Best Buy poised to ax its venture capital unit

Best Buy Co. Inc. is exiting the venture capital business.

Over the past five years, the company's venture capital unit — Best Buy Capital — had invested millions of dollars in eight early-stage start-ups with the hopes of exclusively selling new technology through its retail stores.

But as new CEO Hubert Joly redirects Best Buy's resources toward core store and online operations, the company is winding down Best Buy Capital, according to two sources with knowledge of the situation. Best Buy officials declined to comment, except to say the unit still exists.

Joly is cutting costs and redirecting Best Buy's cash toward more immediate issues: rebooting store operations, matching competitors' prices, and overhauling its inventory and digital operations. The company recently laid off 400 people at its corporate headquarters, the start of a campaign to reduce costs by $700 million over the next few years. Wall Street has praised Joly's efforts as the company's stock price has roughly doubled since December.

Given Joly's priorities, it makes perfect sense for the company to eliminate its venture capital unit, analysts say. Best Buy needs positive impact now, so investing in start-ups whose financial and technological benefits could be years away does not fit into that equation, said Carol Spieckerman, president of Newmarketbuilders, a consulting firm.

"You can expect new leadership to prune anything that's a distraction from their mission of turning around their core business," Spieckerman said.

When the company launched Best Buy Capital in 2008, supporters touted the move as an innovative way to stay abreast of the latest technology coming out of Silicon Valley. Best Buy, after all, considered itself a technology company and wanted to cultivate ties with venture capitalists, the very people who kept their eyes on promising start-ups.

"We formed strong relationships with Silicon Valley," said Kim Garretson, Best Buy's former liaison to the venture capital community who now works at Ovative/Group, a digital marketing agency in Minneapolis. "We liked the fact that they could use us in their due diligence" of potential investments.

For example, Best Buy could work with a start-up to test-market a product. That relationship could further develop into an exclusive distribution agreement or an outright acquisition in which the company could sell the product under its own brands like Insignia and Rocketfish.

But some critics thought the company was a waste of time and money. A low-margin mass retailer really has no place in the high-risk, long-payoff-period world of venture capital. And if Best Buy really wanted exclusive access to a new product, the prospect of selling that product through more than 1,000 stores in North America, not venture money, should be enough to win over start-ups.

Though Garretson supported Best Buy Capital, he is not surprised Best Buy will end the program.

The retailer is trying to "rationalize" its store space to boost profits per store, which means Best Buy will likely stock its shelves with merchandise from large and proven vendors such as Samsung and Sony, Garretson said.

Still, Joly has previously said he wants to expand Best Buy's private label brands by acquiring or licensing brands from manufacturers like Hitachi and JVC. Best Buy's private label brands make up roughly 5 percent of the store's overall product mix. Retail experts say that number should be more like 20 to 25 percent.

Spieckerman said Best Buy can still boost its private-label business without resorting to complicated investments. "A lot of things can be done through strategic partnerships," she said. "You don't have to own something."

Indeed, Best Buy boasts an outfit called New Blue Innovators Program, a unit of Best Buy Exclusive Brands business. New Blue, which sponsored TechCrunch's annual Disrupt conference in San Francisco last year, offers start-ups help in product development, sourcing, logistics, marketing and distribution.

"We have the people, skills, partners, and infrastructure to significantly accelerate speed-to-market and provide a direct path to retail," New Blue's website said.

In other words, do everything that Best Buy Capital promised, but without actually having to invest money in the start-up. Best Buy declined to say whether New Blue survived recent corporate cuts. TechCrunch does not list it as a sponsor for its conference in New York next month.

As for Best Buy Capital, the company does not disclose its portfolio, but a database operated by TechCrunch says Best Buy participated in seven deals that raised about $56 million. In addition, a Canadian company called Solegear Bioplastics Inc. announced in January that it received an undisclosed investment from Best Buy Capital.

"We are still in close contact with Best Buy," said Solegear chief marketing officer Stephanie Zahn.

What role, if any, Best Buy will continue to play with these start-ups remains an open question. The future roles of Best Buy Capital's leaders also are unclear, including Kuk Yi, the unit's founder and top executive, and co-founder Winnie Zeng.

Zeng sits on the board of directors for Valencell, a start-up that is developing biometric sensors based on the human ear. Yi serves as a director for IMVU, a social entertainment firm.

Thomas Lee • 612-673-4113