This week’s Innovation Coffee Break features Efrat Noy and Pradeep Paniyadi of Cisco Investments in conversation with Vijay Rajendran, 500’s Director of Corporate Innovation & Partnerships.

Since 1993, Cisco Investments has staked out an impressive track record as a strategic investor. This in-depth discussion reflects the group’s comprehensive approach to CVC and partnering with promising startups.

We cover topics including:

• The questions they wish founders would ask them more often
• How CVCs can approach investing vs. partnering, or when to do both at the same time
• Kicking the tires – How Cisco Investments uses POCs before embarking on commercial partnerships
• Why Cisco Investments prefers to follow in investment rounds
• What kind of startups they predict will succeed in the era of COVID-19

This Q&A transcript has been lightly edited for clarity

Vijay Rajendran 00:07
Welcome to your Innovation Coffee Break. I’m Vijay Rajendran, Head of Corporate Innovation and Partnerships at 500 Startups’ Ecosystems Group. We join leaders with unique perspectives in the world of innovation and startups investing and in the time you need to sip a cup of coffee, we’ll have some unique conversations. I’m excited today to be joined by Pradeep Paniyadi, Portfolio Relationship Manager and Efrat Noy, Global Lead of Cisco Investments, Market Development Team. Efrat and Pradeep, welcome.

Efrat Noy 00:32
Thank you for being here.

Pradeep Paniyadi 00:33
Thank you, Vijay. Thank you for having us here.

Vijay Rajendran 00:37
Cisco Investments is one of the best known acquirers in Silicon Valley, but there’s more to Cisco than M&A. What should founders and the venture community know about Cisco Investments?

Pradeep Paniyadi 00:53
We are one of the very earliest CVCs and have been investing in startups since 1993, if I’m not mistaken. As Don Tucker, head of M&A and investments for collaboration would say, there’s a pendulum swing between the financial investors and strategic investors. So we swing more towards the strategic side of it. We want to make sure that we are really closely aligned with our business units. So that’s something that not a lot of people know. But, you know, we’d love to talk about it.

Efrat Noy 01:43
I’ll add to it to what Pradeep is saying, Cisco Investments is actually part of Cisco Corp Dev. When we make acquisitions, we refer to our organization as Corp Dev and when we make investments, we refer to it as Cisco Investments, but it’s really the same team doing both. Like Pradeep was saying, this is nothing new for Cisco, we’ve been doing this for over three decades now. We actually see this as a strength for Cisco, the fact that we scan the market, rather heavily with a very high level of expertise with cooperation from our business units, and the subject matter experts that exist there, allow us to have a very strong sense of the markets that we want to invest in. We look at companies not only as an investor, but also as an acquirer, and I think that lens, a very broad sense of of the market, and actually a very broad expertise that we can bring to founders, when we invest in them.

Vijay Rajendran 02:55
Tell us a little bit about that international reach and what geographies your team is it?

Efrat Noy 03:02
Yeah, thanks for that question, Vijay, because it’s actually really important that you know, as Cisco is a global company, so are we, and we don’t limit ourselves by where we source innovation from, we believe that innovation exists everywhere. We look for it in in the various hubs that innovation exists, Silicon Valley included, and so the way we’re organized, or the way we’re actually thinking about this is per domain. Pradeep mentioned Donald in collaboration, he leads our collaboration investments. Same as Donald, we actually have a lot of other people looking at the various business units or the various industries that Cisco cares about the most: cybersecurity, intent based networking, cloud technologies, data center technologies, we’re all looking at that very, very heavily, in cooperation with our business units with the subject matter expertise that exists there. But then at the same time, we also have people dedicated in the regions where that our innovation hubs, such as Israel, such as London, Singapore, who’s really looking at all of Asia PAC, so overall, we’re invested in over 45 countries. And we’re a global investor. At the end of the day, we’re just trying to find the best technology out there and the best rounded founders out there.

Vijay Rajendran 04:24
And your your team is there to help startups to navigate Cisco as well and all these business units?

