· 5 min read
Retailers have been zipping up their Patagonia vests lately to assume the role of venture capitalists. This year, Ulta, The Home Depot, Chipotle, and most recently Dick’s Sporting Goods have all introduced their own VC funds to invest in early-stage companies. We had a few questions about these funds, like why they’re so popular (hint: $$ and missed opportunities are part of it) and how long this trend will last, so read on to learn more about the retail venture wave.
Who are they investing in? Earlier this month, Dick’s Sporting Goods debuted DSG Ventures, a $50 million investment fund focused on brands that “serve athletes and their communities,” according to the company.
- Its first few investments include women’s basketball footwear maker Moolah Kicks; sporting-goods marketplace SidelineSwap; and secondhand outdoor-gear shop Out&Back Outdoor.
Ulta Beauty introduced its own VC fund, Prisma Ventures, in August. The $20 million fund is centered around digital innovation—like data-driven tech and AR, VR, and the metaverse—for seed-stage or series A tech companies.
- The beauty retailer’s chief digital officer Prama Bhatt said that with the fund, Ulta and startups would be “co-creating and experimenting in ways that tap each other’s expertise.”
- So far, it’s given $$ to companies like search-engine tool Adeptmind, lash-extension tech company LUUM, and virtual hairstyle try-on company Re/Style.
The Home Depot in May announced Home Depot Ventures, allocating $150 million with the aim “to find and scale the next big ideas in technology and retail,” EVP and CFO Richard McPhail said in a statement.
And in April, Chipotle rolled out a $50 million VC fund, Cultivate Next, which supports seed to series B companies in “emerging innovation,” according to a release announcing the fund. Its first two investments announced in May were automated food-service platform Hyphen and alt-meat company Meati Foods.
Why are retailers doing this? They’re mainly pushing for growth, according to Simeon Siegel, managing director and senior retail and ecommerce analyst at BMO Capital Markets. “As companies grow and mature, it behooves them to constantly be on the lookout for new growth sectors,” he told us.
The move isn’t too different from the M&A that CPG giants and luxury players have been doing for ages, so Siegel noted many retailers are essentially asking themselves, “Why not me?”
- Ulta, for example, has “facilitated the rise of very successful brands,” and may specifically be wondering why they aren’t getting in on that success before it happens, Siegel noted.
That earlier involvement means earlier equity, yielding higher potential for return for retailers, Kassi Socha, director analyst at Gartner, said. That’s ultimately a step up from the brand incubator model many retailers have previously implemented. “The terms and the outcome and the pressure to succeed is a little bit higher as well,” Socha said.
- With larger organizations, adapting to changing trends quickly can be tricky, so these investments help them innovate more quickly, too.
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Why now? As the capital market tightens and interest rates rise, startups need $$, and retailers are feeling the pressure to diversify their sources of revenue as the retail landscape evolves, Socha said. She also said that retailers are “realizing some of the mistakes” they made in not getting in early with buzzy DTC brands that’ve since stolen some market share.
“Can you imagine if Ulta or Sephora had invested in Glossier early and helped them get off the ground?” Socha said. “How transformative that would have been to their retail organization, had they embraced some of those growing brands from the start, rather than trying to push into a partnership or an acquisition later on?”
However, Siegel also noted that we’re in a bit of a different funding climate than when the ideas for these VC funds were likely formed.
“I think it’s fair to assume the retail-focused fund was thought up and created in a lower-interest-rate, higher-VC-interest environment,” he said. “This has clearly been a work in progress that likely originated back when everyone wanted to be a VC focused on digitally native brands.”
Will the trend continue? Given that we’re in a fairly different economic environment than when these funds were first dreamed up, this one’s a tough call.
“Retailers tend to collectively come together and carry out a trend,” Socha said. “But with some of the macroeconomic pressures we’re facing, it’s unseen if this will be sustainable. Will retailers continue to be able to afford to launch VC funds if they themselves face continued economic pressures?”
Regardless of how future investments are marketed, retailers likely aren’t immune to the goal that many VCs have, Siegel noted. “In an era where people want to find the next great sustainably profitable growth company, retailers may be no different there.”