John Kuolt hates the term ‘incubator’ – at least when describing UP.Labs, a new venture that launched this week with first partner Porsche.
“It has a connotation that we are not,” the CEO and founder of UP.Labs told TechCrunch.
So what is Up.Labs beyond the slogan “building transformative businesses”? on its website?
Look closely and traces of DNA from the GP/LP venture capital world could be spotted. However, UP.Labs is not a venture company, even though it spun off from – and operates alongside – UP Partners. And it’s not a business accelerator or incubator, although it does create startups and work with companies.
In the world of venture capital and startups, UP.Labs seems to stand alone.
The new company, which was launched during Summit 2022 in Bentonville, Arkansas, is structured as a venture capital lab with a new type of financial investment vehicle.
The premise, says Kuolt, is to solve the world’s most pressing transportation and mobility issues by working with businesses.
“We start with the question, how are we going to solve the big, fundamental business problems?” He asked. “Our thesis, we believe, is the shortest path to a faster, cleaner, safer and more accessible future.”
Both Kuolt and UP.Labs President Katelyn Foley spent years at BCG Digital Ventures, the venture capital and incubation arm of Boston Consulting Group. This is where the duo gained experience launching dozens of startups – over 200 in all – for businesses.
UP.Labs, both say, is different. The details regarding UP.Labs’ partnerships, particularly around the financial structure, are important.
UP.Labs starts by locking in a corporate partner. Porsche is the first, and another company will follow this summer, according to Foley.
Under the three-year agreement with Porsche, UP.Labs will create six companies, or two per year, with new business models focused on the automaker’s core businesses such as predictive maintenance, supply chain transparency supply or digital retail, Lutz Meschke, Vice President and Member of the Executive Board of Porsche AG for Finance and IT, written in a LinkedIn post.
The important nugget, Kuolt said, is that the foundation of every startup will be built from a company’s biggest problems — in this case, from Porsche. Once this important and pressing issue is identified, the startup is trained and key talent including proven entrepreneurs, product managers and technologists are hired.
At the beginning, the firm dissects the company to find all the problems. UP.Labs identified 217 of them at Porsche and boiled them down to a set of problems and ideas that would solve them. An investment committee that includes UP.Labs, Porsche and Up Partners, the venture capital firm that will back these startups, narrows them down to the last pair the team will begin incubating. By the end of the year, the first two startups will be launched, funded, and staffed with a CEO, executives, and other talent.
Startups will focus on technology-based solutions, according to Kuolt. However, he added that since the companies they will be working with are in the industrial, physical and mobile worlds, there could also be hardware components.
Companies like Porsche need the format and access to talent that UP.Labs will provide, Kuolt said.
“Porsche is really good at building great cars, chassis and engines,” he said. “But to create the best data science platform that makes these cars super smart and integrates with the city – to have that level of sophistication from a software and data science perspective, you need the best data science products in the world that come from companies like Snapchat, Google, Facebook. And these are people they can’t hire on their own. And they know that.
But Kuolt argues that it’s not just the talent play that makes the UP.Labs model appealing.
Companies trying to tap into top talent and create new businesses or products can pay an outside company or start their own in-house incubator. Both are problematic, Kuolt said.
The fee-for-service model is too short-term and startups take at least three years to mature, he said. Under the business incubator model, the employees who created the startup may be unhappy if it succeeds and they don’t get equity. And if the startup fails, the company loses.
UP.Labs has created a corporate investment agreement in which its partner company can own up to 25% of the founder’s shares. UP.Labs does not allow the partner company to invest more than its pro rata in one of the financing rounds, as this can make it difficult to attract talent and future investors. Kuolt also noted that if they owned more than 25%, according to accounting principles, they would have to consolidate this business into the rest of their conglomerate, “which no one wants to do”.
After three years, a partner company like Porsche will have the option of acquiring the remaining shares of the startup. They will use a third-party appraisal company to determine the fair market value.
“It’s important because the CEOs of these big companies, like Porsche and the VW Group, would never allow a third party to touch all of their essentials in their factories if they didn’t own them,” he said. he declares. “And so, they allow us to do that. They allow [the startup] to tackle the big deal because they can fall asleep at night knowing they’ll own it three years from now. They know that the first three years of a startup are the hardest part, and that’s when you need those great entrepreneurs with equity.