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TECHNOLOGY GIANTS: VC MODEL
Search for The Next ‘Hundred Zeroes’!
Technology Companies are setting up VC funding Arms, Raising optimism of a Great Inorganic Leap forward. Seriously, aren’t corporate venture funds already too overrated?
Issue Date - 18/08/2011
 
When Google founders Sergey Brin & Larry Page decided to take up VC funding of $12.5 million from Kleiner Perkins Caufield & Byers in 1998, they told the VC firm’s partner John Doerr that they were willing to hire an outside CEO, but they backtracked a few months later; saying they would like to go on their own. They were then taken by Doerr to meet a number of CEOs like Andy Grove of Intel, Jeff Bezos of Amazon & Steve Jobs of Apple to really appreciate what a CEO’s job entailed. Finally, they relented on the outsider proposition, provided the outsider was Steve Jobs and no one else, before finally being convinced to explore further!

Considering Steve Jobs’ iconic personality and a high probability of a clash of equals, that may not have been a genuinely good idea. But this anecdote from Steven Levy’s book titled In the Plex: How Google Thinks, Works & Shapes Our Lives, really underscores how Google’s founders never really were comfortable letting their baby being run by anyone but themselves. The inevitable happened this year, when Page took the reins as CEO and Eric Schmidt became Chairman. Page already is talking about taking Google back to its start up days when it comes to the culture of innovation.

They have always been concerned about the company slowing down on growth. Levy mentions that they once fired all the middle managers for that! In fact, though not all may take such extreme action, that reflects a genuine concern of technology companies beyond a certain size, as they risk getting blown over by the next disruptive technology in a dynamic industry. This fact has proved true for companies like Microsoft, Yahoo!, HP, BlackBerry, Dell, IBM and Google itself, to an extent. Apart from a number of initiatives to get the company on the innovation drive again, which include working on book search and autonomous vehicles, one of the Google’s most ambitious moves is with respect to its VC firm Google Ventures, which has earmarked $200 million to fund promising start up companies (touted as a move to find the next Google?). That’s significantly large by VC standards and Google claims that it has a special secret algorithm that can help it find what the next big start ups would be. Apart from Google itself, a number of big technology names are on the list of corporate venture funds like IBM, Intel, SAP, Microsoft and National Semiconductor. But how successful can this VC model led by technology companies be?

 
Corporate venture funds are getting particularly active at this juncture, when the market for technology start ups is hot enough to give birth to speculations about another bubble, and this fear is largely linked to the valuations of social media companies. Buoyed by the enthusiasm of the potential of these start ups, some heady valuations are already happening in the VC/PE space for technology start ups. The LinkedIn IPO was issued at $45, but the price rose up to $122.7 on the first day and closed at $94.25. The company’s valuation rose to $9 billion on the day, unprecedented optimism since the Google IPO. Facebook’s valuation is around $100 billion in secondary markets. Twitter recently received funding of around $400 million (as per reports) from Russian investment fund DST Global led by billionaire Yuri Milne and the company has been valued at $8 billion by the investors according to sources, and this is approximately how social gaming firm Zynga is valued. Online coupon company GroupOn is also coming up with an IPO, and is valued anywhere between $20-25 billion. Alok Mittal, MD, Canaan Partners (VC firm) comments, “In the last tech bubble, the currency was eyeballs; currently, the companies are actually earning revenues and profits.” Indeed that is true, but on the other hand, analysts also worry about the fact that the euphoria around a Facebook could also extend itself to a number of smaller companies who have a similar model, but hardly a similar DNA. Also, private deals are already showing significantly high valuations.

According to the US National Venture Capital Association, corporate venture capitalists (CVCs) invested an aggregate of $583.03 million in the first quarter of 2011 out of a total VC investment of $5.88 billion, which means that they accounted for 9.9% of VC investment, which is a significant rise over 8.3% in the previous year. Interestingly during the previous bubble, they accounted for peak shares of 14.8%, 15.4% and 12.3% of all VC deals in 1999, 2000 and 2001 respectively. Between January 1, 2010 and March 31, 2011, CVCs have invested $347 million in technology ventures and $165.35 million in IT services.

For a VC fund, a market which is on the upswing is definitely a positive in terms of the exit opportunity if done at the right time. But obviously, when actual technology companies enter the VC arena, the objectives can be quite different. There can be multiple strategic objectives in this context. Being a technology firm and having a lot of spare cash is a double edged sword in today’s corporate world. But paying too many dividends is often considered negatively by investors, as it appears that the company is not growth oriented enough or isn’t finding the right growth opportunities.

          

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