In the fifth major computing cycle since the introduction of the mainframe, data is increasingly mobile and connected through the internet.
This is transforming the world but while it means businesses can find and serve customers virtually round the world increasingly easily – leading to the explosive growth rates seen at businesses such as Groupon, LinkedIn and Zynga – the consequence is unprecedented demand on the physical infrastructure that supports the data traffic.
Upgrading hardware is predicted to be the next sector within the information and communication technology sector and one that could play to the advantage of corporate venturing units currently shut out of, or paying large premiums to access, software and mobile services deals being closed on the west coast of the US.
Corporate venturing units of technology-sector sponsors can use their often methodological approaches, scale of parent businesses and understanding of the technical requirements to deliver added value to portfolio companies, as well as the cash to support the entrepreneur’s product development.
Telecoms equipment supplier Nokia Siemens Network said, as it backed US-based chip maker ClariPhy, that data traffic was increasing by 60% per year and it would by 2015, across mobile networks alone, exceed 43 exabytes, equivalent to 6.3 billion people downloading two digital books every day.
Thirty years ago, IBM – whose boss in 1943 thought there was "a world market for maybe five computers" – released its personal computer with 640,000 bytes of random- access memory.
In the fifth wave of technological change, people are connecting on a myriad mobile and fixed devices. This year there are expected to be 5 billion mobile phones for the world’s 7 billion people, and by 2013, there will be more than a billion smartphones connected to the internet. Imagination Technologies, which designs chips for Apple’s iPhone and iPad tablet, said earlier this year it expected more than a billion unit sales, double its previous forecast.
These devices will use services and software increasingly drawn from data hosted on remote servers – the so-called cloud, popularised in the past five years by online retailer Amazon’s Web Service.
In February, storage company EMC invested in the $20m C round consortium backing software-as-a-service provider Aria Systems in the first deal involving its corporate venturing unit, EMC Ventures.
Without needing physically to own and manage computer hardware, but with a large potential audience, services and software companies have been able to start more quickly and refine products more easily in their efforts to achieve profitability.
l Online games company Zynga launched in 2007 (backed by search engine Google and Japan-based telecoms and media conglomerate Softbank) and in a regulatory filing ahead of its planned $1bn flotation said it had 232 million monthly active users, generating $597m of revenues last year. Turnover was $235.4m in the first three months of this year.
l Discount coupons provider Groupon (shareholders include Germany-based publisher Holtzbrinck and retailer Otto Group) in its $750m listing prospectus last month said it generated $644.7m in revenue in the first three months of the year, up from $3.3m in the second quarter of 2009, as its users increased to 83.1 million by the end of March compared with 152,203 in June two years ago.
l LinkedIn, a US-based social network for more than 100 million business professionals backed by software company SAP and publisher McGraw Hill, experienced a 109% rise in its share price during the first day of trading after its initial public offering in May, even after pricing at the top of its revised range following a net revenue increase to $49.2m in the first quarter – 110% more than the same quarter last year.
l China-based social network RenRen, also backed by Softbank and listed in the US in May, has been gaining two million users per month. Total net revenues increased from $13.8m to $76.5m last year, a compound annual growth rate of 135.7%.
The ease with which an internetrelated business can be set up, however, has meant companies have had to invest heavily to defend market share from copycats, often by using private or public funding, including from corporations, to buy peers and expand internationally.
US-based social network Facebook, which is backed by Microsoft (in a rare minority investment) among others, raised $1.5bn at the start of the year in a private placement, while in China, the world’s second-biggest economy after America but largest by population, a raft of companies have raised large rounds, from consumer goods retailer 55tuan ($200m) to 360Buy ($500m) and Lashou ($165m).
It has also led corporate venturing groups to try to become involved by setting up early-stage funds or competitions to accelerate or incubate ideas and nascent businesses.
Last year IBM, which has also committed $150m as part of the White House-led Startup America campaign, launched its global SmartCamp competition, following software company Microsoft’s successful Bizspark open innovation programme.
