Venture capital without the capital

IBM's Venture Capital Group doesn't invest money in start ups, but instead gives them things that director of strategy Drew Clark says money can't buy.

After several years of comprehensive restructuring that computing giant IBM had undergone since the beginning of the 1990s, a decade ago, the company decided to make another strategic change, and exit the applications development business. This meant concentrating on computing infrastructure, software, and services, but the need arose to find suitable partners to provide the applications that would run on these infrastructures.

In the spirit of the end of the 19990s, IBM built a team that was supposed to find suitable partners in the technological breakthrough incubators, that is, the venture capital funds. The logic was clear: a start up that could provide an interesting technological solution on IBM's infrastructure would improve its market penetration and strengthen its standing among its customers. This is also the background to the setting up of the Venture Capital Group within the company. It is still around, despite all the ups and downs.

Last week, Drew Clark, director of strategy for IBM's Venture Capital Group, visited Israel. The group is highly interesting, and does not work in the same way as the corporate venture arms of other companies. "We don't invest money in companies," Clark told "Globes". "We work with venture capital funds on a strategic level, and in that way we make contact with start ups, that later become part of our eco-system."

IBM's Venture Capital Group, contrary to what its name implies, is thus actually driven by a lack of desire to invest money in companies. Only in exceptional cases will it put its hand in its pocket, and even then, it will be payment in kind, through products and services.

"There are special circumstances in which we will give money equivalents, such as for semiconductor companies that want access to our manufacturing capacity," says Clark. "In a case like that, we will also take a stake in the company. The venture capital funds have plenty of available cash, and 80% of it isn't invested at all. What the funds really lack is construction of a good distribution model for their portfolio companies, a successful business model and a way of entering the market and growing. These are things money can't buy, and this is what IBM offers."

The group's Israeli activity is in the hands of Ann Scheman. She says IBM collaborates with ten venture capital firms here, either Israeli firms or foreign firms with an extensive presence in Israel, among them JVP, Genesis, Piatngo, Gemini, Greylock, Sequoia, and Battery.

Besides the Venture Capital Group, IBM operates in Israel through its Global Technology Unit, the executive arm of cooperation with external companies, but the units focus on Israel is geographical rather than just on start ups. According to IBM data, it has helped its partners achieve sales amounting to $1.2 billion.

Why do you object to investing in exchange for shares?

Clark: "The problem is that if you give money, the discussion changes. You aren't just talking about business, but about things like 'is this the right CEO?' or 'will we make the milestones?' It shifts us from the strategic discussion centered on the question how the company can win with us in the marketplace. We want the link with us to be only strategic, and the funds like that."

So far, IBM has teamed with 120 funds around the world, two-thirds of them in the US. "The funds know how to spot the next good companies and the appropriate people to run them, and how to finance them," says Clark. "IBM brings the knowledge of the markets, of the customers, and of the technology. In exchange, it receives exposure to the best start-up companies in the world that match the company's strategy."

The Venture Capital Group is involved with 1,400 companies, and Clark estimates that one in ten of the companies that participate in the program becomes successful. The venture capital funds' success statistics also range around that proportion.

What makes you think IBM's model is more attractive than those of other technology giants, that put money on the table as well?

"We bring to meetings with the funds scientists and even Nobel prize winners who work with us. We have activity in segments where the competitors don't. The funds apparently agree with us, because they call us before they approach anyone else."

And you don’t feel you could lose out in a strategic decision at a company because you aren't on the board?

"What would you prefer: to have a seat on the board, or to be the best friend of all the funds on the board? We are connected with everyone on the board, and that way we have more leverage on the funds and on the company's decisions."

The Venture Capital Group puts an emphasis on segments in its "Smart Planet" initiative, so that today most of the interest is in cleantech, with a stress on solutions in the areas of water and energy, health, and government. "We still buy infrastructures for data centers," Clark says, "but today the focus is on energy consumption and not just on selling the boxes."

The group's connection with the venture capital funds does not end with cooperation, but extends beyond that, in acquisitions that IBM makes. "The Venture Capital Group was involved in due diligence for 60 acquisitions," Clark says. "31 companies that participated in IBM's VC funds program were bought by the company."

Published by Globes [online], Israel business news - - on November 16, 2009

© Copyright of Globes Publisher Itonut (1983) Ltd. 2009

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018