InformationWeek
Defining The Business Value Of Technology
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August 14, 2000 |
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Vendors As VCs: Money And Influence
As the biggest technology vendors increasingly act as venture capitalists, what are they getting in return?
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t's been a good year for Bowstreet. The up-and-coming software developer has landed contracts with some high-profile customers, including FedEx, IBM, and Merrill Lynch, for its directory software aimed at online exchanges. And in March, Bowstreet secured $60 million in third-round financing, including an undisclosed stake from database heavyweight Oracle.But at least one customer has trepidation about the Oracle relationship. "It's all good for Oracle, and mostly good for Bowstreet," says John Thompson, president of Crossmark Performance Group, a unit of Plano, Texas-based Crossmark that provides retail-marketing services. Bowstreet's technology, which uses the Extensible Markup Language to create a data store for relationships among objects in an application, is so powerful, Thompson says, that it could replace a database in some applications. "The beauty of what Bowstreet's got is that it works with anybody," he says. "Oracle's investment could curtail what their product could be."
Baloney, says Ted Dintersmith, general partner at Charles River Ventures, a lead investor in Bowstreet: "No one at Bowstreet wakes up and says, 'What would Oracle think?'"
Still, you can't blame customers for questioning the influence that a big technology investor can have on emerging technologies. America's largest IT suppliers are investing more of their cash in startups that they hope will yield key technical breakthroughs, new distribution channels, and hefty financial returns--not necessarily in that order. According to PricewaterhouseCoopers, venture capitalists and corporate venture funds invested $34.7 billion in emerging technology companies during the first half of the year--more than the $32.3 billion invested during all of last year.
The National Venture Capital Association says U.S. companies (not including dedicated venture capitalists) invested $7.42 billion in 901 companies during the first half of this year, compared with $9.55 billion in 1,021 companies for all of last year. "All of them have the goal of getting in on the ground floor with startups and hitting home runs with a few," says Dwight Davis, a computer industry analyst at Summit Strategies. Among the biggest corporate investors: Cisco Systems, Intel, and Microsoft.
In return for their money, tech vendors take seats on portfolio companies' boards, help hire their managers, and provide input into product development. Startups, for their part, look to tap the resources of a corporate big brother--deep research, industry expertise, and an extensive and highly coordinated supply chain. It's an increasingly synergistic web of relationships that, depending on who's looking at whom, either drives innovation and product development in the IT industry--or potentially hobbles it.
Certainly, the business case for investing in startups is sound. Venture-capital investments can generate huge returns for high-tech vendors when portfolio companies go public or are sold. Dell Computer says it booked a gain of $2 billion on the 30 or so companies in its 90-company portfolio that have gone public since the vendor launched its Dell Ventures unit in April 1999. "The return's been astronomical," says Alex Smith, managing director of Dell Ventures. Intel Capital, which holds stakes in 450 companies valued at $7.5 billion, realized a second-quarter net gain of $2.1 billion on the sale of securities--including 20 million shares of Micron Technology Inc.--from its investment portfolio. High-visibility projects include a series of investments out of the $253 million Intel 64 Fund in developers of power-hungry software apps that can drive demand for Intel's new breed of 64-bit chips, and investments in broadband categories including digital subscriber line, cable, and fixed wireless.
Meanwhile, Oracle cites a return on its Oracle Venture Fund of more than 600% during the portfolio's first year, which ended in January. The vendor increased the fund's size to $500 million this year and held stakes in 26 companies as of early this month. Says Matt Mosman, Oracle's senior VP of corporate development: "Venture capital is just like everything else--it's business."
And it's a booming business. Venture capital has become such a commodity that "you have to have some kind of competitive advantage or you don't win," Mosman says. "The Sand Hill Road companies [traditional venture-capital firms] win because they're great at taking companies public. We have to win by filling in the stuff they don't do."
That includes helping young companies refine products, recruit managers, stay on budget, and write press releases. In addition to seed money for marketing, research and development, and other needs, startups that take investments from large technology companies tap into vast development, distribution, and marketing networks, gaining valuable feedback on products from investing vendors' engineers and early access to vendors' product road maps. "And it can't hurt on Wall Street if you can put on your S-1 [initial public offering registration] that you have Microsoft, Intel, Hewlett-Packard, or Dell investing in you," says Dave Barry, editor of industry newsletter "The Corporate Venturing Report."
In return for all these perks, many big technology companies are looking for more than just a return on their investments--they want technology payback. For example, one person close to the Oracle-Bowstreet deal says the companies spend "a considerable amount of time each week" optimizing Bowstreet's products for Oracle's platform. Bowstreet CEO Bob Crowley won't get into details, but says the companies have discussed incorporating Bowstreet technology into Oracle's online marketplace platform or bundling the startup's products with Oracle's database.
This particular development isn't necessarily perceived as negative by customers such as Crossmark's Thompson. Crossmark doesn't use Oracle's database--the company switched to Microsoft SQL Server several years ago--but Thompson says he'd like to see Oracle adopt the Bowstreet software instead of Oracle's own tools. "We'd have a flexible application development environment on top of a flexible database--the kind of thing you need to build cross-company applications."
For its part, Oracle isn't looking to monopolize Bowstreet's technology. "When we invest in a company, it probably leans them in our direction a little bit," Mosman says. "But it doesn't make the technology decision for them. Most of these companies are running on Oracle anyway. There's nothing in these contracts that says everything you buy has to be from Oracle."
But a little investment money can sure plant the seed.
C-bridge Internet Solutions Inc., a small IT services company, last year took a $2 million personal investment from former Oracle president Ray Lane, followed by $2.7 million from the Oracle Venture Fund. C-bridge CEO Joe Bellini knew Lane from a former job in Oracle's service division; Bellini left Oracle in 1995 to co-found i2 Technologies Inc. At the time of the Oracle investment in C-bridge, Bellini says he was "running the company bootstrapped" to keep it debt-free. But he wanted to "get closer" to Oracle as C-bridge started moving away from Microsoft projects and working more with the Enterprise JavaBeans object model, which Oracle supports. "You knew there were going to be two major players--Microsoft and Oracle," Bellini says.
One project the E-services company had in its pipeline at the time was an effort to connect oil company Chevron Corp.'s gas station convenience stores to a central E-purchasing system. With Oracle's help, C-bridge eventually found itself in the middle of a much larger project, as the effort morphed into RetailersMarketXchange.com, a convenience-store industry exchange built by Oracle, Chevron, and Wal-Mart subsidiary McLane Co. As Chevron developed a broader strategy for the site, "that's when C-bridge said, 'You have to talk to Oracle,'" says Nancy Reyda, president of Re-tailersMarketXchange.com. C-bridge arranged a meeting between Chevron executives and Lane, and "we've been off and running ever since," Reyda says.
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Illustration by Anastasia Vasilakis
Photo of Crowley by Stephen Sherman
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