Twelve years after convincing Wal-Mart Stores Inc. to spin off its online store into a separate entity, Accel wants to find another old-line corporation willing to create an Internet offshoot. The firm is actively considering three to five similar partnerships with large global companies that need an injection of technology innovation, said Jim Breyer, a partner at Accel.
As venture investors jockey to finance the hottest young companies, Accel sees an opportunity for established brands to attract dot-com talent. As with Walmart.com, Accel would help the corporations create a separate Internet business and then use 10 percent to 20 percent of the newly created equity to offer stock options to executives and engineers.
“We take what we believe is a superb physical world company, which for a lot of reasons can’t recruit this next generation of best and brightest Internet entrepreneur,” Breyer, 50, said this month in an interview. “Our idea is in our own way to help unleash some of the opportunity by taking what can be best about the great traditional company but be able to recruit people, give them equity and treat it much more like a venture business.”
In January 2000, Palo Alto, California-based Accel bought a minority stake in Wal-Mart’s online store and spun it out, with the parent company owning a majority stake. Less than two years later, Wal-Mart bought back the site. That provided Accel with a quick payback on its investment, and led to Breyer taking a board seat at the retailer.
The spinout strategy is one area where the 29-year-old firm sees less competition from venture rivals, Breyer said. While he wouldn’t name any companies they’re in talks with, he said they are mostly large media and entertainment providers in Beijing, New York and “other important centers.”
Venture firms are fighting over the same social-networking startups, raising the incentive to look elsewhere, said Mark Cannice, a professor of entrepreneurship and venture capital at the University of San Francisco School of Management.
“There’s a lot of competition for the social plays at the seed and early-stage level,” he said. “It makes great sense to lever their reputation to go after a new market that’s not really tapped and establish themselves early on as a first mover.”
Calling the Shots
These sorts of deals wouldn’t be like typical private- equity investments, because Accel is not aiming to take a majority stake and wants to work closely with the parent company’s management, Breyer said.
The ideal corporation has a single leader or family that owns a large part of the company and can “call the shot,” he said. In Wal-Mart’s (WMT) case, it was the Walton family, which still owns 47 percent of world’s biggest retailer.
While the strategy was successful for Accel, Wal-Mart has had a mixed record online since buying back its Internet unit. The company lags behind Amazon.com Inc. in e-commerce sales, and the parent company’s stock has trailed the broader market over the past decade. Since resuming full ownership of Walmart.com in July 2001, shares of Wal-Mart have climbed 15 percent. That compares with a 27 percent gain for the Dow Jones Industrial Average over that stretch, and an 11-fold increase for Amazon’s stock.
The challenge now for Accel is to find growth after Facebook, which is poised to generate record returns for investors after its initial public offering. Accel, which invested $12.2 million in Facebook in 2005, owns 11.5 percent of the Menlo Park, California-based company’s Class B shares. That stake will probably be worth about $8.5 billion after dilution, assuming Facebook goes public at a $100 billion valuation.
Breyer declined to talk about Facebook, citing restrictions surrounding the company’s pre-IPO quiet period.
In addition to the U.S., Accel has funds that operate out of the U.K., China and India, and is making investments in other countries, including Brazil, Australia and Russia. While the firm continues to invest in Web, mobile and social startups in the U.S., those markets have become more competitive following the success of Facebook, Groupon (GRPN), Twitter Inc. and Zynga Inc.
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