Efrat Noy 04:32
Yeah, absolutely. Actually Pradeep is a very big source of that. One of the things that that we realized quite a few years ago is that there’s a lot of funds out there and the situation is pretty competitive. But one of the things that our founders are really looking for us is is access to to the business unit, access to these SMEs, and access to the very global, successful, and broad go-to-market engine that Cisco has today.

Pradeep Paniyadi 05:04
Our money’s as green as your money, so it’s about what we bring to the table. And Cisco being the 30-year old innovator that it is, and given the reach that we have across all the verticals, when it comes to customers, all the different technologies, like Efrat mentioned, I think, providing startups with the access to that brainpower, that sales power, the channel power, I think that’s our differentiating factor.

Vijay Rajendran 05:40
When I visit any enterprise anywhere in the world, you’re likely to see Cisco, in some way, shape or form. What are the verticals as you define them, though, for your customers?

Pradeep Paniyadi 05:57
Yeah, that’s a good question. In fact, that’s a question that somebody asked me even internally. In a broad sense, Cisco is a horizontal player, but in the finite sense, we are trying to identify industries where we can offer vertical solutions, and that’s where our investments come into play, right? So for example, communications, collaboration, that’s a more horizontal play. But when you bring the ability to communicate two entities together, in, let’s say, a healthcare setting, by offering telehealth that’s powered by WebEx, that is a vertical solution that we can bring on top of an existing horizontal plane. So to that extent, we have presence in heavy industries, like oil and gas manufacturing, a great presence in healthcare. Education is a very strong suit of ours and definitely public sector. So there are multiple verticals, but that’s where the investment arm comes into play, in trying to find those minutiae of platforms that offer additional value on top of our horizontal platform.

Efrat Noy 07:21
Yeah, and let me add just a little bit to that, Vijay, at Cisco we have customers across the board, I want to say that Cisco probably sells into most enterprises or corporations today for Fortune 100 and all the way down. What we’re seeing across these customers is that the lines between enterprise IT, and the line of businesses start to get blurred, right? It’s really becoming more of an enabler to some of these digital capabilities that the line of business or in general the business wants to invest in. Now, with that said, there’s there’s certain capabilities that exist across the board, right, like core technology and core architecture. But then as Pradeep was mentioning, you know, our investments really help Cisco get a better understanding of what that line of business buyer looks for, what is interesting to them, and how they’re going to be adopting technology moving forward.

Vijay Rajendran 08:28
That’s, that’s super helpful. Then kind of untangling what the customer is looking for and sharing that upstream, with folks in the stock community would be super valuable, which kind of like tees up another thing I want to ask about, which is, you know, if you were giving advice to a founder, what would you tell them to look for in CVC? An investor? Efrat, why don’t we start with you.

Efrat Noy 08:57
I think for a founder, CVCs often get overlooked, and sometimes do not, but there’s founders have an opportunity, especially now to choose their VC and choose their investor. I think the same applies to a corporate VC. One of the things that, that we often look for is an alignment with Cisco, we mentioned this, for how does the startup technology align with the corporation, right, or with our business units, either today or in the future. It either aligns right now with a certain very viable solution, or joint solution that would that we would bring innovation together into the hands of our customers, or it aligns with with the roadmap. That’s very important because the strategic alignment matters in order to make the most of it. I think when a founder is really looking for an investment from a CVC, evaluating the company’s access to a startup as a buyer, right? So if the corporation doesn’t have access to the right type of buyer, that’s probably not a good fit, but if it does, then there’s mutual benefit to that, or the CVC can actually bring a founder into the right buyer and increase opportunity there. And lastly, I would say, and Pradeep, you could probably add more to this, but CVCs need to have the ability to bring a founder into the right people within the company. What I mean by that is, the BU leads, the subject matter experts, the sellers that would get you to the right buyer. A founder in my mind has to vet out, what is the CVC’s ability to mobilize the company, and the right personas within the company, for its own growth.

