Going Small for the Next Big Idea

The latest emerging market might be in your own backyard.

Increasingly corporations are tapping the brainpower of startups for innovative products and technology they wouldn't have dreamed up themselves. Often the new ideas have the millennial market in mind.

"The small innovative companies are where the innovative edge is going to come from," says Jeff Amerine, founding principal of Startup Junkie Consulting in Fayetteville, Ark. As a result, large corporations are attempting to get plugged in to the startup scene with venture capital arms, open innovation platforms and startup events.

For example, Walmart has participated in hackathons, such as the TechCrunch Disrupt Hackathon to be held Sept. 19 and 20 in San Francisco. "We're always looking for new, innovative ideas," says Bao Nguyen, spokesman for Walmart Global eCommerce in San Bruno, Calif.

At the same time, startups can benefit from the access to retailers and brands. Eight startups, chosen out of hundreds of applicants, were selected in September to participate in Mondelez International's Shopper Futures program. The startups, which include Sampler, Shelfbucks, Freckle IoT, Strap, Turnstyle Solutions, Aislelabs, Earshot and Aisle411, will work with Mondelez brands and major retailers to develop innovative pilot programs involving mobile technology.

Walmart was a sponsor of Startup Junkie's Mentor Camp in Arkansas this summer, where entrepreneurs gleaned advice from Rick Webb, Walmart's senior vice president of global processes, and chief information officer Karenann Terrell. "They're willing to do that outreach because it's a struggle for all these large corporations to find the talent they need, particularly tech talent," Amerine says.

Walmart has acquired 14 technology companies since 2010, mostly for their talent. "The reason we're here is [in the San Francisco Bay area] is we want to take advantage of the talent pool," Nguyen says. Walmart's acquisition of Kosmix in May 2011 allowed the retail giant to accelerate the internal development of its web technology. "We married that team with our technology team in 2011," Nguyen says.

By looking at small companies at an early stage, corporations won't miss an opportunity that later goes to a competitor.

"To the extent you invest, you have some presence there," says Mike Adhikari, president of the Alliance for M&A Advisors. Large companies gain market knowledge through a corporate venture fund that makes quarter-million-dollar investments. "For every investment you make, you see 50 proposals, and that way you know where the market is going and where new ideas are coming up," he says.

In August, Constellation Brands announced a venture capital arm, Constellation Ventures, to forge relationships with companies years before they previously would have been acquisition targets. "This is really set to be the external innovation arm for us. Before it was hit or miss. People might come to us with ideas or we might stumble upon ideas, but we didn't do it in a very formal way," says Lou Applebaum, Constellation's senior vice president strategy and business development.

The venture arm has announced an investment of an undisclosed amount in Crafthouse Cocktails, a Chicago business offering craft cocktails in a bottle. Constellation's Chief Growth Officer Bill Newlands identified the startup and approached it, says Matt Lindner, co-founder of Crafthouse Cocktails.

"We certainly were looking for investment and ideally smart money–people that we could lean on that could help us with our growth. It was a perfect fit," Lindner says.

Consumers' growing interest in local and organic products also is fueling the trend toward investments in startups, says Benjamin Lee, director of business development at CircleUp, a crowdfunding site focused on consumer brands.

"It's almost by definition much more difficult for a large brand to create that small, local-feeling product because that by definition is not who they are," Lee says. "They look to us for trends and what is doing well." CircleUp, which has helped over 110 companies raise a total of $125 million, filters startups interested in fundraising on the platform, and it accepts fewer than 5 percent of the companies it reviews.

"There's been a lot of statistics around the rise of the millennials' buying power. With that comes the millennials' taste for smaller, more unique offerings. That's just by definition separate from what the large corporations are able to do," Lee says.

Retailers with a local focus also are using the site. Green Zebra Grocery, a small-footprint concept in Portland, Ore., received funding on the site, Lee says. The retailer, which aims to provide healthy products in a convenient retail format, received $1 million from investors on CircleUp as well as $2 million from other investors, according to OregonLive.com.

While many large CPG corporations have established their own venture arms, including Unilever Ventures, General Mills Ventures, Coca-Cola's Venturing & Emerging Brands, and Life Ventures by Nestlé, crowdfunding and startup contests allow for an earlier look. Yogurt maker Chobani has opened a food incubator to provide startups with advice and resources as they gain traction, and Campbell Soup, Procter & Gamble and others use open innovation platforms or contests to scout for new ideas.

The brands' calls for innovation speak to the difficulty corporations often encounter in effectively solving problems they've identified.

"Recognizing something and doing something about it are two different things," says Robyn Bolton, partner at Innosight. "Larger companies often have difficulty executing on ideas."

The pressure from Wall Street investors on large corporations to deliver positive quarterly results can serve as a deterrent for the large companies to attempt innovations considered the least bit risky. "Big companies are designed very intentionally and for very good reasons to do what they do on a massive scale incredibly efficiently," Bolton says. "Innovation is doing something different. That is incredibly difficult to do with big companies."