TrueStart's retail innovation hub in London
As in love, the happiest commercial marriages are usually when both partners' characteristics are complementary. Given that major retailers are not generally known for their imagination and that all too many new businesses fail through a lack of finance and business sense, Truman clearly has a valuable role to play as entrepreneurial matchmaker and midwife.
But it is never wise to force a relationship. The best one can do is to create a propitious scenario where minds and souls can meet. In the case of TrueStart, which parent group True Capital uses to accelerate its own investment in young retail entrepreneurs, this is not a candle-lit dinner for two. Instead, cutting-edge retail & consumer start-ups are offered a hub with 450m² of stylish office space in London’s prestigious Victoria area.
It then helps if you have a mutual goal and vision. Truman has both: "We want to connect the next wave of disruptors with today's market leaders and industry stakeholders and to shape the future of the industry." Sounds good, so let’s go and visit…
Forum for innovation
TrueStart’s modern offices in Francis Street provide room for up to 20 promising entrepreneurs to nurture their ideas on premise. The facility focusses on pushing young businesses forward and offers operational support and guidance for management teams, where required.
Current "residents" are working on a broad range of projects. These include the next wave of social frictionless commerce, a real-time global opinion app that is rich in big data possibilities, or a materials alchemist.
No easy entrance
Many of the bright sparks behind these ideas are very young. "Our life is increasingly dominated by people under 30 with fresh ideas formed in a digital world that did not exist when many of today’s business leaders embarked upon their own careers," says Truman.
But none of them can just walk in. "We only accept entrepreneurs who are able to structurally innovate the niche they inhabit and to scale in a capitally efficient manner." They must also show that they have created a sustainable competitive advantage and that the business has the potential to create high barriers to entry.
If these future Bill Gateses, Steve Jobses or Mark Zuckerbergs survive the rigorous application process, all residents are offered a rigorous six-month programme where they receive day-to-day mentoring from TrueStart’s operational team headed by serial entrepreneur Richard Mergler.
During this time, they can also draw on a range of professional services from in-house legal and accounting advisors to recruitment support in sourcing and securing new team members. There is even the opportunity to access premium retail space via pop-up shops etc.
The money mother ship
Those residents awarded a place at TrueStart can also liaise with True Capital’s network of international partners, including former Ahold CFO Hannu Ryopponen, and Advisory Board members such as Marcel Corstjens, Unilever Chaired Professor of Marketing at INSEAD business school. These, in turn, are well-connected to leading retailers such as Biedronka, BIM, Carrefour, Casino, Delhaize, Jerónimo Martins, Marks & Spencer, Metro Group, Migros, Ocado, Tesco or Walmart.
Perhaps most important of all: Residents have access to growth funding. True Capital has a $5m dedicated seed fund to support the budding entrepreneurs. The company also provides access to capital throughout their journey from early working capital investment to follow-on funding.
Investors include leading international retail executives, and the 50-strong senior mentor list is headed by Anthony de Rothschild, a member of the famous banking family who are shareholders in TrueStart.
True Capital looks for consumer businesses in the UK and Europe with an enterprise value of up to £150m. The growth fund considers both minority and majority stakes in the investee companies, but, given its own knowledge of e-commerce, operational involvement is an essential part of its philosophy.
What do the big retailer partners get out of this? Clearly, sustainable access to a pipeline of innovative and scalable businesses is critical. Otherwise a company such as Tesco would not have sponsored a project like The Rainmaking Loft at London’s St. Katherine Docks where the UK retail giant contributes substantially towards making high-tech office space available to young entrepreneurs for a peppercorn rent.
"But we offer more than just space, and our team is aligned with them through our growth fund. We are also the only independent sector specialist, retail & consumer hub in Europe," Truman stresses.
How do Matt Truman and his backers make their money? TrueStart’s active operational involvement in investee companies creates sustainable deal flow towards True Capital. An investment of £300,000 in the online luxury childrenswear retailer alexandalexa, for example, realised more than 4.5 times invested capital within a three-year period, translating into a 73-per-cent IRR (Internal Rate of Return).
The corporate business model is also based on "strategic partners", such as management consultancy Accenture, international law firm White & Case, or commercial property company Land Securities, and "hub sponsors". For a substantial annual fee they gain pre-emptive access to the products, people, technologies and services that the young entrepreneurs create.
Helen Merriott, MD at Accenture says: "The partnership offers us the chance to support young business minds and genuinely influence the future of the retail industry. Fostering innovation helps our clients to stay ahead of the competition."
Aesthetic use of capital
Partners and sponsors also have direct knowledge of the deals completed within the hub and can make active use of the workspace in Victoria. The PR opportunities in supporting young businesses, innovation and young people in the industry are obvious. Partners also enjoy the automatic sponsorship of events as well as media and licensing opportunities.
