[Paleopsych] Harnessing Innovation

Steve shovland at mindspring.com
Mon Sep 6 14:45:41 UTC 2004

Last September, Intel Capital, the venture arm of Intel, invested $2 
million in a relatively unknown Japanese battery technology company named 
Pionics. While a tiny amount for the giant $30 billion chipmaker, the 
investment has proven to be highly strategic.
Since then, engineers have huddled in R&D labs in Japan and Silicon Valley, 
together figuring out how to double the battery life of PDAs and notebook 
PCs. Their research could very well lead to the next breakthrough for 
Intel. Indeed, Intel's highly successful new Centrino chip was partly 
inspired by a $50 million Intel Capital investment in U.K.-based Cambridge 
Silicon Radio, a pioneer in short-range wireless communications. Through 
that investment four years ago, Intel got "early knowledge of what was 
going on in wireless, which helped to shape the strategy for the Centrino 
chip," says Claude Leglise, vice president at Intel Capital in Santa Clara, 
Calif. The Centrino chip, which provides wireless access and improved 
battery performance on lighter, slimmer notebooks, helped Intel increase 
its market share lead by nearly 3 percent, to 88.1 percent in mobile PC 
microprocessors, according to International Data Group, and accounted for 
25 percent of Intel revenues last year.
Leading cell phone maker Nokia and huge Japanese trading company Itochu 
also are relying on in-house venture units to spot new technology and 
improve their balance sheets, supplementing research and development 
departments in an economical way. At its most ideal, corporate venture 
groups help to fund a startup firm's technology through the laborious and 
costly testing and prototype stage until the startup can be acquired at a 
low valuation when it needs capital for expansion.
During the recent tech downturn, many corporate venture units got the ax, 
as companies hunkered down and focused sharply on cost cutting. Among those 
shut down were Compaq Computer and Commerce One. But while corporate VC 
peaked in 2000, it still accounts for one-fourth of the 169 venture deals 
and one-sixth of the $18 billion in venture spending last year, according 
to the National Venture Capital Association in Washington (see chart). And 
it appears to have stabilized at those still very significant levels. "The 
ones (corporate venturers) who are in there now are the ones who are 
committed, the ones who were there prior to the big run-up," says John 
Taylor, director of research at the National Venture Capital Association. 
He cites Intel, Nokia, Kodak, SmithKline and Softbank as being some of the 
major worldwide players in corporate VC.
Avoiding Bureaucracy
Moreover, with CEOs these days debating ways to achieve top-line growth 
through innovation, corporate venturing shapes up as an important avenue. 
The reason is that some internal R&D operations can become overly 
bureaucratic and therefore are slower to market. Smaller companies often 
come up with great ideas but lack the resources to commercialize them. So 
when a major company can identify and provide funding for those 
innovations, it can later benefit by becoming a major customer for the 
smaller entity. It may also decide to buy the company outright, or can 
simply remain invested as part of a financial portfolio strategy.
At Nokia, an entire new division, Nokia Enterprise Solutions, was created 
from investments made by Nokia Ventures Organization. Over a typically 
Finnish seafood lunch at Nokia's R&D campus on the outskirts of Helsinki, 
director Jyrki Rosenberg explains that the venture group is comprised of 
six units with an overall budget that amounts to 9 percent of Nokia's total 
revenues of $36.2 billion. This entity was patched together from two prior 
investments by the venture group: Nokia One, a provider of mobile email 
access, and Nokia Internet Communications, a supplier of security systems 
and private networks. These groups were then combined with a unit selling 
Nokia phones to businesses.

