Large payment companies, including PayPal, are increasingly using incubators and accelerators to learn about consumers and to nurture startups that might become partners.
PayPal's Start Tank project has expanded to two other locations after its launch in Boston in 2012. After eBay's acquisition of Braintree, Start Tank opened up new locations in London and Chennai, in the Indian state of Tamil Nadu. All three locations have different strategies depending on the local expertise.
The Boston Start Tank is "driven by local entrepreneurs the companies don't have to be directly payments-related, but we pick companies where there's a win-win," said David Chang, chief operating officer for the PayPal Media Network.
For example, one of the 20 companies working in Start Tank is Covet, a social media-based shopping bookmarker. The company allows consumers to mark items they see online to buy at a later date. If the item goes on sale or a similar product launches, the company notifies the consumer.
"This is not an area where [PayPal is] directly touching but you can see where that could lead. Once a consumer covets something, they'll buy it," said Chang. "The model is adjacent; it feeds into payments."
Another interesting business model within the Boston Start Tank is CrowdPerks, which allows consumers to broadcast their interests to merchants. If several consumers express interest in the same item or service, the seller could decide to give out a group discount or other incentive.
"This is very close to an area we're actively involved in," Chang said.
Other startups in the incubator are a little harder to connect with PayPal's business model. For example, Gloss48 is a cosmetics marketplace and instructional site, and Tackle Grab is a subscription-based service that delivers fishing baits and tackle monthly.
The metric of success in Boston is whether the incubator has a positive impact on the local ecosystem and employee and company engagement.
PayPal has helped the startups that went through Start Tank raise $18 million in local venture capital and angel investment, said Chang. And having the incubator has helped PayPal employees make better connections with partners, he said.
In Boston, four classes of startups with a total of 48 companies have gone through the incubator. In the beginning, getting into the incubator wasn't such a rigorous process, but within the current class only 11% of the companies that applied were accepted, said Chang.
In London, there are a number of ex-Braintree employees, said Chang, so that incubator is very developer- and payments-centric. Because of the incubator's goals, it organizes and supports hackathons regularly. The branch in London also heavily touts the Blueprint Project, which waives $50,000 in PayPal payment processing fees and $100,000 in Braintree processing fees for mobile or Web-based developers and startups, said Chang.
The Start Tank in Chennai is gearing up to pick its first round of startups. In Chennai, the incubator is more tech-development focused, which caters to the local culture of building technology, Chang said.
The thought of acquisition is also very different in different areas but, Chang said, PayPal doesn't pick companies just to acquire them later.
Greenbean Recycle, a kind of reverse vending machine that accepts plastic bottles, is a prime example. When a consumer puts a bottle into the machine, the consumer gets five cents directly credited to their PayPal account. But while PayPal is the funding method, the startup was acquired in September by Tomra Systems, a reverse vending machine and sensor-based sorting equipment provider.
Start Tank is more an effort to connect with developers, which PayPal was losing connection with in late 2012 and early 2013.
PayPal has not acquired any of the companies that participated in Start Tank, but the thought of acquisition is probably high in Tel Aviv at eBay's Innovation Center, said Chang. "The metric of success is whether [the startup] strikes up a deal with eBay," he said. EBay also has an Innovation Center in New York City.
As PayPal gets ready to split from its long-time parent company in 2015, Chang said he's not sure what will happen to the incubators, although each one has aligned with one company or the other.
"Post separation, I think I'll still be talking to the eBay guys in New York and Tel Aviv," Chang said. "I would continue to think that [eBay] will push PayPal as the payment method of choice."