"Today, we have eight seed businesses with domain managers for each seed," said Paul Davis, Coinstar's chief executive. "We pay the domain managers like at a venture capital firm: They get a percentage of the value they create. We tell them, 'It's high risk, high reward.'"
As companies mature, their leaders often want to preserve a bootstrapping, entrepreneurial mindset. Coinstar goes a step further.
The fast-growing maker of self-service kiosks started in 1991 by stationing coin-counting machines in retailers. It acquired Redbox movie rental kiosks in 2009. While Coinstar's (CSTR) machines now appear in many supermarkets and drugstores, the Bellevue, Wash.-based firm continues to seek ways to expand its product line.
"Today, we have eight seed businesses with domain managers for each seed," said Paul Davis, Coinstar's chief executive. "We pay the domain managers like at a venture capital firm: They get a percentage of the value they create. We tell them, 'It's high risk, high reward.'"
By recruiting these managers to oversee new business, Coinstar, whose shares surged over 13% in early trading Friday a day after it raised its Q1 and full-year financial outlook, hones its entrepreneurial edge. It also nurtures a host of blockbuster ideas with careful oversight and cost controls.
Sprouting Seeds
Coinstar's strategy to cultivate seed enterprises began three years ago, Davis says. The company decided to terminate some of its non-core businesses with lagging market share and replace them with experimental ideas using a venture capital model.
"We got past the concern of 'You're not a venture capital firm' by being methodical and conservative in setting up thresholds for each seed business," said Davis, 55. "Of nine seeds, we've only shot one. The other eight are all hitting their hurdle rates. We're able to learn quickly and fail cheaply."
To hatch ideas, Coinstar looks both inside and outside the company. Its approximately 2,600 employees suggest new business concepts through a series of internal contests. Of the eight current seeds, six came from the inside.
"An employee who submits a winning idea gets a nice, big fat check," Davis said. "If we scale it, the check gets bigger."
To attract ideas from the outside, Coinstar invites submissions from self-service industry professionals. It dangles access to capital and invests in promising brand extensions.
Let's Share
To identify entrepreneurial breakthroughs, Coinstar has established what Davis calls "whiteboard contests" with students at business schools.
Over the past three years of planting seed businesses, Coinstar has encouraged the domain managers to interact regularly and share insights. The collaboration pays offs.
"Early on, we underestimated the value of cross-learning," Davis said. "But the failure of one business can feed growth in another. We now have a process where each domain manager openly shares what they're learning."
For example, a domain manager might tell the others, "I've worked with this great kiosk manufacturer who's great at design but not at scaling" or "Here's my experience with different user interfaces."
