October 28, 2005 IBM backs VCs, startups to pursue platform aims By Peter Clarke LONDON — There is more than one way to act as the venture capital arm of a large company, and IBM’s venture capital group has tried at least a couple of them. There’s the Intel way: Intel Capital has nearly $1 billion under management, and has made investments in more than 200 companies essentially on a return-on-investment basis. But Intel has an eye on the synergy between its own business interests, those of its customers and those of emerging technology developers seeking seed money. Intel Capital's mission is to make and manage financially-attractive investments that support Intel's strategic objectives. There was a time when IBM thought it too had to invest the same way. But recently, Claudia Fan Munce, vice president of corporate strategy at IBM Corp. and managing director of its Venture Capital Group, has pursued a different strategy. IBM has turned Intel's investment formula on its head. IBM's Venture Capital Group supports the company's strategic objectives by making relatively few investments, and usually in VC funds rather than directly in startup companies. For Fan Munce, IBM's strategy is more about relationships, the alignment of interests and the development of a mutually-supportive ecosystem than about the dollars invested and returns. In this way, Fan Munce has helped craft a group that is IBM's VC arm, and which uses venture capital as a lever in furthering IBM's open standards and open-source software aims. In 1999, when then-Chairman Lou Gerstner decided IBM would pull out of application software and focus on infrastructure, IBM sought to work with venture capitalists to help them create application software development startups, said Fan Munce. "Initially, the intention was not to invest. So we did not have any money when we started," said Fan Munce, adding that it was assumed at the time that any and all parties — VC firms and startups — would fall over themselves to invite Big Blue into their discussions. During the dot-com boom, VC firms didn’t see much value in talking to IBM, which looked to them like an old-fashioned company in those heady times. Not being part of the industry establishment came as a shock to IBM executives, admitted Fan Munce. IBM then went to the other extreme and started casting its money about. If it wanted in on VC discussions it would have to ante-up. It did. "That helped us get to the table. But we realized quickly that it was the wrong thing to do," said Fan Munce, who declined to say how much money IBM invests or how much it wrote off when the dot.com bubble burst. “We didn’t lose all the money,” Fan Munce said. Since learning from those experiences at the beginning of the decade IBM has grown to become one of the most sophisticated players of the VC game, some observers claim. IBM limits itself to only four or five deals a year; it usually puts most of its money into VC funds, Fan Munce explained. In this way it can influence a handful of VC companies along with scores of emerging companies for maximum leverage. The access that IBM gains to companies in emerging technologies and emerging geographies is worth far more than the return on the cash itself, Fan Munce stressed. To illustrate the point Fan Munce referenced a two-day invitation-only conference that IBM has convened in Shanghai for the first week in November, which is set to be attended by IBM and representatives of most of the venture capital firms that are active, or want to be active, in China. “IBM has been in China since 1967. When in China we are a Chinese company,” said Fan Munce stressing that IBM has more Chinese experience than many of the indigenous Chinese startups it is trying to help. In fact the venture capitalists have come round to IBM's original way of thinking so that the company is now valued as a partner for its sales channel, its government and blue-chip customer base, for its research and intellectual property, for its opinions and its ability to effect introductions. Any or all of these could be used to help make the difference for a startup. But this is not philanthropy. The benefit for IBM is that its involvement with VC firms and startups helps to set the technology agenda, particularly in the emerging geographies, or at least punch its weight, as other companies seek to set the agenda. "Microsoft is on a similar mission. It's a platform battle," said Fan Munce prompting the image of the Linux penguin grappling with the multicolored four-paned window. As a result of four years of effort IBM now has close ties with leading venture firms that are now promoting IBM's open platforms to more than 950 of their portfolio companies throughout the world. "In 2001 we had 21 portfolio companies selling software for our platforms. In 2005 we've got over 900." At the latest count IBM has engaged with 950 venture capital backed companies and these have helped bring forward more than 300 applications. IBM has also deliberately targeted Brazil, Russia, India and China, in the past years and feels its strong growth in these territories recently is related to the development efforts made there. And in August 2005 IBM announced the formation of its Venture Capital Advisory Council, which is chartered to work with IBM to accelerate innovation around the deployment of open standards-based solutions, particularly in emerging markets. The council comprises venture capital partners at Accel Partners, Darby Overseas Investments Ltd., Draper, Fisher and Jurvetson, Hummer Winblad Venture Partners, 3i, U.S. Venture Partners, and Walden International. “IBM’s approach to venture capital is really state-of-the-art,” said Paul Holland, general partner at Foundation Capital (Menlo Park, Calif.). “Rather than compete with us they help us create connections. It’s all about how they manage one of the most effective channels for technology.” IBM is one of a relatively small band of companies which, if it takes a position on a technology, be it smart dust, wireless broadband, or ambient intelligence, can influence the when, where and how of the technology's adoption. Holland added that when he approaches IBM VCG with an opportunity he usually gets one of three responses; it’s a product or technology IBM wants to actively embrace and resell, or more passively it’s a product or technology the company is prepared to partner over, or thirdly IBM is not interested, either because it’s competitive to something it has, or because the technology is not interesting or viable. “IBM VCG is very effective at getting one of those three answers back to us quickly,” said Holland. Holland acknowledged that IBM has its own IT view and philosophy and venture capital firms have to take that into consideration when they approach the IT giant. “They have their view of the stack just as other companies have a different view. But we can make our decisions on a case-by-case basis,” Holland said. The evolution of IBM’s venture capital group has followed a classical progression of thesis, followed by antithesis and ending in synthesis. It is now getting to do its venturing using something more powerful than cash; its experience, its intellectual property, its sales channel, and its contacts. It expects the mixture to continue to create wealth for the startups and VC firms it works with as well as for IBM and its shareholders. Article URL: Click here