The disruptor that doesn't want to be disrupted

A subsidiary of JetBlue Airways is investing in startups to better understand travel technology, guard against disruption, and position its parent for the future.
JetBlue

When JetBlue Airways was founded almost 20 years ago, the company was seen as a disruptive force in a sector already undergoing a shakeup.

Major US airlines were staving off threats from discount airline pioneers, such as Southwest Airlines, who were capitalising on the use of small airports, offering few frills, and driving down fares demanded by some of the industry's heavyweights at the time.

JetBlue sought to fit somewhere in the middle by offering less expensive fares than full-service carriers but more cabin comforts than other low-price competitors.

The gambit worked. Today the New York-based airline is an established carrier that reported annual operating revenues of $7 billion last year — about two-and-a-half times what it reported ten years prior.

JetBlue's success illustrates how opportunities can be exploited when established companies don't evolve quickly enough. It's a lesson JetBlue is mindful of now that the airline itself is a veteran of the sector.

Two years ago the company founded JetBlue Technology Ventures, a wholly owned subsidiary based in the southern San Francisco Bay area known as Silicon Valley, which has become a global centre for technological innovation.

"We were very conscious about what was happening to general industries and the speed of disruption and the speed of change," said Steve Priest, ACMA, CGMA, who was named CFO of JetBlue in early 2017 after serving as the airline's vice-president of structural programmes. "We wanted to be ready and continue that innovative spirit as we continued in our history. We thought the best way to do that was to partner with Silicon Valley."

The unit, one of the first US airline-backed venture capital subsidiaries, is dedicated to identifying, funding, and nurturing early-stage companies developing technologies that, in the near term, could help JetBlue reduce costs, increase operational performance, or improve customer service. Other investments could reshape the sector altogether. Having a front-row seat can help the airline adapt.

Through the subsidiary — which is funding everything from data software startups to electric aircraft manufacturers — the airline is adopting the approach that a good offence is the best defence. The disruptor doesn't want to be disrupted.

"I'd rather be driving the bus than getting hit by it," Priest said.

Pressure to innovate — faster

The rate of technological advancement, mobility of talent, access to information, and relatively low financial barriers to starting a new business continue to put pressure on established corporations to innovate.

About 63% of companies are experiencing disruption and about two-fifths are highly susceptible to future disruption, according to Accenture Research's Disruptability Index 2018. One cautionary note for disruption deniers: The average tenure of an S&P 500 company is projected to be 12 years by 2027, down from 33 in 1964, according to US consultancy Innosight.

To avoid being blind-sided, established corporations are increasingly creating corporate venture capital groups to invest in startups that are developing innovative technologies. In 2017, about 243 corporate venture capital groups were involved in at least one early round of funding for a startup. That's up about 45% from 2016, according to data from CB Insights.

Corporate venture capital groups tend to differ from traditional venture capital firms, which are usually focused on a return on direct investments in early-stage companies. Corporate venture capital groups find greater value in learning about new technologies that could benefit the corporate parent. Many do that through accelerator or incubator programmes, which often include a combination of direct investment and business development coaching (see "Accelerators v Incubators" at bottom of page).

Corporate accelerators and incubators tend to target companies at different stages of maturity. But they aim to do essentially the same thing: attract specific types of startups to help solve a specific set of problems for the corporation. Problems may range from internal back-office functionality to customer-facing products or services. We refer to these arrangements as "accelerators" throughout this article.

For corporations, accelerators can amount to a faster, cheaper, and less risky means to innovate compared with the corporate entity's going it alone. Likewise, accelerators can be an effective means for startups to lessen their risk of scaling. Startups also benefit by gaining access to expertise, funding, and a halo effect of the corporation's brand (see "10 Elements of a Successful Corporate Accelerator").

The programmes are highly competitive. Corporate accelerators often review thousands of applications each year but ultimately invest in only a few. Managed well, the relationship can reap rewards for the sponsoring corporation and startup, while also creating value for customers.

JetBlue's venture arm demonstrates how.

A knowledge-building exercise

JetBlue Technology Ventures targets early-stage companies — particularly those in their first few rounds of funding — at the nexus of technology and travel.

It is focused primarily on startups that want to improve things such as customer service; airline operations and maintenance; revenue management, sales, and distribution; and regional transport. And it looks for companies that are on one of three trajectories: Those that could make an impact within 18 months, those whose products could come to market within two to five years, and those with a seven- to ten-year horizon. Most fall into the first category, said Priest, who sits on the venture arm's investment committee.

