John Kuolt hates the term “incubator” — at least when describing UP.Labs, a new venture launched this week with inaugural partner Porsche.
“It has a connotation that we’re not,” the CEO and founder of UP.Labs told Vidak For Congress.
So what’s Up.Labs beyond the “building transformative businesses” tagline on its website?
If you look closely, you might see some trace DNA from the GP/LP venture capital world. However, UP.Labs is not a venture company, even though it originated from – and works in parallel with – UP Partners. And it is not a business accelerator or incubator, although it builds startups and collaborates with companies.
In the world of venture and startups, UP.Labs seems to be alone.
Launched at Up Summit 2022 in Bentonville, Arkansas, the new company is structured as a venture lab with a new kind of financial investment vehicle.
The premise, Kuolt explains, is to tackle the world’s most pressing transportation and mobility issues by partnering with businesses.
“We start with the question: how are we going to solve big core problems for companies?” he asked. “We believe our dissertation is the shortest path 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 launching dozens of startups — more than 200 in total — for businesses.
UP.Labs, the couple say, is different. The details surrounding UP.Labs’ partnerships, especially around the financial structure, are important.
UP.Labs starts by including a business partner. Porsche is the first and according to Foley, another company will follow this summer.
Under the three-year agreement with Porsche, UP.Labs will create six companies, or two a year, with new business models focused on the automaker’s core businesses, such as predictive maintenance, supply chain transparency or digital retail, Lutz Meschke, deputy chairman and member of the board of directors of Porsche AG on finance and IT, wrote in a LinkedIn message.
The important nugget, Kuolt said, is that the foundation of any startup will be built on a company’s biggest problems — in this case, Porsche’s biggest problems. Once that major, pressing problem is identified, the startup is formed and key talent including proven entrepreneurs, product leaders and technologists are hired.
In the beginning, the company dissects the company to find all the problems. UP.Labs identified 217 at Porsche and narrowed them down to a series of problems and associated ideas that they would solve. An investment committee made up of UP.Labs, Porsche and Up Partners, the venture firm that will back these startups, limits them to the last few the team will hatch. By the end of the year, the first two startups will be launched, funded and staffed with a CEO, executives and other talent.
According to Kuolt, the startups will focus on technology-based solutions. However, he added that since the companies they will be working with are in the industrial, physical and moving world, there may be hardware components for 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 engines,” he said. “But to create the best data science platform that makes 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 coming from companies like Snapchat, Google , Facebook. And those are people they can’t hire alone. And they know it.”
But Kuolt argues that it’s more than just the talent game that makes the UP.Labs model attractive.
Companies that tap into top talent and create new businesses or products can either pay an outside company or launch their own in-house incubator. Both are problematic, Koult said.
The pay-for-service model is too short-term, and startups need at least three years to mature, he said. According to the business incubator model, the employees who built the startup may be dissatisfied if it succeeds and they don’t get equity. And if the startup fills up, the company loses.
UP.Labs has entered into a venture agreement for corporate investors in which the partner company can own up to 25% of the founder’s shares. UP.Labs not allows the business partner to invest more than their pro rata in any of the funding rounds as this 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 company into the rest of their conglomerate, “which no one wants to do.”
After three years, a corporate partner such as Porsche will be given the option to acquire the remaining shares of the startup. They will use an outside valuation firm to determine the fair market value.
“This is important because the CEOs of these big companies, such as Porsche and the VW Group, would never allow a third party to touch all of their core business 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 will own it in three years. They know that the first three years of a startup are the hardest, and that’s where you need those great entrepreneurs with equity capital.”