How This Midwestern City Is Leading America in Retail Tech
WHY YOU SHOULD CARE
Because Silicon Valley shouldn’t have all the fun.
By Brian Martucci
Last year, the top three executives at workforce management startup Branch Messenger decamped from Pasadena, California–based Idealab, the United States’ oldest surviving technology incubator, midway through their stint there. Their destination: Minneapolis.
Of 150-plus Idealab startups birthed over two-plus decades, 45 have achieved successful exits. In Pasadena, Branch’s founders had seasoned mentors who built careers guiding founders from early stage to initial public offering or acquisition. And the West Coast’s top venture funds were either across town or a short flight up the coast, in Silicon Valley.
Why trade that cushy, sunny perch for a frosty flyover city?
A legacy retailer, of all things, prompted the move. Branch was part of the inaugural cohort at Techstars Retail, a tech accelerator led by Minnesota-bred venture capitalist Ryan Broshar in partnership with Target, America’s second-largest discount retailer. But Techstars is only one in a bouquet of startup accelerators, competitions and platforms that are drawing young retail innovation firms to the Twin Cities.
We accomplished more in three months [after moving to Techstars] than in the year and a half prior.
Atif Siddiqi, founder of Branch Messenger
For years, the third-tier Midwestern metro has been dominated by health care giants like UnitedHealth Group and Medtronic, sprawling conglomerates (3M, Cargill, General Mills) and a polite, low-key culture that values incremental results over grand pronouncements. In the meantime, Target and Best Buy, the region’s big-box giants, have struggled. Now, Inspectorio, a digital quality inspection firm launched in Hong Kong, has joined Branch in moving its base to Minneapolis. Belgium-based SpotCrowd — which uses technology to help catch shoplifters in real time — and India-based StoryXpress — a cloud-based video creation service — have announced they will relocate to Minnesota in the coming months. Last year, Amazon, perennial nemesis of brick-and-mortar retailers like Target and Best Buy, quietly opened a 100,000-square-foot software development office in the same building where Branch Messenger first shifted in Minneapolis. And a slew of local retail tech startups offering services from meal deliveries and e-commerce to consumer relationship management are thriving.
“We accomplished more in three months [after moving to Techstars] than in the year and a half prior,” says Branch Messenger founder Atif Siddiqi.
When it comes to attracting startups, the Twin Cities have an edge over peers in some ways. The metro is home to 17 Fortune 500 companies. Retired executives from these firms are well represented in the area’s angel investing community, while those currently working hunt for promising acquisition targets. That’s an advantage over ostensibly startup-friendly metros like Denver and Boulder, where more early-stage companies compete for attention from fewer incumbents.
“We have a number of big companies that got their start here,” says Shawntera Hardy, commissioner of the Minnesota Department of Employment and Economic Development (DEED). “They have a legacy of entrepreneurship and strategic reinvestment in the ecosystem.”
But the emergence of this new wave of retail tech startups — both local and those that have relocated — appears intricately linked to the multiple platforms the Twin Cities have come to offer them in recent years.
RetailXelerator, a “scale-up accelerator,” connects funded product startups with retailers, utilities and other prospective clients. Its portfolio boasts about 20 concepts from across the U.S. MN Cup, the country’s largest statewide startup competition, attracts dozens of early-stage concepts each year with $450,000 in available seed capital. Not all startups that emerge with any success from MN Cup are retail-oriented, but several — like Kipsu, a customer relationship management firm, and Upsie, a retail warranty provider — are. And like Branch Messenger, the three foreign firms that have relocated — Inspectorio, SpotCrowd and StoryXpress — are all beneficiaries of Techstars’ program, as are local startups like St. Paul–based meal delivery service Local Crate.
These firms are growing, and drawing the attention of investors. Branch Messenger has received $10 million in two back-to-back funding rounds, and its services are used by giants like CVS, Walgreens and McDonald’s. Inspectorio closed last year on a $3.7 million funding round led by Target itself. Kidizen, a St. Paul–based e-commerce platform for children’s products, recently closed on a $3 million Series A round led by Chicago-based Origin Ventures, which says on its blog that it heard of the firm while attending a Techstars event. Upsie founder and CEO Clarence Bethea says the firm is growing 25 percent month-on-month.
Not all retail startups here have relied on accelerators and contests. But the upsides of these platforms extend far beyond traditional hand-holding, say founders of firms that have participated. The Twin Cities Startup Week, for instance, offers up to $300 reimbursements for flights into the metro, apart from full access to the event’s seminars and breakouts, and networking opportunities. These platforms have in turn spawned a close-knit startup fraternity that looks out for its own, says Bethea.
Harsh challenges do lie ahead for the Twin Cities. Minneapolis–St. Paul’s lakes can’t compete with Colorado’s mountains or California’s mild climate. So, those promoting the metro’s potential play up the region’s quality of life — nationally renowned parks, manageable commutes, relatively low cost of living — while downplaying its notoriously cold winters.
But anemic local funding networks and a risk-averse corporate culture, endemic to the region, are a tougher challenge to surmount. The DEED contributes $30,000 to MN Cup annually, and offers a crucial loan program for startups owned by minorities, women and veterans, who face heightened skepticism from Minnesota’s largely white male investors and executives. A state program that gave a 25 percent tax break for investments in tech and product startups has helped bring in more than $400 million in private investment, says Hardy. But Minnesota’s Legislature declined to renew the program in 2018, and funding has already run out for this year.
A fear of startups among established firms doesn’t help. “Some retail startups are so disruptive that they’re a threat to job security [at incumbent companies],” says Kim Garretson, a Minneapolis-area retail innovation consultant.
This isn’t unique to Minnesota; retailers and consumer product firms have long held innovation at arm’s length. But Doug Berg, founder of Minnetonka-based e-commerce solutions provider MyAlerts, says Minnesota companies take the cake.
Still, the willingness of the local startup community to embrace out-of-town companies leaves Techstars’ Broshar optimistic. “Their achievements shine a positive light on the region’s retail tech ecosystem,” he says.
- Brian Martucci, OZY AuthorContact Brian Martucci