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Answering the Call

Trust corporations to know when the VC game is ready for new players.

Corporate venture capital has been on its way out for a while, but it isn't quite gone. And now it's hinting at a comeback--with some big names behind it.

European wireless heavyweight Orange S.A., one of France's largest companies, didn't even begin venture activities until late 2000, after the Internet bubble had burst. And Orange isn't alone. Applied Materials Inc., a Santa Clara, California, multinational maker of semiconductor manufacturing equipment, started a new venture fund last fall. Nestle S.A., the Swiss food giant, kicked off its VC unit in March 2002.

These companies are serious, too. Orbotech Ltd., a NASDAQ-listed Israeli maker of printed circuit board inspection equipment, began a VC unit in June and has already invested $7 million in three companies.

Whatever their vision, these companies are certainly going against the tide. The number of active corporate VC firms shrank from 381 in 2000 to 272 at the end of 2001, according to the National Venture Capital Association. Total corporate venture investments fell from $15.8 billion in 2000 to $4.7 billion last year, as the number of corporate venture deals was dropping from 1,934 to 880.

"There's been a lot less getting in than getting out," says Dave Barry, vice president of Asset Allocations, the Wellesley, Massachusetts, publisher of the Corporate Venturing Directory and Yearbook.

The climate in the industry creates some advantages for the new round of corporate venture units. With venture capital scarcer, they have the opportunity to cut better deals. And don't forget that competitors are still dealing with existing portfolios of often-troubled companies they invested in during the bubble days.

Jeff Brown is one entrepreneur who can testify to the remaining vigor in corporate venture capital. That's because Orange Ventures has invested $1.5 million in RadioFrame Networks Inc., the 55-person Redmond, Washington, wireless technology company where Brown is president and CEO.

"You'll see more of [corporate venturing]," the 42-year-old says. "It makes a lot of sense." Indeed, corporate venture investors say they can still get new ideas and new markets for their own goods and services and, in some cases, keep innovative technologies out of the hands of competitors through investing in small companies.

Today's corporate VC tends to be more patient, more strategic, less concerned with cashing out and less willing to invest in untested ideas. It's difficult, however, to characterize a group of companies with ties to industries as disparate as telecommunications, biotechnology, software and many others.

Some corporate investors mainly want to identify and get stakes in companies they may someday acquire. Others want to tap into promising technology. A few are like traditional venture capitalists, purely interested in return on investment.

For entrepreneurs, corporate venture offers several pluses. Jeff Brown liked Orange because it could someday be a major user of RadioFrames' technology, which improves performance of wireless networks inside buildings. Other entrepreneurs like corporate investors because they can get early access to the larger companies' next-generation technologies.

That was one of the benefits for Alisa Nessler, the 44-year-old CEO of Austin, Texas-based Lane15 Software. The 50-employee company sells software for managing next-generation computer data networks and needs advance warning of trends and technologies in microprocessors and computer systems. Investments from Intel Capital and Dell Ventures, as well as other VC firms, ensure Nessler has an insider's knowledge.

If you're interested in corporate investors, start by feeling out suppliers, customers and others you do business with. Nessler says Intel's interest in financing her start-up showed up unexpectedly in early conversations about her company's technology. Also network heavily with other entrepreneurs, bankers, angel investors and professionals such as attorneys and accountants. Most corporate investments come through referrals, especially from traditional VCs who want the benefits of corporate sponsorship for their investments.

Corporate investors rarely invest by themselves, preferring to group with traditional venture investors, usually in later stages. But they do invest in young firms; Nessler's company was about a year old when it landed its first rounds. If you can get traditional VC financing, you can probably get corporate venture.

"It does look like some large companies are re-evaluating their goals and their portfolios," says Nessler. "But I still see corporate investment."

And time may be on your side if you can wait for the venture environment to return to, if not millennial frenzy, at least healthy activity. That day isn't far off, according to Mike Dolbec, a former corporate venture capitalist with 3Com and current head of Orange Ventures. "By the time you print this story," he predicts, "the pendulum will have swung full circle."

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This article was originally published in the July 2002 print edition of Entrepreneur with the headline: Answering the Call.

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