Where Brands Go to be Born Again

Citi, AmEx, AT&T and others are tapping into the entrepreneurial talent in Palo Alto, Calif.

Orange, apparently, is the real color of money.

In the Silicon Valley town of Palo Alto, Calif., within blocks of where Facebook and Google grew up, Citi’s chief innovation officer Deborah Hopkins sits in a work space that looks nothing like the typical bank office—a single, impossible-to-miss, bright orange wall, absolutely no one wearing a suit—and describes her goals for the brand.

Hopkins—who loves to talk shop—says her plan essentially is to invest millions of dollars in young startups offering digital capabilities to win over the bank’s target consumers and revitalize the Citi brand for a new age.

“We want to find client-focused innovations that will transform our company culture and identity,” she explains. “The innovations will make financial services simpler for customers; they will show people that we are a friend that wants to help them. I’d like our brand to prompt people to tell their friends, ‘Oh my god­—Citi gets me.’”

To make that brand rebirth a reality, Hopkins set up shop in Palo Alto in 2010, enlisting an eclectic team of 15 nonbankers.

When we visited the Citi offices in early January, news broke just two days earlier that 10 big banks, including Citigroup, would have to reimburse customers $8.5 billion for using defective or fraudulent documents to pursue faulty mortgages, reminding a weary public that the mortgage mess was far from over. On that particular week, Hopkins’ vision of remaking the Citi brand would appear to be a long way off.

Silicon Valley is the busy hub of digital innovation, invention and talent, and Palo Alto, a city of 66,000 attached at the hip to Stanford University, is its heart. On the thriving, mile-long University Avenue, one comes across packs of young people from around the world walking, talking and texting their way from one ethnic eatery and coffeehouse to the next. Much of the chatter revolves around who is creating, joining or leaving a given startup, and how much money they just raised. Among the older, gray-specked investor types enjoying pricey wine in sidewalk bistros, conversation centers around how the batch of current startups doesn’t have a clue about basic business principles.

Citi is one of the first of several large U.S. brands to tap into the entrepreneurial talent, culture and complex personal network that thrives here. In Palo Alto, one can also find the investment and research offices of Ford, AT&T and American Express. Walmart Labs is a just few miles away, in San Bruno. “Across industries, we are seeing disruption that goes beyond just technology—it is a disruption in our business models,” says Hopkins. “We don’t want to wait until it hits us. Citi is here to see the waves when they are ripples, so we can synthesize the changes.”

Deloitte Consulting confirms what Citi is facing. In this “postdigital” era, brands must confront “a new normal and a new basis of competition, with digitalization at its core,” says Mark White, Deloitte principal and CTO. Forward-thinking organizations have to figure out how to bake in the digital forces of mobile, analytics, social and the cloud, he adds.

Citi’s highest-profile investment is Square, a mobile payments company started by Twitter founder Jack Dorsey. In September 2012, Square closed its round of Series D funding, totaling $200 million. Investors included Citi Ventures and Starbucks Coffee Co.

Another Citi-backed startup is ReadyForZero, a site that links consumers’ financial accounts and uses analytics to advise them how to pare down their debt. About three months ago, Citi began sending some customers to the site, and the bank will expand referrals this year.

Citi has also invested in Linkable Networks, a Groupon-like service that links discounted offers directly to a customer’s Citi card. It is slated to go live this year.

In most cases, Citi Ventures makes a small minority investment in a startup (generally less than $10 million, per sources). But unlike VCs who seek a large return on their investments when a startup is acquired or goes public, the main goal of Citi and other companies is to commercialize or adapt the offering of the startup into products and services within their umbrella brands. “Our role is to be a partner, not owner. We aren’t looking for a financial return,” confirms Arvind Purushotham, managing director at Citi Ventures.

Yet surprisingly, giving away money is not always so easy. Hopkins says Citigroup execs in New York “think anybody out here will take our meetings. But actually, not. We have to show entrepreneurs that a big company can be a good partner. We must demonstrate our value to them.” In 2012, Citi Ventures met with about 800 entrepreneurs and VCs.

Are all those meetings worth it? Yes, say brand experts.

“The financial services brand that can commercialize consumer-facing tech investments the fastest will win,” says Andy Pierce, U.S. president of the brand consultancy Prophet. “Plus, if your brand is weighted with ill will due to the mortgage meltdown, as Citigroup is, a good way to turn that around is to surprise me with services that show you are working on my behalf.”

But besides simply handing out money, Citi Ventures’ work in Palo Alto is about getting into the flow of the community, says Purushotham. For instance, Citi, according to an insider, is building a relationship with AT&T’s Foundry, conveniently located across the hall. The Foundry invites indie developers to use its space to work on projects tied to telecommunications and regularly hosts networking events. Like Citi, it is on the lookout for entrepreneurs in which to invest.

Just a few blocks away, American Express is also trying to invest its way into a brand transformation. In late 2011, AmEx opened the Palo Alto office of its Enterprise Growth Group in, as it happens, Facebook’s former offices where the open floor plan is outfitted with the requisite glass, metal and, yes, bright orange dividers. Managing director Harshul Sanghi calls Palo Alto “the Disneyland of innovation. We have to be engaged in this local ecosystem. We can’t helicopter it in.”

The AmEx team works with a fund of $100 million and generally makes investments of $9 million or less in a startup as part of a funding round of about $15 million, says Sanghi. Ness Computing is one of the startups that counts AmEx among its investors. Ness offers a dining guide app that uses data from one’s social networks combined with a search engine to make personalized restaurant recommendations. The relationship is young, and AmEx won’t elaborate on its plans with Ness.

As an example of what to expect from its investments, Sanghi points to the four-month-old AmEx and Walmart-branded Bluebird card, which grew out of AmEx’s 2010 acquisition of startup Revolution Money. Bluebird, designed to broaden AmEx’s customer base, is a low-fee, prepaid debit card that can be reloaded either in stores or via a smartphone.

Digital services spawned here are intended to make AmEx more inclusive, says an insider. The brand that built its identity on a “members only” concept now wants to become relevant to anyone, including those who don’t even want a credit card. “We don’t want the brand to represent a walled garden,” says the insider. “We think everyone deserves our level of customer service.”

However, as brand strategist Pierce points out, AmEx makes most of its profit from its affluent customer base. “For it to become the brand for everyman would be a challenge,” he says. A better bet would be if its digital investments “built on the brand’s customer service and ability to hyperpersonalize its offerings. In those areas, it is already a step ahead.”

Sanghi, a VC veteran in Silicon Valley, and his team of 15 met with more than 400 startups in 2012. Every month, they also play matchmaker, hosting a dozen or so from AmEx’s offices in New York and introducing them to about 50 area startups.

When Sanghi opened the office 18 months ago, he says, Silicon Valley viewed AmEx as a bank card and travel company, but now the brand is viewed more as “a leader in the digital space.” For the handful of startups he’s identified as serious prospects, “we offer ways for them to leverage their technology for our company, and we help them become successful,” Sanghi says, sounding more like a salesman than a patron.

Strolling around the offices, Sanghi shows off the communal meeting space, a ridiculously high-tech coffeemaker (expensive coffeemakers are a Palo Alto status symbol) and a rather plain-looking counter, the only remnant from the Facebook days. “We like to rub it for good luck,” Sanghi says.