By Tom Furphy
Over the past three decades, venture capital (VC) has been the backbone of many of the most transformative innovations across industries including the retail and consumer industries. Yet, as we enter a new era, a stark reality is emerging — VC investment into these sectors is drying up. VC investment into the retail and consumer sectors is running at less than half pre-COVID levels and more than 75% below COVID peaks. At a time when Amazon and Walmart collectively spend over $100 billion annually on consumer innovation, the rest of the industry finds itself increasingly starved of external investment support. This not only compromises innovation in the near term, but also serves as an existential threat to long-term industry viability as consumer interest shifts toward retailers and experiences that continue to raise the bar.
Last year in this issue of Chain Drug Review, I wondered if this decline in external capital would prompt us to create a new innovation model. One that the industry can bring forth while maintaining competitive boundaries and can be tapped by retailers of all sizes. A model that encourages entrepreneurial risk and is supported by adequate funding, while igniting industry innovation and giving retailers a seat at the table. And, most importantly, an innovation framework that allows us to delight our customers with new breakthroughs to help them solve all kinds of challenges in their daily lives.
This prompted a series of discussions with retailers in the U.S. and abroad who believe that this existential threat could prompt the industry to do things better. The discussions were productive, and the direction was clear. That set us off to develop an investment model that addresses the challenges raised by traditional VCs while turning the industry into an innovation machine. The Consumer Equity Partners (CEP) Industry Innovation Fund is the result of this work. We believe this can be a transformational initiative to foster industry-driven innovation while offering equity upside to market-making retailers and improving outcomes for start-ups and scale-ups.
Why now? The funding shift threatening retail innovation
The need for this initiative stems from a growing funding gap in retail and consumer innovation. As highlighted in an article I wrote last year, the venture funding model is evolving in ways that disadvantage the retail and consumer sectors. While some of the pullback is the result of VCs raising the bar on investment requirements, demanding completed pilots, proven ROI and often profitability before committing capital, much of it is attributed to major VC firms pulling back from retail and consumer investments altogether. These VCs consistently point to the long sales cycles, full retailer tech road maps, never ending pilots and lack of technical rigor within the industry as the key reason they’ve pulled back funding.
This decline in funding starves start-ups and scale-ups of the critical financial fuel that they need. Requiring start-ups and scale-ups to be self-funded pressures them to prioritize profitability over innovation, potentially stifling new breakthroughs. For retailers, it presents an existential challenge: Without a healthy pipeline of external innovations, they risk falling behind the technological arms race that is being led by their massive, well-funded competitors.
A $15 trillion industry at a pivotal moment
Essential Commerce, the retail channels and product categories that customers shop to serve their daily needs, represents a $15 trillion global industry. Within this, as consumer experiences are reshaped by AI, quantum computing and emerging business models, we estimate at least $1 trillion in new market value will be created in the next decade. The CEP Industry Innovation Fund aims to tap this potential by investing in enabling technologies and new models that will shape the future of Essential Commerce. We’ve assembled a founding team with a proven track record of success growing start-ups and innovating inside companies such as Amazon, Tesco, Intel, Unilever, Microsoft, Panda Group and Airbnb. Our team’s shared passion for consumer and retail innovation drives our commitment to this fund.
A new model for innovation investment
The CEP Industry Innovation Fund is largely structured like a traditional VC fund, but designed to provide strategic advantages to industry investors, such as retailers, brands and service partners, while reducing risk for start-ups and scale-ups. Our model allows retailers to fund innovation from their balance sheet instead of their P&L, enabling them to make longer-term bets. We then extend the retailers’ investment dollars with additional capital from strategic and financial investors, giving them outsized value for their investment.
We source and qualify innovations globally, ensuring they align with retailer strategies. Retailer investors participate in the due diligence process and commit to at least one pilot every two years, ensuring real-world application of emerging technologies. A rigorous preconfigured pilot process, supported by highly regarded implementation partners, mitigates risk and positions successful companies for broad-scale adoption. Most importantly, this combination of capital and expertise makes it easier for retailers to test and adopt innovation without derailing their current road map initiatives. This model accelerates innovation timelines, improves technology ROI and allows retailers to participate in the equity upside of successful portfolio companies.
Investment focus areas
The fund will invest based on a Consumer 2050 thesis that spans major areas of innovation including new shopping experiences; smart retail, merchandising and store operations; responsive supply and fulfillment solutions; advanced retail media, marketing and advertising innovations; culinary and food service solutions; and retail and consumer health tech. Our thesis will continually be informed by technological advancements, emerging trends and our investors’ strategies. We will target companies that have previously raised outside capital, have a product that is sufficiently developed so that we can assess its capability and defensibility, and the company should have demonstrated some level of product-market fit.
Exclusive market immersion experiences
Beyond investment, the CEP Industry Innovation Fund provides exclusive market immersion events for its retailer investor base. These events, held one or two times per year in innovation hubs around the world, offer firsthand insights into cutting-edge consumer and retail innovations. Participants gain exposure to emerging technologies, new business models and next-generation retail formats while attending start-up showcases and pitch sessions. These immersions foster strong international deal flow, helping retailers stay ahead of global trends while providing education and inspiration to their teams.
Shaping the future of retail innovation
I’m encouraged to report that the CEP Industry Innovation Fund is gaining traction worldwide, with several major retailers and strategic investors committing to the initiative. If this momentum continues, we anticipate closing the fund and making our first investments by the third quarter of this year.
The launch of this novel investment and innovation platform represents a pivotal shift in how innovation is funded and fostered within the retail and consumer industries. By providing an alternative to traditional VC funding, we aim to empower retailers, accelerate promising start-ups and drive the next wave of industry transformation. For retailers looking to stay competitive; for start-ups seeking patient, strategic capital; and for investors eager to capture upside in Essential Commerce innovation, the CEP Industry Innovation Fund offers a unique, high-impact solution.
Tom Furphy is chief executive officer and managing director of Consumer Equity Partners.