A departure for Nokia, the enterprise solutions group is geared to selling 
mobile phones, email services and security systems to the faster-growth 
business sector, and its products compete with Oracle, Hewlett-Packard and 
Microsoft rather than with traditional rivals such as Motorola, Ericsson 
and Samsung. Business communications services are growing by more than 40 
percent per year, according to research firm IDG, while cell phone sales 
have stagnated.
One of four major divisions now, the enterprise solutions group reported 
revenues of $234 million in Nokia's first quarter 2004, representing a 
growth rate of 95 percent compared with the first quarter of '03. That was 
a much-needed boost, given overall sales were down by 2 percent last year 
and by the same percent for this year's first quarter. Continuing to 
leverage the new division, Nokia recently hired Hewlett-Packard veteran 
Mary McDowell as head of the enterprise unit and moved the operation to New 
York from Helsinki to be closer to business customers.
Itochu, too, is fueling its growth with investments from an internal 
venture group. One star is MeshNetworks, a wireless networking firm funded 
by Itochu Technology last year with a mere $1 million. Itochu set up its 
Japanese business under a licensing agreement and today MeshNetworks Japan 
is wholly owned by Itochu, with a $2 million contract to supply Japan's 
transport system with information needed during traffic jams, accidents and 
natural disasters. "One of the strengths of our group is that we are not 
only a VC group, but a support to Itochu technology," says Kazuhiko "Bob" 
Sunada, president and CEO of Itochu Technology in Santa Clara. "We get good 
access to technology from the startup community, so we don't just look at 
this as a return on investment."
In-the-know CEOs are maintaining or even increasing support for their 
venture units, economic downturn or not. This year's budget at the 
100-person Intel Capital is $700 million, twice as much as the year before, 
says Leglise. Meanwhile, Intel's R&D spending is also rising, up to $4.4 
billion last year from $3.1 billion in 1999. CEO Craig Barrett leads the 
innovation charge, noting recently in a speech at the Intel Developer Forum 
for hardware and software developers that "Intel has always invested 
heavily during the downturns as a way to continue to innovate and emerge 
from the downturn stronger than before."
Intel's investments act as a kind of early warning radar system, allowing 
it to peer into promising technologies across a variety of businesses. 
"Because we have a portfolio of 350 companies, we do get a fair amount of 
knowledge about worldwide technological developments, and we are able to 
synthesize that learning and bring it back to the engineers to influence 
their long-term thinking," says Leglise, who travels frequently to 
Bangalore, Shanghai and other innovation hot spots in search of 
entrepreneurs to back. With Silicon Valley "not the only center of 
innovation" and with "world class centers of excellence with different 
market needs for different countries," he says, it helps to have that broad 
Leglise, who is on the road about half of the time, oversees Intel's 
venture investments outside the U.S., which began in 1998 and now account 
for 40 percent of the group's investments. Among the markets he cites for 
innovation are Japan, for semiconductor manufacturing technology, consumer 
electronics and cellular applications; Korea, for broadband applications 
and information technology networks; the U.K., for wireless capabilities; 
and China, for adapting technology for unique local needs, such as the 
low-cost mobile phone PAS technology made popular by UT Starcom.
At the best corporate venture units such as Intel, Nokia and Itochu, the 
groups not only stimulate new product innovation but also can be a profit 
center and fund their own initiatives. Much as with a typical venture 
capital firm, investments in startups lead to money-making small businesses 
that provide a return on investment when merged, acquired or taken public 
on NASDAQ or another exchange.
Acting Like a VC
Intel's Leglise has no trouble ticking off successes from his group: 
Cisco's acquisition of Israeli startup Riverhead Networks in April for $39 
million; a "good financial return" from the acquisition of European-leading 
Linux provider, Suse Linux, to Novell last November; and a "good IPO in 
London" when Cambridge Silicon Radio, a maker of silicon chips for 
bluetooth-enabled wireless devices, went public on the London Stock 
Exchange in February. "We look for the same good returns as a VC," says 
Leglise. Just like any good venture firm, Intel is not afraid to make a 
mistake either. "If you don't make mistakes, you are not taking enough 
risks," he says. "We are not worried about making mistakes, but about 
discovery of an incredible amount of technology talent."
Nokia has taken an extra step into the venture world by setting up in 
Silicon Valley a unit called Nokia Venture Partners. It operates like a 
venture capital firm with outside limited partners or investors, including 
Goldman Sachs. From a $650 million fund, Nokia's venture arm has made some 
30 investments since it was formed five years ago, with its biggest success 
coming with the acquisition of portfolio company PayPal to eBay in late 
2002 for $1.5 billion.
Tucked in a nondescript office suite along the Great American Parkway in 
Santa Clara, Itochu Technology has invested an average of $2 million in 90 
U.S. technology companies and achieved an impressive 45 percent return on 
these investments since 1994. About 30 percent of the companies it has 
invested in have gone public, while another 40 percent were acquired. Among 
the success stories are Siebel Systems (an IPO in 1996 with a 47-times 
return on an investment made in 1995); Openwave (merged in 1999 with 
phone.com); Nvidia (public listing in 1999 with a 114 percent return on a 
1994 investment); and Recourse Technologies (acquired in 2002 by Symantec 
at a 300 percent return on a deal financed in 2001). The firm, like most 
other venturers in Silicon Valley, has not escaped writing off an 
investment or two, admitted Takashi Kameda, vice president, venture 
With lots of startups looking for financial support in the Valley, Itochu 
has its pick of information technology companies and looks at several 
hundred potential deals each year. Last year, Itochu backed five companies, 
all of them hungry for Japanese sales to offset sluggish U.S. growth in the 
large Japanese IT market. Currently, Itochu sees opportunities for U.S. 
high-tech companies in Japan and Asia in four areas: wireless, security, 
storage and broadband.
But Itochu's "secret sauce" is in helping its investees break into the 
Japanese market. Through the trading firm's 1,500 salespeople in Japan, 
Itochu gets firsthand market intelligence about consumer trends. The Itochu 
team then assesses how ready a portfolio company is for Japan and how ready 
the Japanese market is for their product. If it looks like a go, then 
Itochu counsels the firm on market strategy and introduces the management 
to Itochu distributors. Itochu earns money on these "finds" by entering 
into reseller licensing agreements with the U.S. firms. Itochu also 
negotiates distribution agreements and handles export regulation and tax 
paperwork. "We are able to see growth in certain market sectors, and we 
help firms to develop the Japan market. It would be very hard for them to 
do it on their own," says Kameda. He adds, "For U.S. companies that are not 
shipping their own product to Japanese markets, we make $100 million 
annually in revenues for shipping their product."
Of course, winning the game of corporate VC isn't easy. CEOs who go down 
this path have to make sure their investment managers are more than just 
money people; they have to be sophisticated enough to understand the 
implication of new technologies for the company's core businesses. CEOs 
also must be prepared for the corporate VC unit to have a sizeable budget 
that may not produce immediate results for the bottom line. It can take 
three to five years before viable products are developed. But the evidence 
seems unmistakable: Corporate VC can yield powerful results.

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