Applied Ventures, semiconductor technology producer Applied Materials’ corporate venturing arm, is scaling up its investments as new technologies lead to more routes for strategic deals, the unit’s head, Rajesh Swaminathan, told Global Corporate Venturing.
“We started out doing six investments a year,” Swaminathan said. “Last year we did 11. The pipeline is widening, the inflections are widening; are we deploying more capital or are we constrained by what we have? Historically, we have a $2m to $3m-size cheque as a sweet spot. We have done $500,000 at one point, and $30m, but the sweet spot was $2m to $3m. Over the last year the sweet spot was $3m to $5m.”
The unit is also leading more deals than it used to, and has led or co-led five of the 11 rounds in which it participated in the past year, for companies including polymer resin developer Adaptive3D and magnetoresistive random access memory product developer Spin Memory, while also taking board seats. That goes hand in hand with retaining support for existing portfolio companies.
“For follow-on investments, we look at it from a financial perspective,” Swaminathan explained. “Sometimes we make an investment and for whatever reason the strategic fit goes away. But we don’t stop our investment, we look at it purely in terms of whether it makes financial sense and continue to invest in the portfolio company, help them grow and so on and so forth.
“That is very critical for maintaining credibility in the industry and supporting portfolio companies in the right way, not just coming across as a strategic investor who walks away from an opportunity if a play is not in an area of interest anymore.”
In addition to its equity investments, Applied Ventures is branching out into other forms of startup support. Applied Materials is investing $250m to establish an innovation hub in upstate New York that will be buoyed by $600m from the state of New York’s Empire State Development. The facility will provide state-of-the-art equipment available for startups who will also gain access to the corporate’s resources.
“This is a big gap in the ecosystem that startups are not able to overcome,” Swaminathan said. “If a startup has to build a chip for AI or any other inflection we have talked about, they have to try and find a partner far away from the US, somewhere in Asia, who may only be looking at later-stage companies, or who may not have the bandwidth to support startups from their mandate or incentive perspective, or because they just have a bottleneck due to working with larger players.
“We thought this was a big gap we needed to fix. We spent a year coming up with this facility in close coordination with the New York state government, and now startups are in a position to leverage this facility. We are already shipping tools there and we expect it to be fully operational later this year. This is a game changing way a corporate VC can add value to the company it is investing in.”
The unit has supplied a total of some $300m to about 80 portfolio companies and is currently investing roughly $50m a year. It is looking to concentrate on artificial intelligence, augmented and virtual reality, 3D printing, life sciences, medical devices and autonomous vehicle technology, and Swaminathan said the key is integrating them with existing technologies.
“They look like different sectors but the common theme is how do we bring the innovations that have happened in the consumer industry, like smartphones, TVs, displays, that kind of stuff, into these new verticals? If you look at AI, there is a lot of hype but the fundamental chip innovation still needs to happen: how do you bring the processor, in-memory computing and memory innovations that are needed to make this AI stuff really happen?
“There is a lot of semiconductor innovation related to that,” added. “If you look at AR and VR, these are big, bulky glasses, and for consumer and even enterprise-level adoption there are a lot of manufacturing processes that need to come from the semiconductor industry to make that innovation happen. That is another really big area of focus for us.”
A big question being asked in the startup space, by VCs as well as corporates, is how long the boom in investment, which has so far outpaced the predictions by bears in 2015 as well as the (as it turned out temporary) desolation of the IPO market, can last.
Swaminathan however is bullish, and pointed out that Applied Ventures has traditionally performed well during downturns such as the economic crash that occurred a decade ago, because a downturn inevitably leads to more attractive valuations for investors as well as less hype outside of genuinely innovative technologies. The areas in which it invests will continue to reflect inflection points regardless.
“We don’t think of it from a public market perspective – in the next six months there’s going to be a downturn, or in the next two years there is going to be an insurance holdback – we look at these inflections. The way AI is happening, there are going to be more innovations in medical devices and life sciences – none of that is going to stop because of any temporary impasse in what is happening (economically).
“Of course, we are sensitive to how the public market perception plays into the current investors and the ability of the portfolio companies to apply capital, so we continue to gauge the companies from that perspective: whether they need to raise a bigger funding round now, whether they need to be more sensitive to the valuation in order to attract [investors] even in a down market.
“We try to manage it on the risk, but we don’t shy away from making the right investments because we think from a long-term perspective.”