Land Securities reveals its specific interest: "We recognise that on-going access to innovation in the retail and consumer sector is crucial to a business such as ours which directly owns £7bn of retail property and 17.5m square feet of retail space. All of these start-ups are potential Land Securities clients as their businesses scale."
Clearly, it will be interesting to see how much creative disruption these young entrepreneurial fauves actually create within the trade establishment. One thing’s for sure, though, Matt Truman will be watching them closely (cf. interview below).
Podcast. Click arrow to listen to an audio version of the text:
"Entrepreneurs are our stars"
We've been on a very steep learning curve from Day 1. But the main thing we have learned is to maintain independence and never to compromise the entrepreneurs' decision-making because they are our stars. We have also learned that every team and every deal is completely different.
Do big retailers with a dominant market share really need innovation?
We live in a world where it has never been so easy to globalise and where the cost of doing so has never been so low. It is therefore tempting to concentrate on international M&A. But the speed of change in grocery, especially as regards the relationship with the customer, has also never been faster.
No matter how big a company is, it has to be alive and open to innovation and able to react to it quickly. Above all, it should make innovation central to how it moves the business forward.
Various retailers have already built their own innovation hubs or sponsor external ones. Why, therefore, TrueStart?
I think the big plus we have over other pure innovation hubs is our flexibility around financing. We connect two very different parties that have always been separate. We unite the financial universe, including seed funding, incubation capital and venture capital, with large corporates who want to be innovative, but who don’t really have the necessary structure or culture.
As regards retailer-owned hubs, the key issue for me that our entrepreneurs want to be billionaires bringing the retail and consumer sector along for the innovative ride. They don't necessarily want to work for said big retailer and they don't want the prize to be solving that industry stakeholder's problems.
We have found that these retailer owned hubs often become iterative rather than genuinely innovative and end up with their own employees in the hub rather than groundbreaking entrepreneurs. The biggest challenge in this business is finding world-class entrepreneurial talent and we believe retailers and industry stakeholders struggle to find, recruit and retain those types of smart creative.
They are frequently structured in cohorts, which I find somewhat strange. It also strikes me as odd that the entrepreneur has to have an idea within a particular timeframe. The reality is that new business ideas and opportunities often come when you least expect them.
So what do the corporates get from you?
I think there are huge benefits to be gained from our deal flow, networks, and relationships with both senior executives and government authorities. We offer an independent hub which provides independence of thinking as well as sustainable and creative access to innovation. Corporates thus gain a pre-emptive right to build relationships with young, fast, innovative disrupters.
We see it on three levels: the intrinsic knowledge level where a head of strategy should know these developments exist, the pre-emptive ability to implement that idea or business into a stakeholder's business ahead of the competition, and, finally, the ability to acquire a particular asset if it fits with the strategy.
The key word here is pre-emptive, that is what creates advantage, a genuine pre-emptive pipeline of structural disruption for our partners, set up in a very structured way.
What if these brave sparks are working on ideas that threaten one’s own business?
There is intrinsic value in having exclusive access to innovation before your competitors do! Take, for instance, one client of ours, Land Securities. They are a FTSE 100-company with around £8bn of retail exposure. Regardless of whether our young entrepreneurs are working on a new click & collect or pop-up shop concept, Land Securities needs to know how its investment in bricks & mortar might be affected. So whatever it is, they get to see it first through partnering with us.
What retail and fmcg projects are your entrepreneurs working on?
One example is a supply chain analytics business that predicts when a factory could go wrong. If you have a bottling plant, for instance, the technology forecasts what parts of the factory are slowing or breaking down on the basis of only very small movements in performance.
Apple now uses this warning system in a Foxconn Electronics factory in Shenzhen. If you are putting 70 iPhones a minute through a production plant, there are huge savings to be made from avoiding wastage.
We also have teams working on real-time pricing analytics displayed on dashboards that sit on buyers' desks. This is particularly exciting because pricing and the transparency of pricing are hugely important issues for the trade.
Other research is focussed on applying online analytic capability to bricks & mortar. This year we signed a deal with a firm that effectively monitors the movement of customers in shops and their transactional behaviour in real time. The results can be pushed through to store managers to help them make better decisions around customers.
Much research is also focussed on customer loyalty cards. One of our business applications has come up with a system that puts new online analytics technology into existing company cards. Nearly all retailers have loyalty cards these days, but no one wants to change established structures at a cost of millions. So the new idea offers bricks & mortar retailers enhanced analytics capability within a seamless, frictionless integration process. Big retailers often have three- or four-year IT plans that require even more years to build and implement. So it is very difficult to sell a new idea to a CIO or CTO where they would first have to totally recast their business.
Who are your shareholders?
