Google's New Role: Venture Capitalist

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Widespread Corporate Stakes

Among the reasons for the corporate-investing comeback: an upswing in research-and-development spending after the tech-stock crash; the need to spot promising startups in China, India, and Russia; and increased shareholder willingness to tolerate the quarterly vicissitudes of venture investing in order to create long-term value. Venture investments by pharmaceutical companies to fill their drug-development pipelines also helped boost the first-half numbers, according to the NVCA—Novartis (NVS) and Johnson & Johnson (JNJ) were among the biggest U.S. investors.

In the tech sector, Intel Capital invested $236 million worldwide through the first half, 62% of that overseas. Among its winning investments was a $218.5 million stake in virtualization software company VMware (VMW), now worth triple that amount after VMware's blockbuster Aug. 14 IPO (see BusinessWeek.com, 8/14/07, "VMware Shrugs Off Shaky Markets"). In 2006, Intel took a $600 million stake in Craig McCaw's Clearwire (CLWR), which is building a long-range WiMAX network.

Intel has restructured its fund to emphasize financial returns and is investing in follow-up rounds in its portfolio companies—something it didn't do before. "There's no strategic value unless each individual investment is successful," says Intel Capital President Arvind Sodhani. "A bankrupt company is not very strategically valuable to Intel—or to anybody for that matter."

Nothing Ventured, Nothing Gained

Cisco Systems (CSCO), too, is parking more venture money in emerging markets. In 2005 the maker of computer-networking gear earmarked $100 million for investment in Indian startups, and since December, 2006, it has opened funds to invest in China and Russia. Closer to home, Cisco took a $150 million stake in VMware. The company averages 15 to 20 investments a year, a spokesman says.

In the wireless sector, Motorola Ventures invests about $100 million a year worldwide. Key 2007 deals include Vocel, which makes software for marketing ringtones and mobile applications, and VidSys, which provides video-surveillance technology to the military. And cell-phone chipmaker Qualcomm (QCOM) has been investing in startups that provide TV and payment services for mobile phones (see BusinessWeek.com, 1/18/07, "Qualcomm's Crystal Ball").

Even Yahoo! (YHOO) is turning its attention to nurturing startups—both inside and outside its walls. The company has set up an in-house incubator called Brickhouse in downtown San Francisco, and in May, Yahoo hired noted dealmaker Blake Jorgensen as its chief financial officer, signaling an increased willingness to make acquisitions (see BusinessWeek.com, 2/9/07, "Yahoo Taps Its Inner Startup").

Returning to the Fray

Corporate venturing can be risky. Amid the tech market crash, longtime investors such as Intel booked big investment losses, and some companies, including Dell (DELL) and Boeing (BA), exited the venture business entirely. "They got burned after the bubble, probably even more than the traditional VCs," says Mark Heesen, president of the NVCA. Other companies, such as Microsoft (MSFT), IBM (IBM), and Hewlett-Packard (HPQ), scaled way back. Microsoft and HP still make selective startup investments, though not through formal programs. IBM has stopped taking equity stakes entirely, though it works with VCs to strike technology deals with young companies that can help it generate revenue or spot acquisition targets, says Claudia Fan Munce, managing director of IBM's venture capital group.

Now the question is whether corporate investors and VCs can shepherd their investments to acquisitions or IPOs after a summer in which stock and credit markets took a beating (see BusinessWeek, 8/27/07, "Tech Stock Oasis: Can It Last?"). "Tech has been down for so long," says the NVCA's Heesen. "Now people are saying: 'Everything else is so bad, maybe tech is a good place to be.'"

Google and other corporate venture investors are betting that's true—and they're treading on VCs' turf to make sure they claim some prime acreage.

Check out the BusinessWeek.com slide show to learn more about technology companies' venture investments.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.