InformationWeek.com

Welcome Guest. | Log In| Register | Membership Benefits

April 23, 2001

Corporate Venture Capitalists Undeterred By Economy

Money is tighter, of course, but opportunities still abound for corporate tech investors

By Christopher T. Heun (cheun@cmp.com)

More on venture capital funding:

InternetWeek: VC Funds' Losses Signal Retrenchment (04/11/01)
EETimes: Lucent Looks Within (03/01/01)
TechWeb News: Startup Looks To Crack Networking Lineup (02/02/01)

ark Klopp's pockets aren't as deep as those of the venture capitalists he hangs out with, but that hasn't discouraged him from playing in the tech-funding game. Despite the sagging economy, Klopp and other investment managers work-ing for nontech businesses are still seeking, and finding, promising opportunities.

The managing director of ventures at Eastman Chemical Co., Klopp is responsible for spotting innovative technology that will help his $5.3 billion company find new ways to streamline logistics, conduct financial settlements, and interact with its worldwide customers in the chemical industry.

Eastman has made five investments in the last nine weeks, ranging from $1 million to $2 million and including Saqqara Systems Inc. and EquipNet Inc. "In each case, a strategic relationship was established as well," Klopp says. "That lets us help entrepreneurs be successful in our industry and enables us to have access to early development of the technology."

Overall, investments by venture capitalists and businesses have fallen dramatically since an all-time high of $19.4 billion in the first quarter of last year, according to data collected by PricewaterhouseCoopers and VentureOne Corp. In the final three months of last year, funding slipped to $13.7 billion and is estimated to be in the $10 billion range for last quarter.

But that's creating opportunities, as well. "The number of companies that aren't getting funded because venture pockets have shut tight really leaves a happy hunting ground for corporations," says Robert C. Roeper, managing director of Venture Investment Management Company LLC, a Boston venture-capital firm.

Eastman was willing to move Klopp 18 months ago from its headquarters in Kingsport, Tenn., to an office within striking distance of Silicon Valley, in Danville, Calif. "It's not unique as far as the Ciscos and Intels of the world, but for a brick-and-mortar company like Eastman, it's somewhat unique," he says. What's also different about Eastman's forays into venture financing is its continuing support of the efforts, despite the economy. Eastman, along with several other companies including Coca Cola and General Mills, view startups as a way to get the products and technology they need to in-crease revenue.

A lot of the funds of high-tech vendors "have been hammered really bad; it's impacted their earnings," says Tracy Lefteroff, managing partner, venture capital and private equity practice, at PricewaterhouseCoopers. The technology companies constitute the majority of corporate investing, but "50% or more writedowns in 2000 were not unusual," Lefteroff says.

United Parcel Service Inc. is aggressively investing. It will finance three or four companies this quarter--its first new deals since the middle of last year--and complete a handful of follow-on rounds for startups already in its portfolio, says John Wilson, who manages the company's strategic enterprise fund. He expects to invest about $10 million in the next year in technology related to biometrics, middleware integration, and supply-chain application software.

"The pace is growing," Wilson says. "In some cases, the size of the investment is growing and we're expanding the reasons for investing, too." Wilson says two recent deals prove that UPS is broadening its reach: Cargo Technology LLC, a San Diego manufacturer of inflatable packaging insulation to refrigerate food or medicine, is a traditional type of investment because of its potential to let UPS ship new types of goods. But Savi Technology in Sunnyvale, Calif., is a little more far-out. Its network of radio-frequency ID tags, if they ever cost as little as pennies apiece, could be placed on boxes to track shipments along with the bar-code scanners UPS uses now. "It's an alternative technology," Wilson says. "We foresee it maybe being a complement [to other technology] in the future, and so we invested to learn more about it."

For its part, General Mills invested in an online market-research company, MarketTools, that will let it conduct 75% of its consumer surveys online, compared with 10% a year ago. Along with that, the company will realize a 45% cost savings in the process.

Last month, Coke launched its own incubator, Fizzion. The soft-drink company teamed with Georgia Tech's Advanced Technology Development Center to invest up to $250,000 in 10 to 15 companies. Coke is looking for innovative software and technology to improve logistics, distribution, marketing, and monitoring of production specifications. It will help startups prove commercial viability, says Chris Lowe, Fizzion's president and CEO.

As far as VC opportunities, "this is a great time to invest because valuations are lower," says Naveed Khan, president and CEO of Siemens Venture Capital USA. "You have a lot of choice, you can look at a lot of companies, and you're not in hurry to make a decision on the spot."

Siemens also has an office in California, but after signing 17 deals last year, the firm hasn't completed one this year. However, Khan has big plans for the next eight months; he's aiming to back 12 new companies. Medical en-gineering, energy management and consumption, and Web-site security are at the top of his wish list.