We are trying to build a vertically integrated, laser-focused investment firm. As co-founders and owners of True Capital, Paul Cocker and I control the wider group together with a silent partner who is a tech entrepreneur on the US-West Coast. We have two external, minority shareholders in TrueStart, which is the hub proper: the Rothschild and Heffernan families.
Why do you call yourselves a 'sector specialist' investment group?
If you look at the investment industry, private equity and hedge funds are mostly based on size rather than specialisation. Instead of thinking vertically, they tend to work horizontally across a specific market capitalisation. A mid-tier private equity firm, for instance, will tell you that it invests $30m to $50m in projects, regardless of the sector involved.
I’ve never really understood this because, if I know what makes a good retail business, then due diligence etc. will be very similar whatever the size and the IP from sector knowledge and networks will build incredibly strongly over time. The hub provides a fantastic network and culture in this regard.
You have also opened your business to external partners for an annual fee of £125K. How would retailers like Edeka or Rewe profit from such a partnership?
Our fee is relatively small for big retailers within the context of their overall business. It gives them permanently focused access to the whole deal-flow process. So they will also be exposed to interesting ideas that have the potential to provide them with the new technology they know they need.
Even excluding the cultural and knowledge benefits gained, partners only need to implement one technology out of 20 businesses a year in order to get a return on their fee. This is why we promise to deliver ROI in six years, especially when our technologies are implemented across a multi-billion dollar business.
We also offer retailers accountability as many projects just get lost and nothing gets done. We bring partners to entrepreneurial seed projects in a very structured way. Big retailers can then accelerate these in order to sustain or enhance market leadership.
Do you offer external partners any other investment opportunities?
Next year we hope to build some specialist funds on top of the hub. Retailers can invest in these to take the businesses further from a financial return perspective, but we’ll manage the funds on their behalf. So retailers will not only be able to see the innovation implemented, but also get a growth fund return on what they are doing. We have some retailers and stakeholders involved in this way already.
You now have a score of entrepreneurial teams at your London hub. How did they find you and you them?
Probably around half of our applicants originally came from our own networks or via referrals. The other half contacted us through the digital application process on our website. We don't market in the traditional advertising sense, but we build sustainable partnerships with universities such as Imperial College, London.
We also embroil ourselves in the entrepreneurial community, which is a very disparate group, as entrepreneurs can come from anywhere. Later on, they often become our biggest advocates.
We have two full-time employees who help us build a community by hosting our own events. These can be anything from a hacker-thon to an investor day. We also do a number of pitches to top businesses and raise awareness about our brand at trade conferences etc.
Could you extend your innovation hub model to other countries?
Yes, and we've already talked to interested parties from Singapore, Hong Kong, New York and San Francisco. But the key thing for me is first to prove the model here in London. However well-funded one may be, you live or die by the quality and quantity of the entrepreneurs that you are able to attract. This is why we haven’t regionalised in the UK because we couldn’t find enough exceptional deal flow.
Quite frankly, we've got some way to go in the UK because university courses are still not as relevant as they should be. While it is quite possible to receive CVs from US applicants who have studied "entrepreneurship with computer science", highly intelligent local guys still sometimes write that they have "studied Latin" because the education system is not directed enough towards business.
Do you have a philosophy of investment and innovation?
There are many forms of capitalism on financial markets. Innovative entrepreneurs create underlying and sustainable growth. That can mean jobs and infrastructure or, as was the case with Cadbury in 19th century England, whole new towns.
Entrepreneurism dynamically changes the current system or way of behaving. Therefore, entrepreneurs never fit in initially because they are not on the treadmill with everyone else and happy to assume that everything that goes on is also perfectly reasonable.
Obviously everyone at our hub is creating something different and is innovating in their own particular niche, but the beauty about pulling these like-minded people together is that they can actually learn a lot from one another. As a country, I would like to see us become net generators of Intellectual property rather than net consumers.
Would you also say that innovation cycles are becoming increasingly fast?
People talk about waves of change, but in my view innovative changes are being made almost constantly. Given the speed of technology today and the rapidly falling price of being involved and global, if you are not changing and evolving, you will be left behind at a far quicker rate.
In fact, I don’t see even see the process as innovation anymore, I see it as reality. What these young guys do every single day is just reshaping reality, which, by definition, is being innovative.
Could one call what you do 'creative disruption'?
When selecting the entrepreneurs at our hub, we ask if the business is structurally changing and industrially disrupting within its specific industry niche.
But we also ask if the disruption which the innovation would cause has a competitive advantage, and if that competitive advantage is sustainable driven by a genuine consumer use case.
We then look at the entry barriers and whether the idea can be scaled efficiently.
But the key is not disruption for disruption's sake; it's about creating a competitive advantage. The best managers and entrepreneurs are those who understand competitive advantage and who invest in it to enhance such advantage and to build scale. That's when you really become disruptive!