10 reasons why brand owners are becoming the new venture capitalists

bankrolling the startup scene

As new business funding becomes an increasingly vexed issue on a global scale, there are signs that brand owners might prove to be an unlikely new source of capital for startups. Stepping into the funding vacuum that surrounds new venture ecospheres a number of global brands are not only financing early-stage companies but even going a stage further, to create ways of linking them into revenue streams and help them become going concerns. In the longer term,  this type of approach to incubating new businesses could bring much needed cheer to many economies because it might help stimulate more firms with high growth potential, which are ultimately the key ingredient of economic recovery.

THE EMERGENCE OF BRAND VC’S

It is no great surprise that the overwhelming majority of new companies don’t seek to raise funds when they start up. New business owners have historically preferred to finance growth from sales revenue rather than borrow money. The business of raising capital is invariably another business in its own right, involving endless rounds of meetings with investment angels and venture capitalists, let alone banks. The time this all takes can be a big distraction from the core challenges of developing products and services and winning customers, which never goes away. So the businesses that persist in the funding game must have something others don’t. More ambition perhaps, a bigger commitment to innovation, a bigger vision of where the opportunity may lie and certainly a bigger appetite for technology – all of which are indicative characteristics of growth. Not surprisingly there’s no shortage of larger organisations who wouldn’t mind some of that but more of them are starting to follow their minds with their wallets.

Amex is banking on Serve

Earlier this month American Express announced that it plans to invest $100 million in technology companies as it develops its digital-payments system called Serve. AmEx will make minority investments in early stage startups developing mobile-payments products. Whilst it has yet to name any target companies, American Express is seeking a bigger foothold in the growing market for internet commerce and payments over wireless devices, competing with Visa, Google and PayPal amongst others. The planned investments will be managed out of an office in Northern California’s Silicon Valley by Harshul Sanghi,who was hired from Motorola Mobility Ventures to spearhead the new initiative. Since traditional financial services companies missed the boat on e-commerce they’re more determined not to let history repeat itself by missing the m-commerce boat too. So this is a smart move by Amex to keep in play with a marketplace that most commentators still believe will be the next great new market of the 21st century.

STARTUPS GET FIZZY

At a less rarefied level there are other examples of brand ventures in play. Drinks giant Pepsico announced it was to partner ten startup businesses that it hopes to use to drive marketing across its portfolio of brands. In summer 2011 the company unveiled the winners of its PepsiCo10 Europe initiative in which 200 firms competed to win £10,000-worth of investment and pilot marketing projects. The winners include Roamler, an app that uses consumers to act as a mobile workforce, enabling them to earn rewards by performing tasks, such as creating branded flashmobs. Although the marketing pilots for each brand are still in the early stages of development, the project is being used as what PepsiCo describes as an ‘engine of change’ across its business. The first work from the winning companies will reach the market by the start of 2012.

Richard of France Telecom

Also in Europe, France Telecom-Orange and the Publicis Groupe (the advertising group) recently announced the launch of a new 150 million Euro venture capital fund to help budding entrepreneurs in Europe’s digital economy. The fund’s targets for investment will be companies focusing on digital technology, content and services, including online marketing, e-commerce, mobile content and services, online gaming and social networks, as well as supporting technologies including middleware, cloud computing, security and online payments. Stephane Richard, Chairman and CEO of France Telecom-Orange said: “French investment capital has been suffering for far too long from the absence of a solid ecosystem to link young companies together with larger groups, research centers and government systems.”

Some might argue that there is nothing especially new about large companies taking stakes in smaller ones and the difference between acquiring a stake in a business and creating a fund for early stage investment isn’t that different in practice. Yet there are signs that instead of simply acting as funding junction for cash-hungry infant tech businesses, brands are becoming more deeply involved in their growth.

RE-THINKING THE PIE

Portland Incubator Experiment

In 2009, Wieden + Kennedy, a US advertising agency based in Seattle, launched the Portland Incubator Experiment, described at the time as a ‘techno-cultural hub’ for a diverse group of Portland-area innovators to bring the startup ethos into ad culture. Whilst the experiment was deemed to be a success and spawned a number of new tech businesses, the company has recently overhauled PIE to create a new iteration of the idea, whereby it can more directly connect its clients to tech innovation via a number of startup awards.

Nine companies, including a finance-focused cloud management platform, have recently been awarded $18,000 in capital, a place to work, as well as access to Wieden’s management and some of the brightest brains in Portland’s tech scene. Perhaps even more importantly they will also get access to some of the agency’s leading brand connections in companies like Coco-Cola and Google, not just in marketing and communications disciplines but also in areas like IT, retail, design and innovation. The executives in charge of the Wieden experiment are in an interesting position as they’ve witnessed first hand that funding is only part of the problem new companies face . “The first time around, we wanted to find interesting companies. We’re (now) trying to create a different kind of platform for collaboration between entrepreneurs, innovators, technologists and some of the worlds biggest brands because we think when those folk come together there’s some really interesting stuff that can come out” said Renny Gleeson and Rick Turoczy(W+K’s global directors of interactive strategy). Wieden will take a small equity stake in the startups but PIE is not designed to be an investment fund.

Is it conceivable that over the next five to ten years we will see the emergence of real brand innovation ecospheres, each hosting a constellation of startups nourished by enterprise capital, connections and collaboration? Like all things, it will depend to some extent on the ROI. It’s probably less likely if the metrics focus too narrowly on the immediate cash returns on offer, which is just as well as cash isn’t the only thing on the table here. Far from it in fact. Bonin Bough, PepsiCo’s global director of digital and social media said: “We are seeing a creative renaissance driven by digital, which is creating a new canvas for brands to communicate through.” PepsiCo investments in technology startups are therefore being seen as part of an ‘engine of change’ across the business and a ‘new driver of creativity’ in marketing. Whilst it’s hard to disagree with this, it may even prove to be something of an understatement. Investing in (digital) startups might help with all sorts of corporate agendas;

  • shore up skills in short supply (especially technology ones)
  • boost the influence of innovation on corporate cultures
  • extend existing product and service offers
  • extend collaboration work practices
  • accelerate NPD (where larger organisations struggle)
  • utilise redundant office space
  • inject entrepreneurial zeal
  • generate socially positive PR
Above all perhaps startup businesses are good for the corporate soul, like a renewable energy source, which all brands need if they are to evolve and prosper. If by recharging their own batteries brand owners can re-energise new venture investment nobody is going to complain.

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Index B studies the behaviour of thousands of companies and the key trends that drive them to help all businesses understand them better. To find out how Index B can future-proof your company please contact us via enquiries@indexb.co.uk

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