Suddenly, Retailers Are the New Venture Capitalists

Andreessen Horowitz, Bessemer Venture Partners and Sequoia Capital are among the most recognizable venture capital firms in the U.S. They have collectively backed life-changing startups like Airbnb, Facebook, Twitch and Zoom. Traditionally, these firms seek out young companies they believe have long-term potential. In exchange for early capital, they receive a stake, which—if they are correct—nets a huge profit someday. Now, however, startups can increasingly look to another source of capital: retailers. And that means marketers on both sides stand to benefit. Symbiosis So far in 2022, brands like Ulta Beauty, Home Depot and Chipotle have announced VC funds to invest in early-stage startups. It’s a symbiotic relationship in which young companies receive the support they’d get from traditional VCs, while retailers gain access to innovation that could potentially shape the future of shopping—and it comes as the capital market is shrinking as a result of higher interest rates. “In order to keep moving forward with digital transformation, [retailers] have to be the ones to invest since VC funds are tightening a bit,” said Kassi Socha, director analyst at research firm Gartner. And retailers are increasingly up for the challenge. A Downturn Is the Right Time to Invest in Identity Content Prisma and Home Depot Ventures Ulta’s fund, Prisma Ventures, will invest $20 million in “emerging technology startups that seek to shape future online and in-store experiences.” So far, its investments include Haut.ai, a computer vision startup that automates the collection of skin data, and ReStyle, a startup that uses AI and machine learning for hairstyles. In addition to financial support, an Ulta spokesperson noted that the beauty retailer provides mentorship and access to more than 37 million loyalty club members, which “creates opportunities for co-experimentation in real-world retail environments.” That’s a big selling point among retailers. In a similar vein, Home Depot Ventures has $150 million to invest, per a May 2022 statement. (Home Depot did not respond to a request for comment.) Ulta Beauty Debuts Revamped Retail Media Network Cultivate what's next And then there’s Chipotle’s $50 million Cultivate Next fund, which is investing in seed- to Series B-stage companies that focus on restaurants, technology and convenience, as well as those that support the quick-service restaurant’s values. So far, the fund has backed Hyphen, a platform that automates kitchen operations, and Meati Foods, which makes proteins from mushroom root that CMO Chris Brandt described as “pretty darn good.” While Chipotle has no immediate plans to add a mushroom-based product to its menu, Brandt conceded that finding a plant-based substitute for chicken “has been a hard one.” The investment therefore came because “if we don't use it, somebody else might, and we think it's the right direction to go for people and the planet,” he added. How a New Wave of Plant-Based Food Brands Plans to Restore Appetite for Faux Meat ‘Meaningful change at a much bigger scale’ According to Brandt, Chipotle has been approached by many early-stage entrepreneurs over the years “that were doing things that we liked that we thought might enhance our business,” and it wanted a way to help beyond grants. “The Cultivate Next venture fund really was designed to say, ‘Hey, what's the next level of investment that we could make to really help companies that would drive meaningful change at a much bigger scale and could help Chipotle down the road somewhere?’” he added. In addition, Brandt noted Chipotle wants a diverse portfolio, which could also include startups in packaging and recycling. “I personally would love it to have a lot of variety in there [that helps] us meet our environmental, social or governmental goals,” he said. Indeed, meeting social justice and DEI benchmarks is another reason Socha suspects retailers are launching funds now. “Hopefully, some of the startups that they're investing in are minority-led, women-owned … [and investing in] a community that otherwise would struggle to get traditional VC funds,” she added. But that’s not the only reason retailers are moonlighting as VCs. Returns, M&A and competitive advantage For starters, there’s the reason traditional VCs get into the game: potential returns. Then, of course, there’s the possibility of an eventual acquisition—or simply keeping competitors away from innovative technology. “It basically allows [retailers] to almost have first right of refusal … so they potentially can exclude competitors that are already in their industry from access to some of these new opportunities,” said Zach Weinberg, vp of ecommerce at performance marketing network Reprise Digital. And, naturally, at a time when the retail industry is experiencing profound changes, an investment portfolio with cutting-edge technology can help investors avoid extinction. “This is something we can trace back to the barrage of DTC startups that have come and disrupted so many different industries and categories at this point that it is almost not smart to not be looking around at the companies that could potentially disrupt you,” Weinberg said. Retailers also gain access to new hires—particularly to fill gaps in their technology departments. “Talent attraction is also a piece of it,” Socha said. “As key retailers are going through digital transformation, tech talent is hard to come by and retain.” In addition, the funds help retailers “develop long-term relationships with key tech leaders that might help transform their business,” she added. Customers and partners Finally, startups can generally move faster than larger, more established retailers—and they may have a customer base a retailer has struggled to reach. “It's great for the retailer because they get that tech enhancement, but it's great for the startup because they get that guaranteed revenue that allows them to keep pushing forward and grow and build,” Socha said. “When there's equity involved, both teams come to the table a little bit more motivated to be successful together.” As Agencies Struggle to Stay Staffed Up, VMLY&R Shows How It’s Investing in Talent Retention