re the ones that have the the survivability factor that’s so important at an early stage for a company when it’s like running through the Amazon and anything you encounter could possibly kill you on any given day.

Any company who’s at this stage is facing that. And the idea of product market fit, which is one of the three factors or one of the three risks in doing early-stage investing is an evolving standard. It is not a fly in the amber from one point in time. And so, the founders that are aware of that and stay attuned to that are the ones that we found are very successful. And quite frankly, by partnering with us in our businesses, we can help ensure that feedback loop has been established.

Jim: Yeah, and I think if partnering all the way through to the point of working into our global sales channel becomes quite powerful in that versus just, I’ll do it my way and we’ll see what happens here. So this has been a great discussion. Let’s kind of wind things down.

And let me ask you, if this becomes a driveway moment for a founder, co-investor in industrial tech, what is the single mindset shift you hope they walk away with about to partner with a corporate venture arm to accelerate automation, innovation, not slow it down.

Thurston: Good question. The one thing I would say, once again, harking back to a previous answer, is understanding how challenging the industrial space is for early-stage companies. We’ve worked with 20 companies in our portfolio from all stages of growth. And tapping the markets that Emerson serves is not easy, even when you have a good partner. But when you do have a good partner, it helps considerably.

So understanding, especially founders that may, this may be their second or third startup who may have come from other technology sectors or industry sectors who are now doing the industrial automation world that Emerson plays in, knowing that having a global top tier leader, steward in the sectors you choose to serve or trying to serve is or can be quite a game changer.

Jim: Yeah, that makes complete sense. I guess for our listeners, I encourage everyone to visit the Emerson Ventures section on Emerson.com. And you can also get news and updates on the happenings of what Emerson Ventures is up to on their LinkedIn showcase page. Thank you so much for sharing your expertise with our listeners today, Thurston.

Thurston: Happy to.

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