Nothing ventured, nothing gained

Streamlined operations, bigger deals and a global focus have helped Intel Capital become a leader in the venture capital industry.

In the late 1990s, a number of corporations took a gamble on the booming technology industry by launching corporate venture capital firms to invest in the sector. For many, such gambles did not pay off over the long term. Intel Capital, the corporate venture capital arm of semiconductor developer Intel Corporation, was one of the survivors. The firm did not just survive?it flourished.

Since the tech bubble burst, Intel Capital has made changes to increase its efficiency and to strengthen its position as an industry leader. The firm restructured itself and changed the way it sources and manages deals. It has sought out bigger investments, and, most notably, taken an increasingly global approach to its operations.

After a period of speedy growth in the late 1990s, the technology industry suffered a sharp downturn and hit bottom around 2003. Some companies faced large monetary losses and had to shutter their venture capital divisions. For example, Primedia's venture capital unit, an investor in early stage new media and technology start-up companies, closed in 2001 after three years in operation.

The unit had invested in start-ups such as CarsDirect. com and The deal involving the latter site is a prime example of corporate venture capital gone wrong. Primedia bought, a site featuring guidance from experts in a wide range of fields, for about $690 million in 2000. It sold the site to The New York Times Company for $410 million in 2005.

Another high profile shuttering involved the publicly traded consumer finance company CIT Group. CIT Group sold its portfolio of direct private equity investments in 47 companies to the private equity firm Protostar Equity Partners in 2004. At the time, the value of CIT's direct private equity and venture capital investments was about $101 million, and its market capitalization was about $8 billion. The sale followed a reported three-month loss of about $60.5 million.

Overall, the number of companies receiving corporate venture capital dollars plummeted between 2000 and 2003, according to a MoneyTree Report by the National Venture Capital Association (NVCA) and PricewaterhouseCoopers issued in September of 2006. In 2000, nearly 2,000 firms received about $16.8 billion from corporate venture capital, but by 2003, only about 440 firms had received $1.3 billion from such firms.

But not every corporation left the venture business in the wake of tech's dwindling fortunes.

Intel Capital was one firm that managed to stay afloat despite the drastic downturn. ?In the ?98 and ?99 timeframe, we were a major investor in all the internet startups and we did extremely well. All those investments paid off extremely, extremely well,? says Arvind Sodhani, a senior vice president of Intel Corporation and the president of Intel Capital.

VC cheerleaders
Like other firms, Intel Capital faced many obstacles in surviving the burst-bubble market. Foremost, Sodhani says, was the lack of available co-investors as more and more venture capital firms disappeared. Pushing the venture capital cause even as the market slowed helped Intel stay afloat. ?We encouraged everyone and his brother to keep investing in start-ups,? Sodhani says. ?We took the view that we are a critical element of Intel's overall strategic planning and thinking, so we continued to invest in the same way that we had previously invested.?

Intel Capital's perseverance is leaving a big footprint. Last year, it committed an aggregate of nearly $1.1 billion in about 163 deals, a majority of which took place outside of the US. The current carrying value of its investments is about $1.9 billion, according to Intel's own figures through December 30, 2006. Since its founding in 1991, the firm has invested about $6 billion in 1,000 companies worldwide.

Streamlining decisions
Post-bubble, the surviving corporate captives sought new tactics to meet the harsher market, and Intel Capital was no different. When he came to his post at Intel Capital two years ago, Sodhani says, he found the firm's structure could benefit from change. With venture capital and private equity investing dollars increasing in abundance throughout the world, he says, the firm needed to become more competitive.

Sodhani's primary concern was finding ways to attract potential portfolio investments to the firm and away from competing venture capital firms. Key to this initiative was giving each investment professional more authority. ?We streamlined our organization, we organized our organization along investment managers so a portfolio company is working with only one direct individual who is responsible for that deal,? Sodhani says. ?In the past, they were working with two or more people, so we streamlined that effort. We improved our decision-making.?

The power of one
Previously, Sodhani says, the firm would assign two investment professionals? one from Intel Corporation's treasury and one from Intel Capital? to work on each deal. Under that system, one person handled the financial aspects of the transaction while another managed the operation and strategic ones. Now, however, only one person is ?responsible for the deal from start to finish,? Sodhani says. ?As a result, you get a faster decision-making process and you get only one person interacting with the portfolio company and the other co-investors.?

Proof of the effectiveness of the changes, Sodhani says, comes from the feedback the firm gets from its portfolio companies. ?We are hearing back from the VCs and portfolio companies that they are very impressed? surprised and impressed?with the speed and the difference that has taken place,? he says.

Intel's investment parameters have also changed, Sodhani says. While the had previously invested a minimum amount in each deal, it began making larger commitments and leading more deals. ?We started investing the appropriate amount of investment in each of the deals as opposed to investing the minimum amount possible. We started leading the rounds. Unless you own a certain percentage of the company you don't tend to put the resources and effort into growing that company because you really don't have a meaningful stake,? he says.

Sodhani points to the firm's activity last year as a sign of the changes at work. ?Last year we either led or co-led over 50 percent of our investment deals.? Leading a deal, he says, allows the firm to control the terms and conditions that of the transaction.

