InformationWeek

August 14, 2000

Vendors Partner With Venture Capitalists To Fund Startups

iven the competition to fund technology startups, how are vendors gaining an edge? Most corporate venture funds don't take the lead on deals; instead, they work closely with traditional venture capitalists, investment banks, or divisions within their companies to move quickly by offloading legal work and other research.

Sun Microsystems, for example, works with venture capitalists such as Benchmark Capital, Crosspoint Ventures, Kleiner Perkins Caufield & Byers, and Mayfield Investment Partners, according to Jonathan Schwartz, Sun's VP for corporate strategy. Sun receives about 500 proposals a week, and a 10-person team approves deals within two weeks. Signing documents and closing the deal might take an additional three weeks. In addition, Sun recently put deal scouts in Europe, Asia, and the Middle East. "We move very, very quickly," Schwartz says.

Intel receives proposals through its Intel Capital Web site and looks to its engineering labs and business-development teams for leads, says Intel Capital VP Stephen Nachtscheim. But, he says, "we'll say no to deals that look good financially if there's no strategic value." About 250 people work for Intel Capital, a quarter of whom are outside North America. Another source of venture-capital deals is the Intel 64 Fund, which has 14 Intel customers as investors led by Morgan Stanley Dean Witter and including Bank of America, Boeing, Enron, and Ford.

At Microsoft, most deals "bubble up" from product groups and business-development staff. "It's not like Microsoft's financial people go out and look for opportunities," says Sheldon Laube, chairman and CEO of CenterBeam Inc., a Palo Alto, Calif., company in Microsoft's portfolio that provides computer equipment and remote software management services to small businesses. Microsoft participated in CenterBeam's $20 million first round of financing last year and upped its ante in a $41 million round in January. The impetus for the deal? A series of conversations between Laube and Microsoft group VP Jeff Raikes, the CenterBeam CEO says.

Most startups go through at least four rounds of financing before they go public, selling private shares in the company to investors. At the start, angel investors might put in a few hundred thousand dollars--maybe a half-million. Then the venture capitalists get involved, taking a company through progressively larger investment rounds lettered "A" through "D." An A round might consist of a couple of million dollars; a B round, $5 million more. If the company is successful, investors could kick in about $75 million before the company goes public. Most venture capitalists look for returns of two to 10 times their investment, experts says, as do vendors such as Cisco Systems, Intel, Oracle, and Sun.

Oracle is invited into most of its equity deals by private venture-capital firms, says Matt Mosman, Oracle's senior VP of corporate development. "Typically, they were running Oracle technology before we came to the table."

Return to main story, "Money And Influence."

Illustration by Anastasia Vasilakis

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