One of the most interesting debates in corporate venturing is what stage of investment a corporate should pick. Many choose to invest in early stage companies, because they hope to get a front row seat on the grass roots of innovation. Yet later stage investing can make more sense, as investments can be of a size which can potentially give even a large diversified corporate "skin in the game" in private equity parlance, and the portfolio companies are also likely to be easier for the parent company to do business with.
Yet, arguably, this later-stage form of investment is difficult to do well. For this reason, Germany-based technology company SAP’s corporate venturing unit’s swoop last week into the latest $50m round, at an $800m valuation, backing US-based flash memory company is particularly interesting and this week’s Big Deal.
Violin Memory is attempting to make it cheaper for flash memory to be used for tier one storage, the most important information for enterprises to access quickly. It was reported to be pulling together a flotation for between December and April this year, according to news provider Wall Street Journal (WSJ) in July last year. This means, if the WSJ was right then it looks like Violin’s investment was effectively treated as a short-term alternative to a listing.
Backing a fast-growth company at such a stage can be difficult on a risk-reward basis as the competition to invest in such companies can be high, which pushes up valuations, while also being arguably more of a risk in today’s highly volatile capital markets, as the financial backers can get stuck with a capital-intensive business for a longer period than planned.
So why is SAP investing? Nino Marakovic, chief executive of SAP Ventures, said: "I can’t comment on valuation aside from what you already said yourself: the potential for this company is simply enormous."
Marakovic added : "As you know, SAP Ventures is pursuing financial versus strategic objectives, but our sweet spot are companies that exemplify trends that are disruptive / innovative, and as such will have impact on SAP or its customer base. This is one of them."
Marakovic said SAP Ventures was interested in backing Violin because it sees the company is potentially transformative to SAP’s enterprise sector. He said: "Violin does have significant strategic impact for SAP. With the HANA in-memory database and the Sybase database assets, clearly there will be impact from tier one storage going to flash and we will be working hard to create stronger relationships between the companies going forward."
SAP Ventures’ late stage focus has given them a better chance of backing influential companies. Its portfolio of current and previous investments include networking website LinkedIn, Linux developer Red Hat, and conferencing company WebEx. It could beViolin Memory is on a similar path to success.