Pradeep Paniyadi 11:15
She touched upon pretty much all of it. A couple of things I would add is, you have to make sure that as a founder, your vision for who you’re trying to touch, the users you’re trying to touch, the problems you’re trying to solve, are in line with your strategic investors’ motivation, right? So as to go back to the previous example about communication, we we probably wouldn’t invest in a company like Uber or Doordash. Even though they are converting in legacy industry to be something more technology driven, and offering service as a software. We would look at the companies that are offering the ability to communicate to entities in the Uber space to communicate, right, how do I know where the driver is? How do I know where the food is? I left my jacket, I need to get a hold of the last ride. Right, so how do I communicate with them? Startups that are offering that infrastructure-level communication capabilities, that level of security capabilities? You know, how does that match up with, with, you know, a company like Cisco, I think that is critical.

To take that one step further, if I’m a startup, if I’m a founder, and I’m building that communication capability, I go and I go, you know, Cisco’s in line, but can Cisco also bring me in front of Uber? Can Cisco bring me in front of Doordash? These are the companies that I’m building this for, so those two things have to be met. There cannot be any shortcuts, you cannot go one or the other, both have to meet for for the relationship to be successful. The one additional piece I would add is being able to build a strategic relationship is extremely important. So you have to look at your CVC’s track record of building and maintaining partners, whatever the size so their partner ecosystem tells you a lot about their ability to treat partners of any size. Cisco is, if not nothing, we are a partner built and partner driven company. And so that gives you an idea of how we think about ISV partnership, channel partnerships, service level partnerships. That goes a long way in assuming you know, that you are working with the right CVC.

Vijay Rajendran 13:47
That’s super important, Pradeep, and a very enlightened view in terms of, how can we look for the right thing, the infrastructure, and then how do we further help those kinds of organizations with our cloud and with our reach into the large enterprises that would help them be successful? Now, on that note, I want to know more about how early should startups approach Cisco?

Pradeep Paniyadi 14:19
It’s never early enough, so that’s the that’s the answer. Listen, we have, you know, we have a working model as investors, like I said, for over three decades. So we’re not in it to run with anybody else’s ideas, so to speak. But at the same time, we need to know what you’re planning on building and to that extent, it’s a two way street. So when I meet with a startup founder, we’re not just trying to suck in all the information we can. We offer insight on what we’ve learned as we need with other founders. You have to come with not only your best pitch, but your best questions. That’s something a lot of founders don’t do right now when they meet with Cisco. If there is a 30 minute meeting, 25 minutes of it is, this is who we are, what we build, and then five minutes of questions, but the questions are around customers, but not questions around, ‘hey, I’m still early, I’m still in my seed stage, I’m still pre revenue. Have you met with other companies like me? Have you met with customers that I’m targeting? What have you learned?’

That’s not IP that we’re trying to guard somewhere in the basement, that’s knowledge that we’ve picked up in conversations, we’re happy to share, but not a lot of people ask. So I would encourage, you know, early stage founders, do not be afraid to ask those questions. And, you know, we do come across a lot of early stage founders, like I said, seed stage founders, even though we invest in more mature companies, we do want to build that those early relationships, and keep in touch, maintain, you know, any relationship we can. And as they grow, as they build their stable of customers, and the stable of lead investors, we would like to participate in, you know, post seed or post series A investment.

Efrat Noy 16:29
Yeah, and let me let me also add to that, Vijay, I think what what Pradeep is saying is very, very true and absolutely crucial for any founder to understand. Another thing to understand about a corporate VC, especially one as Cisco is, we actually have the mandate to bring outside innovation into the company. So that’s our job, to bring the outside world into, into Cisco’s point of view, and really have that informed decision making when making strategic direction. Now, with that said, when we do get early access to some of these founders, and we do keep in touch with them, and we track their progress, and we track their innovation in market and how they’re reacting to market opportunities in their adoption with customers, ourselves included, we actually use it internally to make informed decisions about strategic direction for the company. In certain situations, without with us also being part of Corp Dev, sometimes that may end up as an acquisition decision, could be that specific company could be a competitor, could be maybe another adjacent space. But all that is very, very important to, to understand, both from our perspective. But again, like Pradeep was saying, it’s never too early, but it can be too late. Right? So you want to get on Corp Devs radar, as soon as possible.