In May, Google Ventures, the corporate venturing unit of the eponymous search engine, invested $3m in an incubator, Firespotter Labs, set up by some of its former engineers and entrepreneur-in-residence Craig Walker. Google’s former China head, Kaifu Lee, set up Innovation Works, which has raised $115m from local online media group Tencent and the founders of Foxconn Technology Group, Lenovo Group, Oriental Education & Technology Group and YouTube since launching in 2009.
Other early-stage accelerators launched or backed in the past 24 months by technology companies include ones from technology groups Junos, Research In Motion-sponsor BlackBerry Partners Fund, Advanced Micro Devices, Cadence, Quest Software and Citrix. These are already striking deals.
Last summer, Ambiq Micro won a business plan competition sponsored by Cisco Systems and venture capital firm Draper Fisher Jurvetson, giving the start-up $250,000 and access to potential future investors.
However, the challenge of marrying large, established tech companies with start-ups was laid out by Bernard Slede at Hewlett-Packard (HP), itself founded by two Stanford University graduates in their garage after the Second World War.
Slede since April last year has been working on the HP Startup Ecosystem programme and said on his LinkedIn page: "My role is to deliver the value of HP to start-ups and the value of the start-up ecosystem to HP – at startup speed at the largest IT firm in the world by revenue."
As well as speed, corporate venturing units are re-examining how they help portfolio companies to compete better against venture capital firms (VCs) for deals by building the noninvestment team.
Google Ventures has 25 people on its team but only six are investors, similar in proportion to Intel Capital, which has 85 investors in a team of 200. The Google Ventures team includes a quantitative analyst, Marianna Dizik, whose research has focused on applying neural networks to predicting stock market behaviour, as well as user design and engineering partners, such as Braden Kowitz (see the entrepreneur’s perspective on Google Ventures in related content below).
VCs, such as start-up Andreessen Horowitz, are responding with a similar model to try to replicate a corporate structure but with fewer resources – Google receives more than a million job applications each year that could be relevant to portfolio companies and its staff are allowed to spend a day a week on pet projects.
But, as the traffic on networks and demand for download speed increases, corporate venturing units are also looking at hardware start-ups that can help. US-listed chip maker Intel has taken the relatively unusual step of buying two portfolio companies, SiPort and Silicon Hive, from its corporate venturing unit, and Intel Capital continues to invest in a spectrum of businesses that help build the ecosystem for more powerful semiconductors to drive sales of its next-generation chips. For the second year, Intel Capital has been chosen as the most influential corporate venturing unit in the sector by Global Corporate Venturing (see profile in related content and click here for the full ranking).
Michael Jeon, head of Samsung Venture Investment Company Europe since the office was set up last year, said: "The data explosion from mobile applications in the past year will catalyse hardware again. Corporate venturing units then have the advantage [over VCs] as hardware is not as capital efficient as software, but corporations have the resources and capital."
Samsung Ventures’ European office has recently backed Cambridge Broadband and Scientific Magnetics. Jeon said: "Samsung is good at looking in the mirror – what is it good at today that it could apply to business for the future, such as making medical technology cheaper and better?"
And, while corporate venturers complained of the difficulty in accessing US internet deals as VCs squeezed them out or made them pay a premium, elsewhere sentiment was positive about the added value corporate venturing could bring, especially in hardware deals.
Intel Capital led the recent $13m investment in Francebased Aldebaran Robotics. Jean-Michel Deligny, founder of corporate advisory boutique Go4Venture, said it had been the first mandate he had received where he was paid more to find strategic, as opposed to purely financial, investors.
As a result, he said he was searching for one more strategic investor beyond Intel for Aldebaran. Deligny added: "What is interesting is for the first nine years since founding Go4Venture I never had a corporate venturer in a syndicate, but in the past year, corporations have led two.
"This tells me a lot about risk. VCs have gone sideways – into internet deals as they are infinitely scaleable and so worth risk, and growth equity as they have less risk – and corporations are looking for more innovation and so are prepared to take more risk.
"The IT sector-focused corporate venturing units are catching up with life sciences as corporations get better at innovation and entrepreneurs respond to VCs having no money with new models on intellectual property and production methods."
