[Paleopsych] Harnessing Innovation
Steve
shovland at mindspring.com
Mon Sep 6 14:45:41 UTC 2004
http://www.chiefexecutive.net/depts/innovation/201.htm
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
spectrum.
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
investment.
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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