Vijay Rajendran 18:08
That’s a great takeaway from from this conversation is certainly, come with questions and don’t be late, literally and figuratively. You know, on that note, you know, and then thinking about the founder options, and this is hopefully, where a good conversation leads, there is, I think, Pradeep, a number of strategic dilemmas that that both founders have, and then many CVC teams may have in terms of, when should I invest or partner versus when is it makes sense to invest in partner at the same time. I’ve watched both startups and parts of big companies that trip in the process of trying to figure out how to walk and chew gum and make that investment and partnership happen at once. Any advice in terms of how to think through this situation?

Pradeep Paniyadi 19:15
Having walked the walk myself, as an entrepreneur in the past, I have to say, whether it’s pure investment, followed by a partnership, or just a pure partnership, you have to make sure that you have the resources to work on that. So you say, hey, we want to collaborate with WebEx. But, you know, we have just one person assigned to it. There are priorities that we put in place to say, you know, we need to execute A, B, and C, but there’s a lag, because as a startup, you don’t have the resources to provide, to execute on that promise, then that you’re off to a bad start. So right off the bat, I want to say don’t bite off more than you can chew. Make sure you communicate the right resource availabilities, the right constraints, the right customers you want to go after. Stepping back to your earlier question about invest versus partner, in the fewest words, if you’re following a blue ocean strategy, we definitely want to invest. If it’s a white space, then it’s a toss up. And the toss up depends on, are you trying to fill that white space with Cisco, by building on a new technology? AI is ubiquitous, but your AI is not the same as my AI. What are you building in the platform that is new, that is innovative, that offers us to fill that white space? That is something we would consider as you know, both investment and a partnership. But if you’re following a blue ocean strategy, definitely. Note I mentioned earlier about converting a legacy industry to a technology driven services software, those conversions, we definitely want to be a part of.

Vijay Rajendran 21:23
That is a really neat mental model in terms of like, when and how it makes sense based on the market to think about what to do? Thank you for sharing that. In terms of what the the partnership should take, is there a preference around doing an internal proof of concept or leaning towards external pilots or something like that is? Or is everything on the table?

Pradeep Paniyadi 21:53
For the partnerships, there’s definitely internal pilots that we would like to execute on. But the the biggest gating is what our sales team have to say, right? Cisco has one of the biggest and the best salesforce out there. You’re looking at 20,000 strong, the kind of conversations they have, the kind of scenarios they experience, they provide the input that’s required for us to understand whether or not partnering with a company– First of all, where are the capability gaps that we currently have? Where are the white spaces, as I mentioned before. They have insights into some of those white spaces that we don’t, and so working with them, they provide that input. Secondly, so that’s the sales team, the business unit, as I said that there always has to be a partner. So the business unit will look at, do we have, you know, the right, let’s say, you know, API’s in place? Do we have the right, you know, technology in place to execute on this partnership? What is the level of effort required to make this happen? Is this high touch? Or is it low touch?

So those are additional gating factors that determine the extent of the pilot. Cisco will always require a sandbox to play in to understand, you know, the startups technology better, right? If you’re, like I said, your AI is different from my AI, but if you have built a new ML platform, we do want to kick the tires, because we are building it ourselves. I mean, not exactly the same, but in, in theory, you know, the kind of technology that we rely on. So, you know, what, is it that you’ve done better? Or what is it that we’ve done better? Where are areas that we can collaborate? Where are areas that we actually butt heads on? To understand those things, we definitely need to kick the tires. Yeah, POCs and pilots are definitely a part of it, commercial partnerships come way down the line.

Vijay Rajendran 24:02
Thank you for sharing that. Because I think for a lot of folks inside of startups, they really want to understand at a level of intention, what is the enterprise partner here thinking, how exactly to do that, and sometimes stating the goals are just like something that both sides overlook, and it’s really important to to see that in practice here.

Efrat Noy 24:29
Yeah, let me let me add just a couple more more points to that, Vijay. Because this is again, just learnings that we’ve had over the years of doing this. Another thing to point out is a lot of times we will go back to our customers to validate a certain solution and market or a certain startup. We’ll actually touch in with our customer base. We’re also subject matter experts, the CIOs to the CTOs to the VP level, to really get their perspective around a certain technology that a startup is developing, and then to its applicability in the market. So we actually get a very independent view of what technology means in the market and what the adoption arc would would look like. In addition to the Cisco expertise that you have, which does carry a Cisco lens, we do make sure that we get the the independent expert expertise as well. Now with it with on the partnership side, I think what’s important to notice, Pradeep mentioned being very upfront about the resource allocation and what you can and cannot do, I want to say also, the flip side is also very, very relevant, right?

