As president of Intel Capital, Vadasz has been investing in other companies for the past decade. But only in the past two years have other established players started to imitate his act. Companies such as Sun Microsystems, Oracle, Dell and Nokia have all launched their own venture-capital efforts. With the Internet driving a tsunami of ideas and business models, older companies are trying to figure out how to pre-empt the scrappy start-ups that could end up eating their lunch. Few forget that once upon a time, Microsoft was barely a blip on IBM’s radar screen. The solution: make the start-up a friend through an early investment. It also doesn’t hurt that the investment, if the start-up goes public, can yield geometric returns. As a result, American corporations last year pitched in $7 billion of the record $48 billion of venture capital invested in new companies, according to the National Venture Capital Association. “If you went back 18 months ago, it was almost a novelty for a corporation to have a venture arm,” says Dave Barry of the Corporate Venturing Report.
Despite the recent competition, Intel’s operation is still the biggest in high tech. Last year alone Vadasz and his staff invested $1.2 billion in 250 private and public companies, bringing the value of the portfolio to more than $8 billion in December. Overall, that’s a fourfold return on the $2 billion it invested, though that still falls short of the returns of superstar venture-capital firms like Kleiner Perkins Caufield & Byers. The second most prolific corporate tech investor, Cisco, has funneled only about $850 million into 85 companies since it started investing in the mid-’90s, and its portfolio is now valued at about $4 billion.
Intel Capital also looks at a much wider array of start-ups than its corporate brethren. Cisco, for instance, is more likely to invest in companies that operate in or near its specialty–Internet infrastructure equipment. The goal, says Ammar Hanafi, Cisco’s vice president of business development, is to get help in developing products that address customer needs. After an investment, Hanafi says, Cisco often shares technology with the start-up, and then co-markets the products. “We use investments as a way to make our relationships closer,” he says. Sometimes the investment ends in marriage: in about 15 percent of the companies it acquires, Cisco has contributed seed funding.
But at Intel Capital, Vadasz has a mandate to go on fishing expeditions. For example, Intel now has a hand in start-ups as varied as eToys, the online toy retailer; iVillage, an online network for women, and CBS SportsLine, a Web portal for sports fans. None of these companies has much to do with Intel’s core chip business. But if the start-ups flourish, Vadasz says, consumers will migrate to broadband Internet connections and multimedia computers, where the Web experience will be richer. That, in turn, will create demand for faster chips and Internet equipment. “In a marketplace like ours, no company alone can create the market,” he says. “We try to figure out how we can accelerate the development of the business ecosystem for our next generation of technology and products.”
Like Intel chairman Andy Grove, Vadasz emigrated from Hungary in the ’50s; in 1968 he became employee No. 3 at Intel, after founders Gordon Moore and Robert Noyce. As the head of engineering, Vadasz over-saw the rapid advancements in the microprocessor that made Intel one of the most successful companies in Silicon Valley. In the early ’90s he moved to Intel Capital, then called the Corporate Business Development Group. Every year he invested in half a dozen companies that were directly related to the advancement of PC technology, and the deals rarely exceeded a million dollars.
But as the Internet age dawned, Intel extended its business beyond the PC to other kinds of devices like Internet appliances, and to networking equipment and servers. Correspondingly, Vadasz has broadened his in-vestment strategy. Last year Vadasz’s group changed its name to Intel Capital and started to promote the new strategy. There have been many high-profile winners: Wall Street successes Inktomi, Broadcast.com and Broadcom all received Intel cash. There have also been what Vadasz calls “sins of omission,” like his refusal to invest in Yahoo or AOL, because, he says, “I looked at them as simple search engines,” rather than as portals.
VC firms are proliferating around the country, from New York’s Silicon Alley to northern Virginia. But many entrepreneurs still say that blue-chip cash smells a little sweeter. As a result, Intel can often cut better deals than regular VCs, drawing a bigger percentage of the start-up for less money. “People understand that a company like Intel is selective about who they invest in,” says Alan Ramadan, who sold 5 percent of his sports-programming site, Quokka.com, to Intel before it went public. Moreover, Intel companies don’t just get the money, they get access to its engineers and the testing equipment in Intel labs. The Intel stamp of approval can also help on Wall Street during the IPO process. When a parade of Linux companies went public last year, the market paid attention in part because Intel–a major partner of Microsoft’s–revealed through its investments that it would support the in-surgent operating system. “It’s opened a tremendous amount of doors,” says Larry Augustin, CEO of VA Linux systems, in which Intel invested $2.5 million. Microsoft was reportedly miffed, but Vadasz simply says: “At the end of the day, companies will do what is in their best strategic interests.”
Vadasz and other corporate venture capitalists are frank about what they don’t do. Unlike traditional VCs, they don’t sit on boards or get involved in day-to-day decisions like hiring a management team. For that reason, Intel Capital made a decision early on to invest right alongside regular VCs in the early rounds of a company’s development. “Venture capitalists are very good at helping start-ups and entrepreneurs manage a company,” says Intel Capital vice president Stephen Nachtsheim. “We’re good at the strategic, technical and marketing side of things. So it makes for a natural pairing.”
Other corporations are following Intel’s blueprint, pairing up with VC firms to fund start-ups. Last month, for example, a small Bellevue, Wash.-based company called PointShare, which builds online services for the health-care industry, received an investment from a larger company called NeoForma, which runs a Web site where medical supplies are bought and sold. The catch: NeoForma itself went public only three months ago. In other words, start-ups are now investing in start-ups. In the New Economy the new can get old very fast.
