In part due to the dismissively titled "The Only Thing Lamer Than Corporate VCs? International, Non-Tech Corporate VCs" article by Sarah Lacy at PandoDaily regarding 'fair-weather' corporate VCs and their burgeoning activity, I decided to republish my article from February 2007, which was originally posted on VentureBeat.
Ms. Lacy and I had a bit of a discussion on Twitter regarding what I felt was her mischaracterization of Intel Capital's approach to venture capital. It's somewhat impossible to have an unconstrained discussion on Twitter so take what you will from our little back-and-forth.
Its been 2+ years since I left Intel Capital but the article below is probably still directionally on point.
My hope is that startups looking to engage with corporate VC units will find this helpful.
---------- Republished [courtesy of VentureBeat]----------
* Working with a Corporate VC: An Insider's Perspective* [http://bit.ly/yBiC0w]
February 22, 2007 6:39 PM Eghosa Omoigui
[*Editor's note: We asked Eghosa Omoigui, Intel Capital's Chief of Staff, to give us some insights about corporate venture capital investing. Intel has been the largest investor in technology companies for several years, and not in just chip companies. He's given us a primer on how Intel Capital thinks. Later, we expect to hear from Ned Hooper, of Cisco, a company with a very different, acquisitive style*.]
Someone once described corporate strategic investing as ‘misunderstood.’ I decided it would be helpful to talk about Corporate VCs (CVCs) and how best to maximize their impact and value to VCs and entrepreneurs alike.*
Intel Capital is Intel’s strategic investment arm. Typically, it focuses on making equity investments into technology companies, funding internal incubation activity, and leading acquisitions to grow the digital economy in support of Intel’s objectives. These objectives can be to create new business opportunities for Intel and expand global markets for our products, while achieving positive financial returns on our investments.
Since we started investing in 1991, Intel Capital Equity has invested more than US$6B in nearly 1,000 companies headquartered in more than 40 countries. In 2006, Intel Capital invested $1.07B (yes, that’s a ‘B,’) and includes a $600M investment in Clearwire (the largest VC round in US history) in 163 deals worldwide (in 26 countries) including 91 new deals, likely qualifying us as the most active technology CVC, and one of the busiest VCs overall. With on-the-ground investment managers in 20+ countries, and leading over 40 percent of our deals in the US and 60 percent+ overseas, we invest in all stages from seed (pre-Series A) through to PIPEs (Private Investments in Public Entities). In 2006, Intel Capital had a total of 37 exits; eight portfolio companies went public via IPO and a total of 29 were acquired.
But enough, for now, about Intel Capital. What about CVC’s in general? How and why do they invest? And how do they add value?
*Why do CVCs invest?*
Generally, and unlike VC firms that raise money from independent investors, the CVC’s lead-off hitter is strategic rationale. It is extremely unusual for a CVC to make an investment where there is no strategic reason for doing so. Strategic engagement, however, can span a wide spectrum of activity.
For example, the CVC’s investment may aim to support a thriving ecosystem around the parent’s core products, e.g. software stacks, display technologies and power innovations.
Other CVC investment ‘incentives’ include: (a) a proxy for inorganic growth; (b) a market development tool , e.g. ‘planting the VC flag’ in new regions and geographies; (c) an eyes-and-ears tool to identify and nurture emergent technologies or foster new trends or business models; (d) a ‘gap-filler’ which approximates to outsourced R&D but with an end customer-centric goal; and finally, (e) a conjoined source of positive returns (financial in addition to strategic)
For what it’s worth, my sense is that Cisco and Cadence generally invest as a potential stepping stone to acquisition. It’s also no news that IBM and Microsoft no longer invest directly (as a general rule), but do invest in some VC funds and funds of funds, and then do business development work with VC firms and their portfolio companies. I understand Samsung Ventures and Motorola Ventures typically require a business agreement with a product group.
Intel Capital is quite flexible and varied in how we work with VCs and start-ups to find an optimal financial and strategic relationship. Note that we’ve rarely acquired the companies we’ve invested in • last I checked we were at about one percent.
*How do CVCs add value?*
There are several ways for a corporate venture capital firm to add value to its portfolio companies.
First, there’s extended reach. As a global technology investor, our perspective expands the pool of insight and knowledge available to entrepreneurs and co-investors. Illustrating this, most people don’t realize we began actively VC investing in China and India back in 1998, long before most of the tech VC world recognized both countries as the next active growth frontiers. (Intel Corp. opened its first office in China in 1985). A corporation like Intel can also help a company access and tap global operational resources — sales, marketing, R&D, channel/customer access, etc.
