Big pharma and technology companies have long been big spenders in start-ups. Others are taking their cue, opting to invest and buy tech companies and not just their products to stay ahead of the curve.
UPS is one such company. The Atlanta group with the fleet of iconic brown trucks has invested around $35 million in more than 30 new technologies in the past 10 years.
As a result, UPS has its hands in everything from radio frequency identification (RFID) and wave technology for the military to homeland security systems and information services for rural villages. Currently, there are 14 companies in its investment portfolio.
The investments suit UPS and the start-ups. UPS gets access to a stream of fresh ideas. The companies, aside from access to capital, can foresee potential future business with the logistics giant and its network of commercial customers.
Each of our investments is driven by strategic interests, says Alan Koenning, who manages the UPS Strategic Enterprise Fund. They're clearly areas that might impact us or impact our customers in terms of how they do business.
UPS doesn't act like a typical venture capital firm; it doesn't take a seat on a start-up's board and has no interest in actively managing the companies in which it invests. It has not bought any of the technologies in which it has taken a stake, either. There's not even a guarantee that corporate involvement will lead to an eventual relationship with UPS or its customers.
We don't put any restraints or constraints on what they can do, says Koenning, part of a two-member investment team. What we're bringing to the equation is our subject-matter expertise, the depth of knowledge in a particular technology or marketplace and the experience and ability to provide perspective.
Emily Mendell, vice president of strategic affairs for the Arlington, Virginia-based National Venture Capital Association, says the UPS strategy is fairly typical of corporate investors. The reason for a corporate venture capital arm most often is not to make a return, she says. The corporate venture capitalist has this almost benevolent reason for being there.
Risks and rewards in VC-style investing
The risk to the entrepreneur, she says, is that corporate VC programs can fall in and out of favor,influenced by changes in a corporation's overall economic health or the whims of a new CEO. But the good news is that corporate VC investing appears to be on a roll, she says, hitting a seven-year high in 2007 at 788 deals. That's up from 676 transactions the year earlier, according to joint research from the association and PricewaterhouseCoopers with data from Thomson Financial.
Alongside traditional venture capitalists such as Carlyle Group, Arch Venture Partners, and others, UPS typically makes an initial commitment of $200,000 to $500,000 in an early-stage round. VCs often serve as referral sources for investment ideas, performing a lot of the initial due diligence, Koenning says.
Investing as start-ups mature
UPS, which continues to invest as the companies mature, also learns about prospects from alliances with universities and its own divisions, which come across new technologies during the course of everyday business.
Once an investment is made, UPS assigns a so-called board observer from within the corporation to serve as the hands-on liaison, attending the start-up's board meetings and providing regular feedback and consulting to management. It also offers access to UPS's operations, which sometimes serve as a laboratory.
They learn from our market, the logistics business, and how they could get value from it, says Robert Papetti, portfolio project manager with UPS's corporate industrial engineering group, who has been assigned as the liaison to Aveso Inc., which is developing thin, low-cost electronic displays for use in product packaging, apparel and other applications. We give them access to what we think our customers will want; they try to get some info on that, too, he says.
UPS made its initial investment in Aveso in 2006. Today the two companies are working closely together as Aveso develops a number of ideas that will likely benefit UPS customers.
Among them: inexpensive smart labels that could alert handlers when the temperature of a package goes above or below what the materials it holds can withstand. Already there has been high level of interest from the health-care industry.
Says Aveso Executive Chairman Nicholas Wood: It's a complete open door. For us, it's product sales. For them, they'll get some efficiencies out of it.