A foothold in Silicon Valley

It is the moment in the summer holidays children dread: when the "Back to School" banners go up in local stores and parents start to tick off the list of classroom supplies for the new term. This year, Walmart, the US retailer, is trying to ease the pain with a dose of innovation. Its online Classrooms by Walmart site goes beyond a generic list of products all children need, and allows teachers to upload tailored requirements for individual classes. Some 60,000 supply lists are already online.

The idea and the technology behind it are the fruit of a "hack day" organised in January by the store's Silicon Valley-based offshoot @WalmartLabs. According to vice-president of products Ravi Raj, the unit has "a charter to innovate at the intersection of social, mobile and retail".

Such "charters" between large companies and innovators like Mr Raj and his colleagues need to change constantly. Established companies want to buy in the passion for innovation of its upbeat, forward-looking young idea-generators. But there is a natural tension between allowing innovators the freedom to come up with new products and enforcing budgetary discipline or traditional corporate culture. In northern California, where demand for software engineers is strong and the perception that the brightest can become billionaires by staying independent is even stronger, that tension is particularly apparent.

No wonder big companies have to juggle with different techniques for tapping the ideas flowing from the area, from arm's-length venture capital investment to outright acquisition. John Hagel of Deloitte's San Francisco-based research unit, the Center for the Edge, detects a greater appetite from clients to consider and invest in innovation: "Two years ago, they were saying 'Don't confuse me with big new things'. Now there's more willingness to think about other options, ways of doing business and technologies."

Silicon Valley has attracted renewed interest in recent years from venture funds operated by US companies, including Citigroup, which started focusing on venturing and innovation for its consumer banking division in 2006.

The scope of the unit, now called Citi Ventures, widened to cover the whole bank when Deborah Hopkins took charge, as Citi's chief innovation officer, in 2008. As a former chief financial officer of Boeing and Lucent, she knows how alien Silicon Valley's idiosyncratic ways can seem to the executives who inhabit head office. As she chaperones Manhattan-based colleagues from San Francisco airport to her low-rise Palo Alto office she says she often has to urge them to "ditch the tie" but she adds: "They get it when they see it."

What do they see exactly? For one thing, Ms Hopkins says, they see an intensity of attitude and focus among Citi Ventures' portfolio companies that belies the casual dress-code. Its current portfolio includes stakes in Shopkick, a shopping reward programme that adds points via shoppers' smartphones when they walk into a store, and Jumio, a payment and online identity verification company. Citi's investments get the bank a seat at the table and the opportunity to introduce the companies more easily to its business divisions. It is no coincidence that Ms Hopkins moved Citi Ventures to Palo Alto – five minutes' walk from Philz Coffee, the watering-hole for entrepreneurs and developers – in 2010. "Last year, we looked at 642 start-ups and invested in eight of them. But it isn't the investment that's the core. It's the 642 transactions with people who are intensely passionate about their idea," she says. Citi is on track to meet 700 start-ups this year.

The advantage of the corporate venturing approach is that entrepreneurial founders of the start-ups retain their independence and motivation, while big companies get access to ideas. But internal bureaucracy and suspicion of products "not invented here" can hamper adoption by corporate whales of ideas developed by these minnows. The solution may be to acquire the promising technology company outright. But here the challenge is to maintain the spark that made the target so promising in the first place.

Some companies go to extremes to do so. After eBay bought Milo, a start-up that tracks inventory at bricks-and-mortar stores for listings on mobile devices, in 2010, it installed Jack Abraham, chief executive, and his team in a standalone house on the campus, complete with table football and a basketball court. Mr Abraham said the decision helped keep his talented staff together: "They know, 'If I go to these other companies, I'll work in a cube'. Here, it gives a sense of being part of something special."

Similarly, when Walmart bought Kosmix, a social media and data analysis company with about 70 employees, last year and turned it into @WalmartLabs, it gave them freedom to experiment with new ideas from San Bruno, just outside San Francisco. Having expanded to accommodate 200 staff, the office does not have the dorm-room feel of some start-ups, but the casual atmosphere seems a long way from the dry formality of most corporate headquarters. Mr Raj, in polo shirt and jeans, says @WalmartLabs "operates like a start-up but with access to Walmart scale". Many developers relish the opportunity to work with abundant customer data to which start-ups have no access. It seems to be paying off. One of @WalmartLabs' first applications following the takeover was Shopycat, a Facebook-based gift recommendation tool that created some buzz during the 2011 winter holiday season. In Walmart's new store off the freeway near San Jose, the unit is experimenting with an application that maps the location of items onto shoppers' smartphones. It is also working on ways to identify trending products that the retailer can add to stocklists quickly.

Whatever model for fostering innovation big companies choose, however, they cannot neglect internal innovation [see box] and also have to accept that some restless Silicon Valley spirits will always wish to move on to the next new thing. Venky Harinarayan and Anand Rajaraman, the entrepreneurial co-heads of @WalmartLabs and co-founders of Kosmix, left in June. They will continue to work for Walmart in an advisory capacity and the company says the rest of the Kosmix team remains intact. But as David Teece, professor at the Haas School of Business, University of California, Berkeley, points out: "There is always tension between achieving the benefits of coordination (which requires integration), and entrepreneurship (which requires autonomy)."

Additional reporting by April Dembosky

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