Venture capitalism is a way of life in Silicon Valley. According to Price Waterhouse $8.5 billion was invested in high tech companies in 1997 - more than double the amount invested in 1995. But it is not just the bankers and the brokers who are scouring Silicon Valley in search of the next big thing. The occupants of Sand Hill Road, Palo Alto, which is the legendary hub for venture capitalists, have been joined by a new group of investors; the giants of the computer industry.
Hardly a week goes by without the likes of Intel or Microsoft or Cisco Systems bestowing their blessings and a few million dollars on small start-up companies. In recent years companies such as Wildfire Communications, Global Internet, Marimba and Juniper Networks have all been on the receiving end of a financial infusion from vendors.
Wildfire, for example, received $12 million from Microsoft and Intel to develop a technology that marries the convenience of the desktop with the functionality of the telephone. A pioneer in the field of electronic-assistant technology, Wildfire develops and markets Wildfire Electronic Assistant software, which runs on hardware from vendors including Compaq, Data General and Unisys. The technology combines voice messaging, voice dialling and call routing with a voice-activated interface.
"Corporate investments are most strategic in nature as opposed to venture capitalists who are more or less exclusively designed for the return on their investment," said Don Sullivan, vice president of finance at Wildfire. "The investments have allowed us to do things we couldn't otherwise do." The money will go toward product development on existing products as well as toward a new version of Enterprise Wildfire, which runs over corporate Lans, he said.
According to Sullivan, previously existing "relationships at the executive level" are what helped Wildfire catch the attention of Microsoft and Intel. Both IT giants plan to integrate Wildfire's technology with the Wintel platform. Microsoft will initially use Wildfire technology for Outlook so that a PC with Wildfire's enterprise product for workgroups can, for example, access data that is stored in Outlook through a voice activation interface.
Microsoft also invested $6 million in General Magic, a Wildfire competitor, which was previously funded and abandoned by investors such as AT&T, Sony and Motorola. General Magic and Wildfire are expected to give a strong boost to computer telephony integration, in particular, with their high-profile backers. General Magic has also completed a private financing transaction worth $5 million.
The money and future investment will help fuel the growth of its Serengeti service. Serengeti is designed to perform and synchronise with several Microsoft applications, including Outlook personal contact manager client software, Schedule Plus and Internet Explorer, as well as Windows CE devices and WebTV.
Karen Hargrove, product manager at Microsoft, said: "General Magic has some technologies focused on a voice user interface and natural language." She said Microsoft will research various technologies but is not sure what will show up in Microsoft products. Microsoft's strategy on whether or not to reach for its cheque book revolves around a focus on opportunity and partnering.
"Microsoft works more with an established management team rather than the venture capitalists who work at the seed stage," according to a Microsoft representative. Recent Microsoft investments include the $12 million in Wildfire, a 10 percent stake in E-Stamp, a $45 million investment in Lernout & Hauspie Speech Products and a 20 percent minority share of Trados, a translation software company.
But it is not just small companies that have attracted Microsoft. The company also bought an 11.5 percent stake in cable company Comcast for $1 billion. That money will go towards building out a fibre-optic backbone intended, in part, to connect PCs and digital televisions. Also, let us not forget Microsoft invested $150 million in Apple Computer in a cross-licensing agreement to share software technologies. The company has also demonstrated a willingness to buy companies, demonstrated by its $425 million purchase of WebTV.
Chip giant Intel, in recent years, has invested heavily in companies whose technologies it expects will grow the market for microprocessors. One of the largest investors in venture capital companies, Intel has invested in a variety of companies that might be useful such as Chips & Technologies, @Home Corp., Marimba and Wildfire. "Intel investments are very different from the stand alone venture capitalists," said Robert Manetta, an Intel representative. "Their [venture capitalists?] investments are to make money; ours are basically strategic. Intel finds the technology in companies and decides if success could help the market grow. Our second aim is, of course, financial gain."
Intel also aims to support applications that extend the capabilities of the connected PC, Manetta said, or to diversify in some areas such as home Internet access. Intel, which began investing in the early 1990s, said it looks at smaller companies with interesting technologies to develop and bring to market. Companies that help the computer market grow are what Intel is looking for, Manetta said, including those in graphics, visual computing and unified messaging, where Intel and Motorola contributed a $15.6 million round of financing to a company called Nuance.
Intel said it will work with Nuance to ensure that its software is accelerated to run on Intel's IA-32 processors and Intel's forthcoming IA-64 processors. Manetta claimed the strategy has helped Intel find new uses and new users for its chips because technology that speeds up the Internet prompts more people to buy PCs, for example.
Inktomi, a developer of scaleable network applications designed to reduce congestion on the Internet, recently went public after receiving a $2 million early stage cash investment from Intel. Both companies will collaborate on the development and porting of Inktomi's Traffic Server network cache product to Intel's architecture.
Inktomi also has a strategic alliance with Microsoft which combines Inktomi's Web crawling technology with Microsoft's front end interface and integration to provide online users access to an index of more than 75 million Internet documents.
Intel's total investment portfolio is now at more than $750 million. In 1997 alone the company invested around $300 million. The portfolio includes 125 companies - typically small, privately held companies - with Intel holding a small minority stake in them. "Intel has a hands off approach. We provide the money and capital," Manetta said. "The whole nature of this investment is taking risk."
There is a common belief that says Intel invests in companies more to get them on the Intel bandwagon than to incorporate their technology. Microsoft is just the opposite - it does not suffer from "the not invented here" syndrome. It is happy to buy technology from someone else.
Microsoft bought DOS from Seattle Computer Products for $50,000 and DOS made the company what it is today. Even as venture capitalists search for the next Cisco Systems, the current Cisco trawls the industry for interesting companies. In 1997, Cisco announced it had taken a minority equity stake in such companies as Global Internet, Tibco Software, Software.com, Precept Software and Radiolan.
"Cisco's like Microsoft," said John Walecka, general partner at Brentwood Venture Capital. "You have to worry about them no matter what you're doing. They are everywhere." An area of particular importance to Cisco has always been the Internet. The company spent more than $10 million on minority stakes in Vxtreme, Informix Software and Softbank Ventures. Ed Kozel, chief technology officer and senior vice president of business development at Cisco, said the investment in Vxtreme was the first step in working with the company to deliver elements of their technology and products in conjunction with Cisco Internetworking Operating Software.
The Valley's venture capitalists freely admit they do not like to invest in companies that plan to compete with the likes of Microsoft and Cisco. However, the rivals of those companies have no such compunction. A company called Juniper Networks, which aspires to wrest away Cisco's grip on the Internet backbone, raised $62 million from AT&T Ventures, 3Com, Ericsson and other Cisco competitors and customers.
The jury is still out as to whether high tech companies make successful venture capitalists. Out of ten companies in a traditional venture capitalist's portfolio, no more than three are likely to be strong successes. Another five or so are probably in the break-even category and the remainder are probably losers in danger of missing out on additional financing or going out of business. Of the small companies mentioned above question marks are already being placed beside some. General Magic is a perennial under achiever; the merits of Wildfire's technology and even Marimba's push technology are continually being debated and there are those who think there are better solutions than Inktomi's. No doubt in every vendor's portfolio there will always be winners and losers and vendors have no divine right to be right.
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