Branch Ventures

This a brief write up in preparation for getting together for an exploratory meeting. Our intent is to set this stage and provide context. Three themes continue to come to the forefront:

• A massive AI wave is building on the horizon.

• Building innovative adjacent businesses (in light of the AI wave) is creating unusual value for established companies.

• High trust partnerships (above all else) are critically important to successfully building innovative adjacent businesses.

The AI Wave

In 1995 the internet was becoming commercially available, marking a significant shift in how businesses and consumers interacted with technology. Bill Gates referred to this 1995 period as an "Internet Tidal Wave," recognizing its potential to transform every aspect of Microsoft's business (which it did). The internet's commercialization led to the dot-com boom, where businesses rapidly adopted internet technologies, leading to a surge in online services and e-commerce. What business today doesn’t rely heavily on the internet?

The AI wave of 2024 is likened to the internet wave of 1995 due to its likelihood of revolutionizing industries and society at large. Satya Nadella, CEO of Microsoft, has compared the impact of AI to the internet revolution, suggesting that AI is poised to have a major impact on society. Dan Ives has called the 2024 AI wave a “1995 moment”. AI technologies, such as large language models (LLMs), are expected to be integrated into most software applications, changing the way we interact with technology. Industries such as healthcare, automotive, financial services, technology, entertainment, etc. are predicted to be transformed by AI relatively quickly.

Comparison and Impact on Industries

Both the internet wave and the AI wave represent pivotal moments in technological advancement with widespread implications for industries. The internet wave connected people and businesses globally, leading to new forms of communication, commerce, and information sharing. Similarly, the AI wave is expected to automate and enhance decision-making processes, create new efficiencies, and enable the development of innovative new businesses, products, and services.

The integration of AI into everyday software will likely change the nature of work, enhance productivity, and lead to the creation of new job categories. Just as the internet wave led to the creation of web development and online marketing roles, the AI wave may lead to a demand for AI ethicists, data scientists, and machine learning engineers.

Google's comparison of the AI wave to the invention of electricity highlights the transformative and foundational nature of AI. Electricity revolutionized industries by powering machines and enabling mass production. Similarly, AI is expected to be a foundational technology that will power new applications and business models across all sectors.

Both the internet wave and the AI wave represent pivotal moments in technological advancement with widespread implications for all industries.

Building Innovative Adjacent Businesses

In light of the massive AI wave, there's a growing enthusiasm among businesses to launch new ventures, as revealed by a global survey conducted by McKinsey. This survey highlighted a significant shift in priorities, with more than half of established company CEOs surveyed ranking the creation of new businesses among their top three priorities. For instance, 27% of CEOs ranked business building as their top priority, and 58% of business leaders agreed that new-business building has become a greater priority for their organizations in the past year.

This marks a notable change from previous years. CFOs are also recognizing the strategic importance of business building, viewing it as a key action on the corporate agenda. Investors share this optimism, placing a higher value on revenue generated from new, adjacent businesses compared to that from core operations.

There's a clear focus on developing businesses that leverage generative AI, reflecting a broader industry shift towards innovation. The current economic climate appears to favor established companies, providing them with a competitive edge in launching new ventures. This is partly due to reduced competition for funding, making it an opportune time for companies with a solid business to find the right external partners to start these new businesses with.

By venturing into new businesses, companies can diversify their o^erings, strengthen their market position, and unlock new growth avenues. This was evident after the financial crisis of 2008-09, where companies that embraced business building saw their revenues soar at triple the rate of their more cautious counterparts. Moreover, many of today's highly valued startups were born during periods of economic uncertainty, underscoring the potential rewards of bold entrepreneurial efforts.

The enterprise value multiple of reported new business revenues represents nearly twice that of core business revenues, and business leaders report that their companies are building 50% more new businesses per year than they did two to five years ago. This underscores the strategic shift and importance of new-business building as a growth driver and the need for CEOs to prioritize and invest in these ventures.

Despite the clear advantages of this approach, a significant number of companies today are choosing to play it safe. They're postponing major investments, conserving cash, and focusing solely on optimizing their core operations. However, this cautious stance might leave them lagging in a world where disruptions are becoming the norm. The survey also revealed that 50% of the expected revenues in the next five years would come from products and services that are yet to be created, highlighting the risk of relying solely on existing business models.

The success of new ventures is not just about having a good idea. It requires a strategic approach, including securing strong leadership support, assembling the right team, selecting the right partners and adopting a flexible governance model that allows the venture to benefit from the parent company's resources while operating with the agility of a startup. Funding strategies that mirror venture capital practices, focusing on long-term investment and milestone-based funding, are also crucial for the growth and sustainability of these ventures.

Moreover, the importance of partnerships in accelerating market access and enhancing capabilities cannot be overstated. Successful ventures often leverage external partnerships to complement their strengths and address gaps, facilitating quicker and more effective market penetration.

The keys to success lies in a combination of strong leadership support, strategic funding, effective governance, and the smart use of partnerships. These elements, when combined, can significantly increase the likelihood of success for new corporate ventures, even in challenging economic times.

High Trust Partnerships

For Branch, the most important decision point lies in who we choose as a partner. If you’ll permit the use of a metaphor.

Embarking on a new venture with a co-owner and business partner can be like steering a flagship through the seas of the marketplace. In this partnership, the new enterprise is the vessel, and the most valuable assets we possess are not tangible resources but the intangible virtues of trust, confidence, mutual respect, and good faith.

Trust serves as the corporate governance framework, ensuring that every decision navigates towards the shared objectives with unwavering integrity. Confidence is the market insight and opportunity that fills our strategic sails, propelling the venture toward innovation and growth. Mutual respect is the culture that underpins our partnership, fostering a collaborative environment where diverse perspectives influence the keel and keep the venture steady.

Good faith is the golden rule —the underlying ethos that each decision and negotiation is conducted with transparency and ethical consideration. It's the assurance that both parties are committed to the venture's success, honoring our fiduciary duties and acting in the best interest of the venture/partnership above individual gain.

These principles are the cornerstones of a successful partnership. They are more critical than seed funding or business models because, ultimately, a venture thrives on the strength of its relationships.

Branch Ventures is a Venture Studio that works with 2 or 3 highly trusted corporate partners each year to form, fund, scale and operate AI product companies with an Enterprise B2B focus.

We are looking forward to exploring a business partnership with you.