There are programs such as our Intel Capital Technology Days (ITDs). These aim to introduce our portfolio companies to Intel customers and bring emerging technologies from those portfolio companies directly to the customer in a structured manner. The underlying goal, of course, is to drive revenue opportunities for the portfolio companies by fast tracking the traditional sales cycle, while presenting helpful products and solutions to Intel customers who may otherwise be unaware. In 2006, Intel Capital held 53 ITDs worldwide with ~200 portfolio companies.
The CVC may also be able to offer, within reason, consistent cash over time, as opposed to the structured funds of most “institutional” venture capital firms.
While we recognize that strategic alignment can change because business unit priorities and strategic direction can and do change, Intel Capital will continue to support financially attractive companies with subsequent rounds of investments where it makes sense.
We’re also experts on deal terms as well as players. Intel Capital has invested in nearly 1,000 companies and had ~350 acquisitions and IPOs worldwide. This means knowledge of IPO or M&A wrinkles, acquirer habits, pros and cons of one acquirer over the other, and standard and not-so-standard terms could lie with your favorite neighborhood CVC investor. In Intel’s case, we have an extensive database. This brings facts and composure to what generally is a relatively stressful and emotional deal process, whether it’s an investment or an acquisition.
*How to Navigate the Corporate VC (and Build Value)*
Some entrepreneurs have complained that corporate VCs are opaque. Here are some tips:
(a) *Learn the investment strategy*: Cisco, Siemens, Comcast, Motorola, Adobe, Intel Capital, Google, TransCosmos, Pfizer, etc. â€¦ they all do it differently. A clear understanding of this will help frame the decision of when to invite a CVC to lead a round or add to the investment syndicate. Intel Capital will invest in all stages, if it makes strategic and/or financial sense.
(b) *Value the process in the CVC and its parent*: For start-ups that often pride themselves on lightning-quick decision making and nimble changes, ‘process’ can be extremely frustrating. However, it can be a useful GPS device on cold dark nights. Trust me. I remember a ‘hot’ deal referred to Intel Capital that conceptually would have been very disruptive technology. The deal was coming together very quickly and I pulled in our investment managers post-haste. They collared the technical experts in the business unit in less than 24 hours and we huddled to do some preliminary super quick technical due diligence. The potential investee company had a bunch of customers, investors and a very solid management team • all elements that would have quickly generated a term sheet from a VC in the bubble days. But our process required that the subject matter experts in the business unit (and the research labs in this case) provide technical due diligence. As we poked around, our concern grew. Turned out there was more (snake) oil in this company than OPEC’s daily production output. We didn’t invest. Our ‘process’ helped us (and at least two other VCs who were looking at the deal) avoid a potential disaster.
(c) *Do your due diligence on the CVC*: Be clear upfront on what they can and cannot do • know why you need them • and say so! For example, Intel Capital brings advantages in three dimensions: breadth (we invest in processors, digital homes/health, mobility, software etc.), reach (global and customer access) and depth (technical expertise). Other CVCs will bring different types of value-add (Cisco, for example, may offer a quicker exit) and I strongly recommend you identify what is most important to help generate material company building value. Note that some CVCs will generally take a BOD seat, but Intel Capital won’t do it as a general rule, choosing instead to take an Observer ‘seat’ and potentially an option to convert that to a full BOD seat if the need arises.
(d) *Find the right investment professional*: Be an aggressive networker. Just keep asking “Are you the best person for me to work with on this deal?” and you’ll eventually get to her/him. CVC’s don’t get bent out of shape if you ask this, because their ‘partnership’ tends to be larger and more segmented than that of a financial VC
(e) *Solicit their input*: into strategy, major deals, IP filings, infrastructure scaling, etc. They should help find customers and contribute ideas to strategy, push product development, call down corp. resources as needed to problem solve and accelerate success You will be surprised at the sheer amount of data and resources that you can access.
(f) *Keep updated*: (through the Board Observer or Director) on related business unit and research lab activity. I suggest regular 1:1s with the Board Observer to keep the communication channels well primed
It has been said that corporate venture efforts are fair-weather friends, unreliable in tough times. I believe this is a gross exaggeration. A good number of CVCs disappeared from sight after the last bubble burst. But those CVCs who quit post-bubble jumped into the VC investing business for all the wrong reasons and without the careful deliberation and organizational framework that should accompany a viable long term investing strategy. There are still plenty of quality CVCs that are great at what they do, make fantastic partners and company builders, add meaningful value, and help create great companies that deliver solid impact, while cheerfully weathering the ups and downs of naturally occurring VC cycles.
© Eghosa Omoigui 2006, 2007. Opinions expressed here are solely mine and may not represent official positions of Intel Corporation or Intel Capital