If Intel Capital had been viewed as the cumbersome ocean liner of the venture capital world, 2006 marked a year when the world's largest corporate VC got a bit nimbler, a bit faster and a lot more aggressive. The investment arm of Intel Corp. cleared $1 billion in total fundings for the first time last year, including a $600 million investment in wireless services startup Clearwire Corp. Excluding that record investment, Intel Capital invested $345 million in 133 deals, a significant increase over 2005's $265 million level.
Much credit goes to Arvind Sodhani, the former Intel Corp. treasurer who began making over Intel Capital after taking the helm in March 2005. By his own admission, the firm had become inefficient in dealing with the startup and VC communities, undermining Intel Corp's strategy of incubating technology markets to fuel demand for its core chip products. But under the watch of Sodhani, the first nonengineer to head Intel Capital, the firm has launched four international venture funds, concentrated on financial returns, become more aggressive in leading investment rounds and streamlined the way portfolio companies and VCs interact with the organization.
"The portfolio companies are ultimately the guys who write the report card, and I get feedback from them and their VCs that they are seeing and interacting with a totally different Intel Capital," Sodhani says.
One of Sodhani's first tasks was to streamline how Intel Capital made investments. In the past, a treasury investment manager would negotiate the deal and conduct some due diligence, while a strategic investment manager would decipher the technology and hammer out a business agreement. Despite Intel Capital's success as a venture investor, the arrangement was clumsy.
"Anytime you have two people responsible for delivering their half of an equation, you will get delay and confusion," Sodhani says. To solve the problem, Intel Capital started cross-training strategic and treasury investment managers and established a single point of contact between the portfolio companies and VCs.
To better track financial performance of investments, Sodhani introduced a process in which deals are measured by an internal rate of return that is tied to how Intel Capital evaluates its investment managers. And to assume greater control over its deals, the firm is taking the lead in a greater number of deals. Before Sodhani became president, Intel Capital led only about 10% of the rounds in which it participated. Now, the firm leads in more than half of the investment rounds in U.S. companies, and the proportion is even higher overseas.
To better leverage its relationship with its portfolio companies and its own customers, Sodhani spearheaded development of "Intel Capital technology days," in which major Intel customers identify portfolio companies they have an interest in. Intel estimates that it set up 20,000 meetings between portfolio companies and Intel customers such as Sprint Nextel Corp., Verizon Communications Inc., BP plc, Huawei Technologies Co. Ltd. and KT Corp., formerly Korea Telecom.
"Typically, a small startup can't get through the door to meet with these companies," Sodhani says. "But after these meetings, we often see follow-up rates of over 70%."
The strategy is winning over some VCs. When Intel Capital invested in startup Skyhook Wireless Inc.'s second round last year, for instance, co-investors Bain Capital Ventures of Boston and Innovent, the venture arm of Finnish telecom giant Nokia Oyj, were swiftly ushered in to meet with Intel executives in the company's wireless product lines even before an agreement was struck.
"The big question you always have with corporate venture investors is do they really have access to people in the lines of business," says Ajay Agarwal, a managing partner with Bain Capital Ventures who sits on Skyhook's board. "We found [Intel Capital] to be very aggressive about opening up contacts within Intel corporate."
Sodhani is frank about the potential dangers that come along with Intel Capital's new attitude. The firm risks overextending itself as it takes the lead in deals and exposing itself to the ongoing volatility in U.S. equity markets.
"We are engaged in a high-risk endeavor, and the challenge you continually face is whether the markets will hold up and whether you've got too big an exposure in a given year," Sodhani says, citing the paucity of initial public offerings as a danger for technology investors. "We put a lot of money into the U.S., and the fact that there are no IPOs in the technology sector is very troubling," Sodhani says. "There's a yellow light blinking." - Olaf de Senerpont Domis
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