Thursday, March 24, 2011

New venture bubble?

What's driving the trend this time, Ackerman says, is a long-term shift in the way companies invest in research and development. With less money devoted to corporate R&D amid pressure to turn immediate profits, big companies "are having to tap into innovation externally, and their VC arms are becoming the front line."

Differing models

Intel was one the leaders in corporate venture capital during the dot-com bubble. "Intel made a lot of money in the early days, and a lot of companies saw that and started joining," said Roy Martinez, who spent four years at Intel Capital during that time and is now chairman of North Bay Angels in Petaluma.

Intel's investment model long has focused on startups that can help its bottom line; last month, the firm announced plans to put about $26 million into six mobile-technology startups. After all, the more mobile devices that are sold, and the more that mobile games drive demand for new devices, the more chips Intel sells.

Chipmaker Nvidia takes that approach even further: its in-house venture program, launched in 2009, invests solely in startups that use the company's proprietary graphics-processing units for computing applications. "If these startup companies are successful, they increase our market footprint," says Jeff Herbst, vice president of business development.

On the opposite end of the philosophical spectrum is Google Ventures, which rolled out two years ago with the goal of investing $100 million a year. Google's portfolio defines diverse, ranging from mobile-payment services and anti-malware technology to vacation rental clearinghouses and a maker of ultra-fuel-efficient cars.

"I think we have breathed new life into corporate venture," says managing partner Bill Maris. The fund now has stakes in more than 20 startups (up from 10 last May); it's increased its staff by 60 percent in that time to about 25.

Rather than look for startups that will, in Maris' words "help us sell widgets," Google's nigh-bottomless coffers allow the search giant to focus on what he calls "incredible entrepreneurs." You'd expect that from a company that famously lets its employees spend 20 percent of their time dreaming up new projects, but Maris insists there's a rigorous approach to sifting through the hundreds of pitches they receive (including referrals from company co-founders Larry Page and Sergey Brin). "Our objective is financial return," Maris says.

Google's wealth does free it from many of the hassles traditional venture firms face, like raising money from outside investors. And while most venture firms these days are steering clear of very-early-stage startups, betting instead on companies with greater likelihood of making money, so-called seed funding is the majority of Google's deal flow.

Though Google has teamed up on investments with outside venture firms (such as a $42 million deal announced last month in tandem with Khosla Ventures), "we're happy to go it alone," Maris says. "Traditionally, corporate venture usually needed or wanted an outside VC along for the ride, which to me always implied a weakness on the team."

Exit strategy

On the other hand, VC firms may have more of an incentive than ever to partner with corporate venture arms. With the IPO market slammed shut since the financial crisis of 2008, VCs have become more dependent on doing deals with corporate America, says James Mawson, who runs a London-based website called

In recent years, he and others note, a corporate acquisition of a venture-backed startup has been one of the only ways for VCs to recoup their investments in small companies. Even though the market may be thawing for initial public offerings of stock, Mawson expects such partnerships to continue.

Mawson says corporate VC began 50 years ago as an "experiment" that has ebbed and flowed in the decades since. "Rising from the ashes of the 2008 recession," he wrote in a recent note to subscribers, "we see unprecedented opportunity for the pieces to come together."

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