So a startup founder really has to have a vision in mind and almost like a true north of where they want to go, right. Because if you get into partnership with companies, such as Cisco, which is, you know, close to 70,000 people strong, you know, $50 billion annual revenue that can carry you to places that you don’t want to go, right? Whenever I talk to founders, I always, I always equate it to, well, there’s the big mothership, the big aircraft carrier, and you’re like a small ship, right? So the tidal wave that you can get into is actually quite, quite big. So you really have to know where you’re navigating to, and sometimes “no” is also a good answer. You always have to know, again, where you want to go, what is the big ship going to give you and can you latch on? Because if you latch on really well, that could carry you miles ahead. But if the ship is going to carry you someplace, you don’t want to go or it’s going to be very, very rocky along the way and for a very long period of time, maybe you don’t want to do that.

Vijay Rajendran 26:59
That’s, that’s really good advice. For a lot of folks, they may not be able to look past getting an important logo, to see, okay, what else comes along with this?

Efrat Noy 27:13
That’s exactly it.

Vijay Rajendran 27:17
A quick question, just to clarify, because I know people will will ask, is, you know, do you lead? Or do you generally follow in investment rounds? Or both?

Pradeep Paniyadi 27:28
We follow. We always go in with with a consortium, and the consortium is always led by a lead investor. So that does two things: that sort of validates the founder’s vision, the business ROI that they foresee; and the kind of team that they back, right, usually, there are a lot of similarities in what we look for in a great team, right? So what makes a great team for a particular startup? For those reasons, we definitely follow and as I mentioned earlier, in the pendulum swing between financial returns and strategic returns, we’re on the strategic return side. Because of that, we’re more focused on following.

Efrat Noy 28:28
Yeah, and it’s not like those financial returns are not important to us, you know, our CFO or CFO would have our heads if we don’t provide any financial return on our portfolio. But strategic is as important to strategic value is as important to us as as financial. When we do partner, we do evaluate quite heavily, not only the founder and the technology that we’re investing in, but also the lead investors and co-investors, we validate those quite a bit.

Vijay Rajendran 29:03
Yeah. And thank you for speaking to that and demystifying it. It’s very helpful for startups to know that having a strategic investor on your cap table is a good thing. And actually, it can be beneficial for them to come along with the financial investors. Because that way, you’re not sending any negative signals to the market as well in terms of your eagerness to work with everybody, obviously, in the ecosystem as the case may be.

Pradeep Paniyadi 29:35
And the hidden reason for that Vijay is if we are a lead strategic investor, we don’t want to force a startup to change its roadmap for its vision. And as a lead, you could probably do that and we don’t want to.

Vijay Rajendran 29:55
Yeah, I think there’s some wisdom and avoiding those unintended consequences. So another thing I wanted to come back to was, Pradeep, you mentioned collaboration, and you mentioned telehealth as two things that were accelerating during the current pandemic. And so I’m curious if you have any observations about what kinds of companies, what kinds of startups will be successful now, during the time of the pandemic, and any green shoots you would anticipate post COVID?

Pradeep Paniyadi 30:32
We’ve been toying with that thought ourselves for the last seven months. There are a couple of tracks that we see, companies that were building capabilities and platforms to remove dependencies on multiple entities seem to be doing well right now. Case in point, one of our companies is a digital adoption platform, digital adoption, increases the user adoption of an enterprise platform, reducing the need for additional training. So in a time, like now, when everybody’s remote, how do you increase an employee’s productivity. That’s by implementing a digital adoption platform to give them in-application guides, to, you know, help take them through their workflow. And the unintended consequence of building an a platform like that is you are right to provide value at a time, like now. And so there are multiple companies that I see that are building areas where they’re removing dependencies, or closing gaps for, you know, for the blind spots, those seem to be doing really well. “I’ve built a better AI” is like, “I’ve built a better mousetrap” right now.

