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.

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).

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.

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.

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 »

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.

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.

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.

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 »

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.

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.