JetBlue Technology Ventures has reviewed applications from more than 2,500 hopeful startups during the past two and a half years. Its portfolio consists of fewer than two dozen companies.

About 10% of applicants undergo a round of face-to-face interviews. From there, about 50 startups receive heavy due diligence from JetBlue Technology Ventures, which digs into the companies' profitability outlooks, cash forecasts, and growth potential. Up to a dozen startups might ultimately receive an investment in a given year.

Through the partnerships, startups receive proof-of-concept testing to help strengthen their value proposition, access to the airline's network of investors and travel industry experts, business development guidance, mentorship, and public relations assistance. Perhaps most important: The startups are able to test products through JetBlue, which caters to a critical mass of 40 million customers, passing through more than 100 destinations on a fleet of almost 250 aeroplanes.

The goal for JetBlue is not necessarily to make piles of money from each investment. Instead, the airline finds value in broadening its network within the travel technology ecosystem and by aligning itself with some of the brightest innovators in it. Through some of its investments, for instance, it is working alongside aerospace manufacturers such as Boeing and the investment arm of tech giant Google. And partnerships with the startups allow the airline to glimpse technologies that could shape the industry for years to come. If one of the portfolio companies is a raging financial success, then JetBlue receives a return on its investment, but a return is not the primary objective. "The benefits JetBlue gets as a whole — in terms of education, culture, innovation, ideation — significantly outweigh the dollars that we're investing in these companies," Priest said.

And, in the context of JetBlue's overall balance sheet, it's a small price to pay, he said.

"We're not trying to find the next Airbnb or the next Uber because, first and foremost, we're an airline and that's what we're about," Priest said. "But we continue to look at tangential business opportunities to continue to drive margin for JetBlue."

The cutting edge of bottom-line efficiencies

JetBlue has long been a forerunner in travel technology. It was among the first airlines to offer in-flight live television and free high-speed wireless internet. But those perks seem quaint compared to what the company is focused on today.

Companies in JetBlue Technology Ventures' portfolio are using artificial intelligence, including machine learning, and cellular technology to better forecast weather events, flight delays, and airfares and to streamline the booking process for individual customers and small businesses. Many of the startups already have a functional product in use.

Gladly is one example. The company's product aims to improve the customer experience by taking all the touchpoints a customer might have — be it with a chatbot on a website, a customer service phone call, email, or even social media channels such as Facebook or Twitter — and putting them in one place, enabling customer service representatives to more quickly assess what a customer needs and how to resolve the issue.

Volantio is another. The company focuses on revenue and capacity maximisation. Its software uses machine learning to help airlines figure out which passengers might be willing to move from a high-demand flight to an underbooked flight. It sends a mobile message to those passengers, sometimes days ahead of a flight, offering upgrades, travel vouchers, or frequent flyer points. If the passenger accepts, the software rebooks the flight. By more quickly identifying flexible travellers, airlines can also cater to last-minute travellers. The arrangement, in turn, enables airlines to fill more empty seats and, thus, increase revenue.

"Those companies are either reducing our costs, increasing our revenue, or improving our operations," Priest said.

The longer-horizon companies, meanwhile, are focused on technologies that could reshape air travel.

Zunum Aero
JetBlue Technology Ventures has invested in Zunum Aero, which is developing a fleet of small, hybrid-powered aircraft that it hopes to have in customer fleets by 2022.


Big ideas but on a smaller scale

These "moonshot" companies make up a smaller fraction of JetBlue Technology Ventures' portfolio, Priest said. But they're the ones that set the imagination ablaze.

One company, Joby Aviation, is developing an electric aircraft that could eventually serve as an air taxi. Another, Zunum Aero, is building a fleet of small hybrid-powered aircraft.

Zunum's recent growth illuminates just how powerful an accelerator can be to a startup. Early last year, the Seattle-area company had three employees, a room in a shared office, and a dream: to build a fleet of aircraft that could connect an underutilised network of regional airports to reduce door-to-door travel time, lower emissions, and cut fuel costs, in turn making flights under 1,000 miles more affordable.

Financing that vision — which involved pitching the idea to investors not fully entrenched in the aerospace sector — was a challenge. But then JetBlue Technology Ventures entered the picture. It invested in Zunum last year.

"A lot of investors are not even able to quantify or assess the risk," said Ashish Kumar, the CEO and founder of Zunum. "... Having JetBlue was a tremendous boost. Not just with their direct investment, but in terms of the message it sends other investors — that you've got a leader in the market, an innovator in the market, that understands aviation, is able to assess risks, that is willing to underwrite our programme. That was very, very important."

