“There are certain environmental factors that affect innovation and favour start-ups,” says Dave Feller, co-founder & CEO of the Redwood City-based Yummly. “Large companies have difficulty replicating these. Some of those are: being small, having technology-focused teams, efficiency and effectiveness of internal communications and rapid decision-making.”
Multinational corporations, by their very nature, end up as large bureaucracies. The corporate culture is codified; risk-taking, innovation and entrepreneurship are in short supply. Yet there is a growing realisation that in an innovative age, if you don’t join the crowd, you are dead. Companies in fast-moving consumer goods (FMCG) and allied sectors, where innovation needs to straddle several dimensions – product, packaging, distribution, marketing – are trying to solve the problem by funding external start-ups.
Yummly, which describes itself as “the most powerful way to search 1 million-plus recipes”, was funded by Unilever Ventures, amongst others. “Unilever Ventures was started to give Unilever a window into the start-up world and find early-stage companies that it could collaborate with, or young brands that it could help to grow and one day integrate into the Unilever portfolio,” says Christopher Sponiar, investment principal with Unilever Ventures, the venture capital fund of the Anglo-Dutch MNC. “Yummly (and others like it) can offer speed and innovation which can be valuable learnings for larger companies,” says Feller.
Unilever is one of the early
a second fund of €90 million and Unilever Ventures recently started investing out of a third fund of €350 million. “All the money is from Unilever,” clarifies Sponiar. Success stories include Snog frozen yoghurt, which began life in London and now has outlets in Kuwait, Pakistan, Columbia and Dubai. “Unilever has licensed the brand to create a take-home product,” says Sponiar.
Feller explains what Unilever brought to the table: “Yummly has several other investors including Unilever Ventures. They provide guidance and resources.” What’s so innovative about a directory of recipes? Yummly is different from other food sites, says Feller, because of its ability to ‘understand’ a recipe. “We can look at a recipe and determine a lot of things about it: whether it’s applicable to
Feller: valuable learnings
specific diets or allergies, the nutrition, the price per serving, the taste… Because Yummly ‘understands’ recipes at such granular levels, it can also provide excellent recommendations (similar to a Netflix or Pandora).”
Some Unilever Ventures’ investments have given handsome returns. Brainjuicer is a market research consultancy using psychology, behavioural economics and social sciences to create tools that better understand and predict human behaviour. Unilever Ventures invested in Brainjuicer in 2003. The company was listed on AIM in 2006. Unilever divested its stake through a series of share placements in 2010 and 2011, generating a 17x multiple on its investment.
Unilever is not the only big fish sniffing around the start-up pond. In Europe, in 2006, Nestle tied up with Inventages Venture Capital to set up a new fund styled W. Health. At the launch, Nestle explained that “this fund will invest in companies active in health, well-being and nutrition as an external complement to Nestle’s own internal R&D competencies”. Says Nestle spokesperson Meike Schmidt: “Nestle has invested in the W. Health fund, managed by Inventages, and not in the company itself. The investment is ongoing and is showing positive results.”
Among the companies backed by Inventages are Xolution, which has
developed re-closable ends for beverage cans; Accera, whose portfolio consists of novel therapeutic drugs and medical foods for neurodegenerative diseases such as Alzheimer’s, Parkinson’s, and Age Associated Memory Impairment; and Phytomedics, which is developing innovative pharmaceutical and food products from traditional plant remedies.
Wolfgang Reichenberger, former global CFO, Nestle, is a general partner at Inventages. In an interview with PricewaterhouseCoopers’ Retail & Consumer World, he explained the difference: “As an independent venture capital fund, Inventages can make independent decisions and participate in the supervision of portfolio companies in a very different fashion from any large corporation… We are not averse to small and sometimes more risks investments than Nestle or any other large corporation. Next, we seek participation, whereas large corporations seek control. Finally, corporations integrate and normally realise synergies. We, however, side with our companies in the years of highest growth rates, and negotiate the modalities of an exit in a couple of years.”
Kartik Hosanagar, professor of Internet commerce at The Wharton School, says he prefers the Reichenberger approach rather than companies making direct investments in start-ups. “Within their sectors, these investors can be very strategic,” says he. “The biggest concern that entrepreneurs have about investors is whether they add value beyond providing money. These strategic investors know the market well, can make customer introductions, and help with all kinds of business development.
The flip side is that taking a lot of money from a strategic investor can at times limit exit options for entrepreneurs. Competitors of your investor may hesitate to buy you because they are worried that your investor has already acquired a lot of proprietary information about the start-up. So, at times, taking money directly from a strategic partner, such as a large company in the market, can backfire. For this reason, I like models wherein these MNCs do not invest directly but instead join as limited partners in an independent venture vehicle. That model has some of the benefits that a strategic investor can provide without many of the downsides.”