Balter on why Dunnhumby Decided to Start Making Venture Investments
“We can do all sorts of innovation internally, but we better start paying attention to what’s happening around us. Let’s bring the talent closer to us, and learn from their mistakes and their growth.”
“The hardest thing for a large company to do is to see that two people in a garage are going to be a real company some day. …People inside Dunnhummby would say, ‘We’re working on stuff like that, and we’re going to do it faster.’ We may, but they have nimbleness on their side.”
Seseri says Many Entrepreneurs Worry about Taking Money from Corporate VC Groups
Some of them, like Comcast Ventures, Time Warner, or Citi Ventures, “are there to stay. You can rely on them. They behave very much like financial investors.” But others are more fickle, getting into VC when times are great and getting out when things seem bleak. “Those are less reliable as sources of capital” from the entrepreneur’s perspective. “Will the person serving on your board be in that role even two years from now? Will your board change, will there be capital for follow-on [funding] rounds?”
“I advise my startups not to take [first or second round] money from strategics.” With later rounds, Seseri says, corporate VCs need to be able to offer help in addition to money — like assistance entering a new geographical market.
Why PayPal Offered Free Office Space to Startups Through StartTank
“A lot of employees at eBay and PayPal came from startups,” through acquisitions. (Chang was one of them, joining PayPal after it acquired his company Where in 2011.) “We had extra office space. [The message] from the top down [was], ‘If you can run the program, and do it with no extra resources, you are welcome to do it.’ It was our sixth day in the week — that was the time we would spend. There were five other locations within eBay and PayPal doing the same thing, and it was all from entrepreneurs [who’d been] acquired in.” eBay and PayPal didn’t charge rent. Chang said that having startups working alongside PayPal employees helped with retention, since his people “could share their expertise with the early-stage companies.”
“I’ve talked to 25 other local companies” about offering space to startups. “For us, it was this side passion project for the ecosystem. For a lot of others it was [to get close to] innovation to eventually acquire, or a startup that would use your distribution.”
Benefits of PayPal’s BattleHack Hackathon Series
“We held BattleHack, with $100,000 in prizes, in 14 different parts of the world, just to get [software] developers to use PayPal and Braintree APIs for payment,” Chang says. “[The goal was to] find the next Uber before it became Uber.” Chang says that PayPal “spent godawful amounts of time trying to work with Uber” as its payment engine; it was ultimately successful. “If we could have identified them earlier, it would have been easier.”
“BattleHack continues to grow,” with more participants each year, Chang says, and PayPal has hired developers who have participated in it.
Why Not Just be an Early Customer?
Balter suggests that one way to get close to startups is to set aside a few million dollars to “pay for startup services. Who wouldn’t want a huge brand to be on their client list? We did one initiative at Smarterer for GE. They paid us a little money and got probably 5x the money in service.”
But it’s essential to “make it super-easy” to work with your company, he continues. “The death to most startups is procurement, like, ‘You need Level 7 security audits [to work with us.]'” Balter suggests creating a one-page agreement. “Some [of these partnerships] will fail, some will be great — but you will get really close to a lot of companies.”
When Startups get Acquired
For the startup, company “culture will never be the same post-acquisition,” Balter says. “As a startup, you’re a race car, super nimble, spinning around the track. The minute you get acquired, you’re basically in a kayak going down a slower river. Your job is just to lean with the river as much as you can…Your career can take off if you learn to lean the right way.”
“Integrations don’t work,” Seseri says. From her Microsoft years, “the only instances where they worked was when we left the companies entirely alone. The best example is Bungie, which makes the game Halo. We left them where they were in the barn and never went anywhere near it, and it became a multi-billion dollar franchise. The other acquisitions, you’re taking startup people who have fire in their belly and telling them, ‘You’re level XYZ and to be re-leveled, you have to wait two years.’ The leadership — [as soon as the] golden handcuffs come off, they’re out the door.”
Here’s a slide referenced during the conversation, showing some of the ways big companies and startups can interact.