I bet a better AI is not a philosophy that will take you too far. Teams that are able to maintain culture, philosophically speaking, themes that have bought into the vision that they have to improve the end users’ work day life, that is very critical. Because that lets you come up with workflows and ideologies that can be executed. It doesn’t matter if you’re sitting in the office or sitting in COVID. Lastly, I would say, what the new normal is, we don’t know, right? We’re still evaluating that. In an even space, for example, everybody knows a virtual events platform is going to go really well. But what virtual events look like, in the future, we don’t know, it’s not a simple case of putting a camera in front of a speaker and then streaming it right. That’s not a that’s not a virtual event. So how you build engagement with your stakeholders, the stakeholders, in this case, your users, your employees, companies that I’ve thought that far, in being able to build that engagement will do really well.

Efrat Noy 33:25
Yeah, let me let me also add to that, Vijay, because, you know in my role within Cisco Investments, I lead our customer platform here and so I end up talking to a lot of customers that are, again, Cisco customers, but also, we look at them independently, and how they’re adopting things. What I hear from them is primarily, you know, COVID has just accelerated the pace of digitization, right, whatever you perceive digitization to be, it sounds like a really big buzzword but but in fact, it really means how is a company using technology and data and to a certain degree, networking underlying, how do you use that to improve the consumer experience, the worker experience, the overall living experience? With that said, in every vertical, that means something different, right? So Pradeep spoke about, about telehealth, that’s certainly accelerated with COVID. Certainly, we’re seeing it in retail but also in other more traditional industries, right, such as manufacturing, oil and gas, they’re all looking at improved experience, but also, the underlying technology, adoption is just heavily accelerated, just because of the need for networking and data collection, and analytics on top of it, right? So, at the end of the day, we’re seeing just a whole proliferation of core technologies. But the vertical side of things, I think that will evolve. But the core tenants of, of successful companies remain across the board

Vijay Rajendran 35:22
And Efrat, that’s such a great segue into a last question I wanted to ask, which is this revolution that is happening in, you know, these different customer areas and inside these massive enterprises? What is the mindset that you would advise a startup to have, when thinking about how to work with a big company today?

Efrat Noy 35:48
Where do I begin? I think there’s so much to talk about, we should probably have another coffee talk just around that. I think at the end of the day, CIOs today kind of go on a spectrum of cost-cutting missionaries to really driving the business forward, right, going into the digitization effort in, in vertical with these different use cases. Now, somewhere along the line, you know, any CIO will be somewhere on that spectrum. However, with that said, any startup or any type of technology would have a value for each one of those personas. Be it, I’m going to call, I’m going to help you become more efficient, and I’m going to help you save a certain amount of dollars for every every month, every year, or certain man hours, etc, or whatever other efficiency KPI that you’re leaning towards, or tracking. Versus, here’s how I’m going to increase your top line and how I’m going to help you drive the business, how I’m going to help you really look good with the board. So first and foremost, and this I hear across the board from all the customers that I speak to is is like, look, we don’t have a propensity to adopt one certain startup in a certain profile or another.

If the technology works for us, we will adopt it, we will make sure that it does get adopted. So even for the very earlier stage, companies, customers, even like the Fortune 100s, they’re very, very open to that and they will adopt a startup technology provided it makes sense. But the way to get there is with the right set of capabilities, with the right message and with the right set of value that they can bring to a CIO. And again, I think the key here is to is to get an understanding around who is the person that you’re talking to, and what do they care about. Right that is a pure go to market question that needs to be answered by by any startup. And it’s sometimes it’s hard to get to right off the bat.

Vijay Rajendran 38:14
That is so true, and it ultimately does come back to people. Thank you both so much. This has been such a rich conversation. I’ve enjoyed it immensely. Efrat Noy and Pradeep Paniyadi, thank you so much for for joining us today at 500 startups and for this Innovation Coffee Break.

Efrat Noy 38:33
Thank you, Vijay.

Pradeep Paniyadi 38:34
Thank you for having us.

Vijay Rajendran 38:35
My pleasure.