Samsung and Intel’s peers have also developed their own venturing programmes, with ARM and Texas Instruments backing the $48m series A round for US-based chip maker Smooth-Stone, Nvidia last month striking its first deal by investing $2.5m in Israel-based Rocketick, a designer of graphics processing unit chips, and Taiwan- based foundry United Microelectronics’ UMC Capital investment unit backing femtocell maker Ubiquisys.
The Smooth-Stone deal has been one of the largest A rounds outside the healthcare sector but corporate venturers said it had been hard to interest VCs in hardware deals as they were perceived as more capital intensive and carried relatively more technological risk than internet start-ups.
At the time of the Smooth-Stone deal, Bruce Beckloff, vice-president of corporate business development at ARM, said: "We provided the initial seed funding combined with some Texas [state] government funding in early 2009. ARM has been working with Smooth-Stone since then to develop the product and find further funding.
"The challenge now is no financial VCs invest in early-stage semiconductor start-ups. We (Smooth-Stone and ARM) had to work very hard to put the syndicate [which includes VCs Battery Ventures, Flybridge Capital Partners and Highland Capital Partners] together, but the outcome of the effort has been tremendous."
And earlier investors have started to reap returns as the relatively few internet security and hardware businesses backed in the past decade are acquired or float on stock exchanges.
Corporate venturing units Dell Ventures, Sumitomo Ventures and Samsung Ventures had been part of a consortium investing nearly $90m over the past two years in computer data storage company Fusion-io, which made 18% gains during its first day of trading last month.
US social network Facebook is a big customer of Fusion-io, which relocates important data for active processes to users’ servers to improve processing speed. Fusionio raised $233.7m in its initial public offering and had a market capitalisation of nearly $2bn.
In a guest comment in Global Corporate Venturing in November, Robert Ackerman, founder of venture capital firm Allegis Capital, which specialises in working with corporations, said there had been 16 IT security acquisitions worth more than $10bn in the previous 100 days.
As a result, he added: "For all the talk about a chronic shortage of exits for venture-backed companies, one segment of the venture capital technology ecosystem is poised to go from hot to hotter. "IT security – the umbrella term for technologies designed to protect the digital superhighway – is coming into its own, and in a big way. Following repeated breaches of government and corporate networks, widespread theft of credit card records, and medical records transitioning to digital storage and delivery, the security risk index on computer networks has moved from ‘potentially dangerous’ to ‘we are under siege’."
And corporate venturers are both in greater demand and taking their experience to start-ups.
Annette Finsterbusch left Applied Ventures in April, having founded Applied Materials’ corporate venturing unit in 2004, to become chief executive (CEO) of stealth start-up Firefly Green Technology, which will make solid state lighting. Firefly has subsequently been oversubscribed for its series A round without, "regrettably," corporate venturing units being involved, she said.
Ariel Efrati has just left Amdocs Ventures to become CEO of CallmyName. Amdocs’ corporate venturing units hired Ziv Lesham as director in September from local Israeli consultant Bridgehead Alliance. Amdocs is one of a number of tech firms to have been building up its direct corporate venturing team.
This year Loïc Liétar became executive vice-president of STMicroelectronics in charge of the company’s new venture activities, Quest expanded its investments team by hiring Tyler Jewell and Michael Coffman, LG Electronics hired Mike Dolbec and Henry Chung for LG Ventures last year and Korea-based conglomerate Samsung’s Seoul-based corporate venturing team has expanded over the past year to 20 from 15, taking on another limited partner from among its parent’s other subsidiaries.
Also in Asia, Souichi Tajima joined CyberAgent Ventures in August last year as executive president as the internet corporate venturing team expanded across Vietnam, China and Japan.
The difficulty of retaining talent in Asia is illustrated by Leo Chan leaving TCL Capital after five months in the post, with Hao Xiong as investment manager there since July last year. In past year Eric Sun has left graphics software group Adobe Ventures as its only China representative.
Despite the difficulty, however, a number of firms have set up global operations successfully, including many in the top 10 list of most influential units as judged by Global Corporate Venturing, such as Qualcomm and SAP Ventures, which has just set up a fund.
As IT extends its reach into all regions and products, having the ability to see innovation across multiple sectors and geographies will be increasingly important and an opportunity for established businesses.