John Kuolt hates the term “incubator” — at least when describing UP.Labs, a new venture that launched this week with inaugural partner Porsche.
“It has a connotation that we aren’t,” the CEO and founder of UP.Labs told ProWellTech.
So what is Up.Labs beyond the “building transformative companies” tagline on its website?
Look closely and some trace DNA from the GP/LP venture capital world might be spotted. However, UP.Labs is not a venture firm, even though it emerged from — and operates in parallel with — UP Partners. And it’s not a corporate accelerator or incubator, although it is building startups and working with corporations.
In the world of venture and startups, UP.Labs appears to sit alone.
The new company, which launched during Up Summit 2022 in Bentonville, Arkansas, is structured as a venture lab with a new kind of financial investment vehicle.
The premise, Kuolt explains, is to address the world’s most pressing problems around transportation and mobility by working with corporations.
“We start with the question, how do we go solve big core problems for corporations?” he asked. “Our thesis, we believe, is the shortest road to a faster, cleaner, safer, more accessible future.”
Kuolt and UP.Labs President Katelyn Foley both spent years at BCG Digital Ventures, the venture capital and incubation arm of the Boston Consulting Group. It was here that the pair gained experience in launching dozens of startups — more than 200 in all — for corporations.
UP.Labs, the pair say, is different. The details around UP.Labs’ partnerships, particularly around the financial structure, matter.
UP.Labs starts by locking in a corporate partner. Porsche is the first, and another corporation will follow as early as this summer, according to Foley.
Under the three-year agreement with Porsche, UP.Labs will establish six companies, or two a year, with new business models focused on the automaker’s core activities such as predictive maintenance, supply chain transparency or digital retail, Lutz Meschke, deputy chairman and member of the Porsche AG executive board on finance and IT, wrote in a LinkedIn post.
The important nugget, Kuolt said, is that the foundation of every startup will be built off a corporation’s — in this case, Porsche’s — biggest problems. Once that big, pressing problem is identified, the startup is formed and key talent including proven entrepreneurs, product leaders, and technologists are hired.
In the beginning, the firm dissects the corporation to find all problems. UP.Labs identified 217 over at Porsche and whittled them down to a set of problems and accompanying ideas that would solve them. An investment committee that includes UP.Labs, Porsche and Up Partners, the venture firm that will back these startups, narrows them down to the final pair that the team will start incubating. By the end of the year, the first two startups will be launched, funded and staffed with a CEO, executives and other talent.
The startups will be focused on technology-based solutions, according to Kuolt. However, he added that since the companies they’ll be working with are in the industrial, physical and moving worlds, there may be some hardware components to them as well.
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 motors,” he said. “But in order to create the best data science platform that make these cars super smart and integrate with the city — to have that level of sophistication from a software and data science perspective, you need the best data science product people in the world that come from companies like Snapchat, Google, Facebook. And those are people that they can’t hire on their own. And they know that.”
But Kuolt contends it’s more than just the talent play that makes the UP.Labs model attractive.
Corporations trying to tap top talent and create new businesses or products may pay an outside firm or launch their own in-house incubator. Both are problematic, Kuolt said.
The pay-for-service model is too short-term, and startups take at least three years to mature, he said. Under the corporate incubator model, the employees that built the startup may be dissatisfied if it succeeds and they don’t get equity. And if the startup tanks, the corporation loses.
UP.Labs has created a corporate investor venturing agreement in which its partner corporation can own up to 25% of the founder’s shares. UP.Labs doesn’t allow the corporate partner to invest more than their pro rata in any of the financing rounds because it can make it difficult to attract talent and future investors. Kuolt also noted that if they own more than 25%, depending on 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 corporate partner like Porsche will have the option to acquire the remaining shares of the startup. They will use a third-party valuation firm to determine the fair market value.
“This is important because the CEOs of these large companies, like Porsche and the VW Group, would never allow a third party to touch all their core stuff in their factories if they don’t own it,” he said. “And so, they allow us to do it. They allow [the startup] to tackle the big problem because they can go to sleep at night knowing they’re gonna own it in three years. They know that the first three years of a startup is the hardest part, and that’s where you need those great entrepreneurs with equity.”