Big companies generally can't innovate like start-ups. Even when the will is there and internal groups are given start-up-like environments, it's hard to recreate the energy, desperation, and inspiration felt in truly entrepreneurial settings.
That does not mean established, mature businesses can't profit from the ingenuity that's common in a start-up setting. Some companies have created incubators to do just that, while others make select investments in fledgling companies.
Starbucks (NASDAQ:SBUX) has decided to become one of those companies that invests in start-ups by creating Valor Siren Ventures I (VSV). The investment will be managed by Valor Equity Partners, "a leading growth-focused private equity investment firm that was among the first investors in food technology," according to a press release. "The new fund will identify and invest in companies that are developing technologies, products, and solutions relating to food or retail."
What is Starbucks doing?
The coffee chain won't be entering this space alone. It has invested $100 million in VSV, and seeks to raise an additional $300 million in the next few months from other strategic partners and key institutional investors. Starbucks also plans to "explore direct commercial arrangements with these start-ups," according to the press release.
"We believe that innovative ideas are fuel for the future, and we continue to build on this heritage inside our company across beverage, experiential retail, and our digital flywheel," said CEO Kevin Johnson. "At the same time, and with an eye toward accelerating our innovation agenda, we are inspired by and want to support the creative, entrepreneurial businesses of tomorrow with whom we may explore commercial relationships down the road. This new partnership with Valor presents exciting opportunities, not only for these start-ups but also for Starbucks, as we build an enduring company for decades to come."
This is the coffee company acknowledging that while it will continue to invest in technology, the next great idea may not come from its own people. Investing in start-ups allows the company to see what's being developed and to quickly adopt emerging technology.
Will this work?
Investing in start-ups is a challenging proposition, but the chances for Starbucks-backed companies to succeed are greater than for those companies fully on their own. In theory, the coffee company should be able to identify companies creating solutions for problems it has. If the solutions succeed, Starbucks can become a customer, driving the start-up's growth.
In some cases, the coffee company could buy a controlling interest in a company that creates solutions that work for its needs. In others, it can remain a customer, profiting from its stake in the start-up.
You don't need to succeed in every investment when you create a venture fund. In fact, one major success can cover dozens of failures. That makes it logical for the coffee chain to invest in diverse ideas and companies looking to do things that may not yet seem possible.
It's hard to know what the next major innovation in the food service space will be. It could involve packaging, delivery, supply chain, or countless other areas. With this new fund Starbucks will have a much better chance of being on the cutting edge of technology (and owning a piece of it) than it would have had if it continued to operate solely on its own.