Honing the Edge

Venturing to be No. 1 in hit products

  • Article by: THOMAS LEE , Star Tribune
  • Updated: March 24, 2011 - 9:11 AM

Scouting for Best Buy's future hot sellers has led the nation's big electronics retailer into the venture-capital arena. It's also a way to help get new products onto shelves first and exclusively.

A big-box retailer from Minnesota and Silicon Valley venture capitalists may seem like strange bedfellows, but there was Best Buy CEO Brad Anderson in a San Jose hotel last October, schmoozing with technology investors about the future of consumer electronics.

Anderson, along with other top executives, store managers, and employees ("blue shirts" in company jargon), offered their views on what customers want and, perhaps more important, will want. In return, the Richfield-based retailing giant hoped to absorb a culture that prizes risk and speed, said Nancy Bologna, Best Buy's vice president of Venture Networks.

"We are coming in the spirit of learning," said Bologna, describing the company's message to the venture capitalists. "We need you. ... One of the things that we are trying to learn is the way [venture capitalists] think and the way they do business. They have a much higher risk tolerance. They have very rapid decision making cycles. We are trying to absorb their thinking DNA."

The Best Buy-sponsored forum was perhaps its most high-profile effort to court venture capitalists. Over the past four years, the company has quietly built a network of contacts in Silicon Valley to identify start-ups with promising technology that eventually may land on a Best Buy shelf near you.

It is not uncommon for global corporations such as Cargill Inc. and Medtronic Inc. to have venture-capital arms that invest in small start-ups. But big-box retailers investing in the products and services they sell is rare, observers say.

For one thing, mass retailing is inherently a conservative, low-margin business that depends on selling large amounts of merchandise, often through price promotions, to turn a profit. Such retailers are likely to stock established brands such as Sony and Apple rather than devote precious shelf space to an unproven technology from an unknown start-up.

So far, Best Buy's effort has yielded Slingbox, a device that allows users to watch their home television anywhere in the world, and Kajeet, a cell phone service for 11- to 13-year-old "tweens."

Best Buy recently started its own venture-capital fund, Alpha Capital, that will invest directly in start-ups. Such initiatives could enable Best Buy to beat its competition to the Next Big Thing by landing exclusive distribution deals, or at least allow the company to influence the product or service's rollout.

"Best Buy wants to make sure its stores have access to the latest and greatest technology," said Michael Gorman, managing director of Split Rock Partners, an Eden Prairie-based venture-capital firm. "The company wants to be aware of services being developed in which they may have a unique ability to shape it and gain a real foothold in the market. Best Buy is in a phenomenal position to engage in these conversations. They are so engaged with the customer already. [Venture capitalists] would love to have access to their thinking."

Comfortable with risk

Best Buy, the country's largest electronics retailer, has a long record of taking risks, some successful (Geek Squad) and some not (EQ Life, Musicland). But the company always performs at its best when selling new technology to consumers, analysts say.

Even in a struggling economy, Best Buy continues to plow significant time and money into new stores and fancy-sounding strategies such as "customer centricity,'' a concept that consists of more one-on-one demonstrations of audio equipment and computers, and a reenergized sales staff trained to focus on the wants of specialized customer groups, from middle-aged soccer moms to young techies.

"Best Buy is always interested in trying new things," said Mitch Kaiser, a retail analyst with Minneapolis-based Piper Jaffray Companies. Plunging into venture capital is "somewhat unusual and forward thinking," he said. "The biggest risk is that Best Buy is a retailer and they are pretty good at that," Kasier said. "Do they have the core competency in investing in technology? They are putting in products that might not sell."

Bologna said the venture program is just another step in the retailer's perennial quest for growth and innovation.

"We have never been a company to really sit back and rest," she said. "We constantly invest in how do we think about markets, about industries that are in flux such as entertainment. How do we get into a position to notice new breakthrough technologies, new business models that we may not -- because we are sitting here -- be aware of?"

Best Buy became aware of Sling Media Inc. through a venture-capital contact. Founded in 2004, the Foster City, Calif.-based start-up developed a device called the Slingbox that allows users to connect a PC, laptop, or smart phone into their home televisions. The company also developed software that remotely controls any audio/video device, including a digital cable box, satellite receiver, digital video recorder and even a still video camera.

Best Buy offered the start-up a compelling opportunity: the chance to tap into the retailer's network of stores to test consumer reaction. Best Buy does not own a stake in Sling Media.

"Sling Media is a good example. ... We met them early enough," said Marti Nyman, Best Buy's point man with venture capitalists and director of its Global Innovation Network. "It's really hard to just build a company. What they lack is: 'How do we get this to the customer; what customer need will this really fulfill?' It's like shooting at a target 2 miles away and you don't know whether it's 1 mile away or 10 miles away."

Said Sling Media CEO Blake Krikorian: "They took a big gamble on us." And it appears to have paid off. "The product has sold incredibly well,'' Krikorian said. "The relationships we formed early on with Best Buy really [benefitted] both companies."

EchoStar Corp., a satellite television provider, acquired Sling Media for $380 million last year.

Slingbox success

Neither Best Buy nor Krikorian would disclose sales figures. But Slingbox is sold at all Best Buy stores.

"We have pretty strict sales requirements once we put it on the shelf," Bologna said. "It's got to produce."

Slingbox's real value is not just a one-time purchase, Nyman said. It also promotes sales of other products and services. In other words, a customer who purchases a Slingbox is also likely to buy a television or computer and subscribe to TiVo.

"We put a product in the market that is really disruptive," Nyman said. "With the proliferation of TiVo and DVR, people want access to their stuff, their way, their time. It's this notion of portability of people's content."

Bologna said the company possesses a number of options in its venture-capital "toolbox." As with Sling Media, Best Buy could work with a start-up to test-market a product. That relationship could further develop into an exclusive distribution agreement.

Best Buy also could purchase a financial stake in the start-up through Alpha Capital. Bologna would not disclose much about Alpha Capital except to say that she and Nyman will refer promising opportunities to the fund.

"We are pioneers, kind of finding our way and betting for Alpha Capital," she said.

Thomas Lee • 612-673-7744

  • about this series

  • A continuing series on innovation in Minnesota.
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