The JetBlue brand has been a particular boost to Zunum's talent recruitment efforts. Before the investment, Zunum might have received five calls back for every 20 calls to potential job candidates. Since the investment, and because of the buzz surrounding it, most of those recruiting calls are now returned. "Even if they want to say no, there's curiosity," Kumar said.

Zunum now has three offices, 30 full-time employees, and a plan to test its 12-passenger aircraft by 2019, at which point it expects to have up to 150 employees. It hopes to have the aircraft in customer fleets by 2022.

"Without this nature of backing, we'd be very nervous about trying to scale up at that pace," Kumar said. "And we probably would not be able to scale up, just not being able to pull in the talent at the pace we need them."

And without the confidence to grow, it might not have its first customer, either. In May, Zunum announced that its first customer planned to add up to 100 Zunum aircraft to its fleet.

The customer? JetSuite, a private jet charter company, which also happens to be a JetBlue partner.

Informing the future

Many of these complex, long-horizon technology investments might not be JetBlue's bread and butter now, or ever. But it's critical for the company to be involved in the early stages of development.

For instance, JetBlue isn't an aircraft manufacturer. But advancing electric-powered aircraft technology could help its bottom line. Once larger aircraft can utilise the technology, airlines could reap the rewards of cost savings and greater financial predictability. Fuel costs, after all, are volatile, and they represent a significant chunk of an airline's budget. JetBlue, for example, spends about 23% of its annual operating budget on fuel.

There's also the danger of not getting involved at all in these tangential businesses. It's the danger of irrelevance. "We're looking through a risk-management lens of 'let's not get left behind', to make sure we are keeping pace with the changing environment,'" Priest said.

And there's a cultural element to the airline's entry into the venture capital arena: The mentality of innovation, long a staple of JetBlue's culture, has been refreshed and strengthened.

"If you look at the fabric of the organisation," Priest said, "the way we run our business will be more and more influenced by the investments we've made in these ventures and the influence they have on the business as time moves forward."

Business units at the corporate headquarters are often asked to consult on venture-backed startups and their products. Conversely, business units increasingly seek the venture arm's expertise to identify emerging technologies to solve specific problems within the company.

Through those relationships, there are new leadership opportunities for up-and-coming employees. JetBlue personnel often serve as board advisers to startups in the JetBlue Technology Ventures portfolio.

Meanwhile, members of JetBlue's finance leadership team, which Priest oversees, now have an annual innovation goal related to company objectives, which is tied to compensation.

Already, the team is investigating ways to improve its payment processes by testing technologies that could reduce manual transactions, increase refund payment options for customers, and speed transactions from days to minutes.

That finance team innovation goal didn't exist before the company's creation of JetBlue Technology Ventures, Priest said.

"It's bringing a spirit of innovation across the whole organisation," he said. "It's getting everyone to think in a different way."


Accelerators v incubators

Accelerator and incubator programmes are generally created to nurture growing companies in which the investment group has a stake. Arrangements differ by organisation in terms of investment and support offered. But both concepts have the intent of helping startups develop products and market maturity through coaching, mentorship, and access to an established network of experts.

Venture capital-backed accelerators and incubators focus on developing a company that will provide investors return on initial investment. Corporate-backed accelerators focus on developing a product that will help the company and its constituents.

Accelerators are usually designed for more mature startups or ideas in need of a capital and organisational boost. Incubators are often associated with companies still in the ideation stage. Incubators often don’t take equity positions in startups, whereas accelerators often do. Corporate accelerators can be considered a form of corporate venture capital, especially if an equity position is taken.

Some accelerators and incubators are all-virtual arrangements, whereas others are on-site at the corporate backer, which may offer space within its facilities.

On-site arrangements cost more due to required overhead, but they offer opportunities for startups and corporate leaders to collaborate more organically. These work well in innovation hotbeds such as Silicon Valley in California. But their pool of applicants may be limited only to startups already in the area or with the means or willingness to move there.

Virtual accelerators offer a lower-cost alternative because most of the collaboration is done virtually. This may require heavy scheduling to collaborate. But there’s an upside: A virtual accelerator can lure startups from anywhere, regardless of location.

— Mark S. Brooks


Jack Hagel is an FM magazine editorial director. To comment on this article or to suggest an idea for another article, contact him at Jack.Hagel@aicpa-cima.com. Mark S. Brooks is the associate director of innovation and strategic partnerships at the Association of International Certified Professional Accountants.


Additional reading

Buying innovation: The rise of corporate venture capital

Some organisations are looking beyond their corporate borders to invest in — or outright buy — products or technologies.