Intel Capital

Capital under management:
$1.9 billion as of December 30, 2006
US, UK, Germany, Israel, China, India, Japan Brazil, South Korea,
Taiwan Poland, Russia and Mexico
Key Intel Capital operations personnel:
Arvind Sodhani, senior vice president, Intel Corporation and president,
Intel Capital
Total employees:
Approximately 100
Digital home, consumer internet, digital enterprise, software,
mobility, manufacturing, emerging technologies and digital health
Intel Digital Home Fund ($200 million; 2004)
Intel Communications Fund ($500 million; 1999)
Intel Capital China Technology Fund ($200 million; 2005)
Intel Capital Middle East and Turkey Fund ($50 million; 2005)
Intel Capital India Technology Fund ($250 million; 2005)
Intel Capital Brazil Technology Fund ($50 million; 2006)

Stretching around the world
A global reach has become an increasingly important part of Intel Capital's business model. The firm now has teams placed in cities throughout the world, including London, Munich, Tel Aviv, Bangalore, Hong Kong, Beijing, Shanghai, Tokyo, Sao Paolo, Moscow, Warsaw and Mexico City. The size of the teams in each office varies, from one person in Warsaw, for example, to two or three person teams in Taiwan and Korea, to larger teams in India, China and London, Sodhani says. In 2006, the firm took part in deals in 26 countries, including Vietnam, China, Singapore, Germany and Israel. ?Over 50 percent of our investment dollars are going to investments outside the US,? Sodhani says.

The firm led about 70 percent of those international investments last year, Sodhani says.

?Innovation takes place all over the world,? Sodhani says of the firm's push for an international presence. ?I think it's critical to have local people on the ground, both for knowing what's going on, for having relationships, for finding the deals, for having feet on the ground to get deals done, getting things done fast,? he adds.

?We took the view that we are a critical element of Intel's overall strategic planning and thinking, so we continued to invest in the same way that we had previously invested.?

In the past two years, Intel Capital has announced multiple new funds overseas, including in China, India and Brazil. In June of 2005, it established Intel Capital China Technology Fund, a $200 million fund that invests in Chinese technology companies developing hardware in software. ?The pace of IT innovation is accelerating,? Sodhani said in a statement at the time the fund was set up. ?Companies around the world should look beyond China's purchasing power and view the country's innovators as potential suppliers.?

Establishment of local country funds reflects the firm's commitment to that region, Sodhani says. It is ?a way for us to telegraph and communicate to the local area, to the country or to the region that this is the sort of the commitment we have in this region.?

The firm launched a $250 million venture capital fund focused on India's information technology industry in December of 2005. That fund, known as the Intel Capital India Technology Fund, focuses on investments in mobile communications, broadband applications and wireless technologies. The fund ?will help Indian companies drive technology adoption locally and identify new business opportunities globally,? Craig Barrett, Intel's chairman, said in a statement about the fund.

Brazil has become another target for the firm. Intel Capital set up a $50 million fund to focus on investments in the country in March of 2006. The target sectors include hardware, local content development and IT service providers and services, such as broadband infrastructure. That fund's establishment followed the appointment of David Thomas, the managing director of the firm's Sao Paolo office, to the position of chairman of the Latin American Venture Capital Association in September of 2005.

Most recently, the firm has turned to Taiwan. It made a $65 million investment in Powertech Technology, a provider of back-end assembly and test services for memory companies. The company plans to use the investment to support the growth of its operations. Intel itself is a customer of Powertech and uses its technology for flash memory devices. ?Flash memory is increasingly used in mobile devices such as laptops and cell phones to deliver an improved user experience in the areas of performance, battery life and reliability,? Sodhani said in a statement regarding the deal.

Intel Capital's investment activity has grown in the US as well. The firm made its largest commitment in its history with a $600 million investment in Clearwire Corporation, a high-speed wireless broadband services provider, last July. The financing for that deal was used to accelerate the development and deployment of portable and mobile WiMAX networks, an alternative to the Wi-Fi signals currently used. Intel led the round on that transaction. Motorola Ventures, the venture capital division of mobile phone and accessories maker Motorola, also took part in the deal. The total commitment to Clearwire was about $1.1 billion, Sodhani says.

The pace of venture capital activity has increased with the addition of a number of new firms into the space. In the second quarter of 2006, corporate venture capital investment a new high over its previous peak in 2002, according to the report by PricewaterhouseCoopers and the NVCA. At that time, venture capital firms completed 195 deals with an aggregate value of $602.5 million.

Private equity is actually moving into some later stage companies, and so this is where we compete with them and vice versa,? Sodhani says. ?We do not compete with them in buying entire companies and taking them private.? He adds, ?We're encountering them particularly in the emerging markets in the later-stage investments. My guess is that some [private equity] firms are taking the view that they'd rather get the learning done at the later-stage as opposed to by taking the company private.?

Sodhani is disinclined to talk about competitors within the corporate VC world. ?I'd rather not name any names, but we compete and work with everybody,? he says. ?So on a given deal, a given firm can be a competitor, on another deal the same firm can be a partner.?

Such political hedging speaks volumes about the state of corporate VC these days. With no party ruled out of potential collaboration, Intel is taking a far more expansive view of its business, from deals to geographies, so that should the market contract again, it is poised to thrive as ably as it has thus far.