Cisco Systems began what it calls “theme investing” three years ago as a way to find and exploit new business opportunities.
The new approach led to emerging areas of tech such as big data and analytics, the Internet of Things, next-generation data centers and security.
Rob Salvagno, head of corporate development and Cisco Investments, the three-decade-old tech giant’s venture arm, said the aim is to look for opportunities several adjacencies away from the company’s core businesses. In security, that has meant exploring the intersection of cybersecurity and tech trends, such as IoT, containers and micro services.
In the past year, Cisco also has been active on the M&A front. The company has acquired 15 companies since new Chief Executive Chuck Robbins joined in July 2015, and for good reason.
The market climate for M&A is unique with significant funding having gone to venture-backed startups and acquisition likely to be a more favored path to exit in the future, Salvagno said.
He added that in the past two months the number of inquires from companies pursuing acquisitions has been higher than he can remember.
VCJ recently had the opportunity to speak with Salvagno. An edited transcript of the conversation follows.
Q: Three years ago you expanded your investment strategy to include theme investing. Describe what you mean by theme investing?
A: Theme investments for Cisco are ones that fundamentally look to markets that are perhaps one, two or even more adjacencies away from our core businesses.
For us, the nature of a theme is something that may be interesting to Cisco three, four, five years down the road based on its potential to impact our business or that of our customers. Perhaps a good example of that was one of our first themes, which was big data and analytics.
Today, big data and analytics is one of our top priorities as a company.
Q: What key themes drive your investing?
A: The key themes for us today from an investing perspective are big data and analytics, next-generation data center, IoT, security and silicon.
We also have regional themes of investing in Israel, China and India.
Q: Cisco has been an active acquirer. Why is this an interesting time for you?
A: It is an interesting time from an M&A perspective because of overall actionability. I describe actionabilty from few facets.
First from a Cisco perspective, as Chuck is bringing a very specific focus to our top priority areas. What that means is we have all of our resources, including M&A, focused around how we can accelerate our position in areas like data center, cloud and IoT.
Because of that, M&A is going to continue to play a major role in accelerating our position in those areas.
Number two is, as a company, I think we’ve got the focus and leadership team in place, with Chuck and his leaders. For one year now, we’re able to go after opportunities on a pro-active basis, where a number of traditional IT players struggle with their own challenges.
Third, we have a very unique market climate right now. We’re going out of an environment where the venture capital has been significant.
We are coming out of a climate where the public markets, which used to be much more receptive to high-growth, low-profitability types of players are now starting to shift.
What I think that is going to mean is that M&A is likely going to be a more favored path for companies that need to find exits in the future.
Given that we also have M&A as a big part of our strategy, this is going to put Cisco in a great position to look at those as ways to continue accelerate those priority areas I discussed.
Q: Have you noticed a change in the way private companies look toward M&A today?
A: The market climate has added a perspective for a number of companies in terms of what’s a more likely exit path—M&A vs. IPO—and perhaps a reset in expectations around overall value.
What that has done is either push companies to pro actively consider M&A or push companies to have a more realistic view on price. And sometimes it is a combination of both.
One of the best stats I could give you is in the last 60 days, the number of inbound inquires of companies that are pursuing M&A paths has been higher than I can ever recall. That to me is an example of the first, which is companies resetting their expectations with regard to what paths they want to pursue as a company: remain independent or pursue M&A.
I’m seeing more pursuing M&A than I can recall ever before.
Q: With theme investing, how do you deliver value to portfolio companies when investments don’t have the sponsorship of a business unit?
A: Given that 50 percent of our investments fit into that theme-based category, we are very focused on how we can deliver a unique value proposition that is outside of a potential relationship with the business units.
Our thesis is we are trying to build out a platform that allows our portfolio companies to access some of the attributes that Cisco has as a company. If I were to focus on one example, Cisco has built over time one of the most successful go-to-market, or sales-and-channel engines that we have used to serve a broad array of customers, from enterprise customers to service provider customers. If we can find a way to access both that knowledge and that sales-and-channel organization to benefit our portfolio companies, that is an example of the type of value proposition that we are building and continuing to invest in.
A great example is (several) weeks ago we held our Cisco Live (user) conference in Las Vegas. This was the fourth Cisco Live where we hosted 25 of our portfolio companies.
Q: What do you find interesting in the area of security?
A: Where we see security opportunities interesting to Cisco from a strategic investment front are where new security challenges are being created by the rise of some of the broader trends.
As an example, when we look at IoT, it brings a whole new set of security challenges. So that represents an area that is emerging. When we think of something like containers or micro services, we believe that adds an additional security challenge that didn’t exist before.
Q: Have you raised financial expectations for theme investments to justify the higher risks?
A: As we expanded our investment mandate into theme investments three years ago, a fundamental principle of that was that we had an opportunity now to look at a broader landscape.
With the broader landscape, we felt it put us in the position to raise the financial bar. The quick answer is “yes.” We believe that we should have a higher financial bar for theme-based investments.