Can venture funds help retailers keep apace with technology?

Discussion
Photo: Getty Images/gorodenkoff
Aug 08, 2022

Ulta Beauty has become the latest retailer to officially launch a digital innovation venture fund. The fund will invest $20 million in startups “unlocking new technology that fuels greater discovery, personalization, and convenience.”

Prisma Ventures, unofficially announced at Ulta’s 2021 investor day, has invested in five firms:

  • Haut.ai,  a B2B SaaS tool for AI analysis of customers’ skin
  • Adeptmind, an AI-powered e-commerce search engine 
  • Revea, a skincare company using personal analysis and machine learning to tailor skincare
  • LUUM, a lash extension robot
  • ReStyle, a virtual hair try-on start-up

Beyond capital, fund participants have access to Ulta’s innovation team, consumer insights and in-market testing opportunities.

“We believe this fund presents opportunities for creative disruptors to further propel the industry forward,” said Prama Bhatt, chief digital officer, Ulta, in a statement. “We set out to build lasting relationships with startups, welcoming them into our ecosystem, co-creating and experimenting in ways that tap each other’s expertise and ultimately leverage our resources to imagine – and reimagine – what’s next for retail and beauty.”

Among other retailers, Amazon.com in April established a $1 billion Amazon Industrial Innovation Fund “to spur and support innovation in customer fulfillment, logistics, and the supply chain.”

Also in April, Chipotle launched a $50 million Cultivate Next fund focused on restaurant innovations. In May, Home Depot launched a $150 million Home Depot Ventures fund to “identify, fund and partner with early-stage companies to accelerate emerging technologies that aim to improve the customer experience and shape the future of home improvement.”

Other retailers with digital innovation funds include CVS Health, Alimentation Couche-Tard and Albertsons.

A still common route to explore emerging technologies is strategic collaborations. Kroger in March partnered with Nvidia to build an AI-powered lab and demonstration center.

Walmart, Amazon and Nike stand out for making numerous acquisitions to extend their digital capabilities. Earlier this year, Nike announced plans to open an Atlanta Technology Center focused on supply chain, cybersecurity and AI.

Ratnakar Lavu, global CDIO at Nike, wrote on LinkedIn, “Our advanced teams focus on AI/ML, platform as a service, dev ops, Web3 and much more and we aspire to move people into action to create a better world.”

DISCUSSION QUESTIONS: What’s driving the apparent trend of retailers establishing venture funds to invest in digital startups? What’s the advantages and drawbacks versus strategic partnerships or outright acquisitions?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Maybe I am naive but I see this as a way to engage next-gen customers and innovators and to help legacy management keep their finger on the pulse of innovation."
"These are mutually beneficial relationships for both parties and, ultimately, for the end-consumer as well."
"One big drawback is that many of these investments fail, as most VCs will tell you."

Join the Discussion!

13 Comments on "Can venture funds help retailers keep apace with technology?"


Sort by:   newest | oldest | most voted
Mark Ryski
BrainTrust

All businesses need to innovate, and this is an effective way for some retailers to do it. For retailers that have the financial wherewithal, creating venture funds to invest in promising technology is a smart way to go. But while this may be effective for some retailers, it won’t be for others who lack the capital and expertise to do it effectively. One big drawback is that many of these investments fail, as most VCs will tell you. But one of the big advantages is that if a successful technology can be found, the retailer may have exclusive rights to apply the technology in their business to help create competitive advantage.

Bob Amster
BrainTrust

Retailers have come to understand the importance of technology and its ongoing development. The industry leaders have the financial resources to promote their own cause and, by investing in such ways, they are staking out pieces of a variety of innovative, emerging technologies so they can be first to apply them. This is as speculative as any investment. Some investments will succeed and many will not. The downside of this approach is that retailers may become to involved in the development and the running of tech companies, which is not really the realm of retail (with the exception of Amazon and FedEx which are more technology companies than anything else).

Dion Kenney
BrainTrust
1 month 16 days ago

The world is changing at a remarkable rate. The “fourth industrial revolution” is bringing all sorts of new technologies and proposed ways to apply them to create value and breakthrough operating processes. If this wave of development is like the ones that preceded it, several platform technologies will launch a thousand companies and applications, only a few of which will become “standards.” The general trend is easy to see, but it is hard to predict the winners, One thing is certain however and that is the loss of relevance of those that don’t evolve.

Christine Russo
BrainTrust

Maybe I am naive but I see this as a way to engage next-gen customers and innovators and to help legacy management keep their finger on the pulse of innovation.

