American’s malls are taking an interest in retail startups in an effort to drive up consumer interest.
By Ruth Simon. Source: WSJ.
America’s startup-investing frenzy has reached the shopping mall.
On the prowl for retail innovation, Simon Property Group, the nation’s largest mall developer, has funneled roughly $20 million into 18 startups, mostly over the past 15 months through its venture-capital arm, Simon Venture Group.
In June, Simon invested $1 million in Union Station, an online bridesmaid’s dress rental service. In an early meeting, the two companies brainstormed ways that Union Station—which currently operates a showroom at its New York City headquarters and runs pop-up events around the country—might eventually develop a presence in Simon malls. J. Skyler Fernandes, managing director of Simon Venture Group, has also introduced the startup to roughly a half-dozen possible investors.
“It’s a potential new retail category that Simon doesn’t have in its portfolio of retailers,” said Mr. Fernandes, who was brought in to launch Simon Venture Group last year, having previously worked for Centripetal Capital Partners, a Stamford, Conn., venture firm.
Corie Hardee, 35 years old, said she founded New York-based Union Station in 2012 after realizing that the four most expensive dresses in her closet were bridesmaid’s dresses she had worn just once. The investment from Simon Venture Group “is a great validation of what we are doing,” she said.
Westfield Corp., another mall developer, runs Westfield Labs, which employs a team of software engineers and invests in—and works with—startups. Indeed, Simon and Westfield are two of five mall operators that are backing the Silicon Valley startup Deliv Inc., a crowdsourced delivery service that connects available, vetted contracted drivers with retailers that need items delivered. The as-needed drivers make it easier for retailers to compete with Amazon.com Inc. and other big e-commerce companies.
Daphne Carmeli, the 51-year-old founder of Deliv, said working with the top mall developers reduces her Menlo Park, Calif., company’s operating costs, provides access to hundreds of retailers and makes it easier to offer a single solution to major retailers with locations around the country.
Speaking about Deliv, Mikael Thygesen, Simon Property’s chief marketing officer and part of the team that vets potential investments, said he believes that using an existing store as a distribution center makes the physical presence more valuable. “Fulfilling from the store is very interesting to us,” Mr. Thygesen said.
Simon Property chief executive David Simon (no relation to reporter) launched the fund last year as a way to get better access to startups. The fund is a wholly owned subsidiary of Simon Property, a real-estate investment trust, which operates nearly 200 malls, outlets and other retail properties. Simon Property has about $4.87 billion in annual revenue.
Mr. Simon approves each investment, which can range from $250,000 to $5 million. The Indianapolis-based company had previously made a handful of ad-hoc investments in startups. One of Simon’s startup investments has already produced a return: Shopkick Inc., a shopping-loyalty app, was acquired last year by SK Telecom Co. for $200 million.
“We’re finding out where retailers have their biggest problems and then finding solutions, whether they are useful for Simon or for retail more broadly,” said Mr. Fernandes.
Elsewhere, Simon has made two investments totaling $1.5 million in Fashion Project, an online retailer that also allows consumers to donate gently used clothes and direct proceeds from their sale to the charity of their choice.
Fashion Project “brings people to the mall for donating clothes,” said Mr. Fernandes, who figures he has spoken with more than 1,700 startups since launching the fund. “It brings them back a second time if there are incentives from retailers.”
Last year, Simon ran two pilot projects, allowing customers to register for Fashion Project and pick up donation bags at four of its malls. It also has connected the startup to retailers it could partner with on donation programs, according to Fashion Project co-founder Anna Palmer.
The mall operators’ appetite for investing in startups illustrates how established companies of all stripes are turning to venture funding as a way to stay abreast of the latest innovations in business and business models. There were 686 venture-backed deals with corporate financing last year, the highest since 2001, according to Dow Jones VentureSource.
Home improvement retailer Lowe’s Cos. doesn’t have a formal venture fund but has a dedicated team researching opportunities and making investments in early-stage startups such as Decorist, an online marketplace offering affordable personalized design and décor advice.
Corporations jumped into venture funding in the late-1960s, mid-1980s and dot-com boom of the 1990s, only to retreat when the market soured. The median lifespan of a corporate venture fund has been just one year, according Harvard Business School Professor Josh Lerner. “We’ve seen some element of faddishness about it,” Prof. Lerner said.
Generally, financial “returns from corporate venturing programs have been substantially less than those of independent venture groups,” Prof. Lerner added. But even ventures that aren’t profitable can provide companies with valuable access to potential partners, cutting-edge technology and new business models, he said.
Other potential pitfalls include conflicts of interest between corporate investors, who may view a startup as a potential acquisition candidate, and startups that might find it more lucrative to sell to another buyer or to take their company public.
Jeff Bussgang, a partner with Flybridge Capital Partners, a venture-capital firm based in Boston and New York, typically tells founders of early-stage businesses to wait until their companies are more established before taking corporate funding because their business models and priorities may change, which can put them at odds with a corporation whose priorities are their own strategic interests.
Deliv’s Ms. Carmeli sees the partnership with mall operators as a win-win. “I was able to lock up an ecosystem,” she said. “The mall operators want to see the success of the retailers.”