Mohamed Amer, PhD
BrainTrust
Corporate venture funds can help retailers keep pace with innovation trends in the startup world. But just because you create a corporate fund doesn’t mean you will automatically attract the startups you desire. Startups weigh the pros and cons of corporate VCs and can identify several benefits from such a relationship. Corporate VCs give the startup an immediate credibility boost and add significant domain and network connections. They tend to be more patient and take a longer view than traditional VCs. They don’t usually take a board seat and maintain a lower stake to avoid triggering GAAP reporting. On the less attractive side, the strategic objective of the corporate VC may not align with the startup’s financial exit strategy, which may include a Right of First Refusal clause on any acquisitions. Competitors to the corporate VC and their ecosystem may shy away from doing business with the startup. The bottom line is that to wade into the digital innovation stream all corporations, including retailers, should investigate launching a venture fund as part of their investment… Read more »
Brandon Rael
BrainTrust

Legacy retailers have been advised to “act as a startup” and “perpetually innovate.” However a culture of relentless innovation requires a significant in-house investment of resources, tools, capabilities, and a re-imagination of that company’s operating model. There are inherent business benefits of acquiring capabilities and talents via mergers and acquisitions, but this approach will require patience, time, organizational change management and a culture shift.

As retailers seek new ways and strategies to leverage innovative technologies that fuel greater discovery, personalization, and convenience, the venture firm route that Ulta and other retailers are leveraging could help to drive and accelerate innovation without a significant investment. The startup technology community operates at the epicenter of what is innovative and exciting. While there are inherent advantages to this approach, there is a risk that these innovative approaches will fail. However failure is part of the innovation process, which requires resilience and persistence.

Melissa Minkow
BrainTrust

I love this approach. Big corporations often have so much process weighing them down, keeping them from innovating and encouraging new thinking. These are mutually beneficial relationships for both parties and, ultimately, for the end-consumer as well.

David Naumann
BrainTrust

Excellent assessment Melissa. Large companies are focused on running their business and “keeping their lights on.” They don’t have the time and dedicated resources to devote to innovation. It is also a great strategy to tap talent that isn’t close to your business to get truly innovative ideas.

Peter Charness
BrainTrust

Magic happens when technology innovators have access to deep domain knowledge. With daily requirements taking up most of the time of retailers’ internal IT team it’s hard for them to be free to innovate. Likewise technology innovation without practical use cases can be hard to benefit from. This is a good approach to marry the best of both worlds.

Gary Sankary
BrainTrust
Until the pandemic, many retailers were lukewarm about adopting new tech. Other than at tier one, there wasn’t much urgency to change. The market has done a 180 and many are looking for innovative ways to move the needle quickly on core capabilities like customer relationship management, personalization, assortment planning, and more. At the same, advances in the tech sector have opened up a host of new possibilities for ways to measure customer sentiment, reach new customers, and track inventory. It’s a bit of the Wild West out there, as anyone who’s strolled through the expo at NRF’s Big Show can attest. There are two reasons (IMHO) for a retailer to want to invest in these businesses. The first and easiest to understand is to own the IP. I’ve been involved in these acquisitions in my past life. This is only a short-term solution to keeping great ideas away from competitors. Eventually, they catch up. The other reason is to accelerate innovation by allowing these entities to operate outside the retailer’s regular funding and governance… Read more »
Tara Kirkpatrick
BrainTrust

Over the last 2.5 years especially, retailers realized the need for speed and that tech innovation is a major competitive advantage. For example, Ulta had consistently trailed Sephora in mobile downloads, according to Apptopia estimates, until it developed Buy Online, Pick up in Store in late 2019. Even after Sephora developed it out of need in 2020, Ulta spent all of 2021 outpacing Sephora by an average of 420,000 downloads every quarter. Sephora started experimenting with AR in late 2021, and these strategic investments will help Ulta test new technology, while also keeping it safe from a competitor. Assuming synergy and business results, retailers that have invested in a start-up through a corporate venture fund could make a more calculated acquisition.

Patricia Vekich Waldron
Staff

Most retail IT spend is on operations, i.e. keeping the lights on. Innovation and R&D need attention and investment away from day-to-day operations to deliver unique, next-level products and experiences.

Nicola Kinsella
BrainTrust

Why invest? It provides the vendor with more financial stability than a partnership alone, gives the retail more control over the vendor’s product roadmap, but the retailer doesn’t assume full risk like they would in the case of acquisition, and can spread the risks and benefits across multiple pieces of tech. As long as the team that’s running the fund is savvy, it’s a really interesting play. Because it provides retailers with more opportunities to innovate using cutting edge tech to help them differentiate their offering.

wpDiscuz
Braintrust
"Maybe I am naive but I see this as a way to engage next-gen customers and innovators and to help legacy management keep their finger on the pulse of innovation."
"These are mutually beneficial relationships for both parties and, ultimately, for the end-consumer as well."
"One big drawback is that many of these investments fail, as most VCs will tell you."

Take Our Instant Poll

What’s the likelihood that retailers establishing venture funds to invest in digital startups will become more common over the next five years?

View Results

Loading ... Loading ...