The Starting Line: Tech giants stay steady with VC funds

Sure, the heady days of hot initial public offerings and ever higher Nasdaq records are gone, but venture capital funding is still at historic levels, on par with first quarter of 1999. Technology companies, an important source of venture capital, say that they are still investing.

"The bottom line is we still believe in this," said Robert Manetta, a spokesman for Intel, whose Intel Capital unit was among the top venture capital players in the third quarter.

The numbers by and large back up that sentiment. Tech companies including Intel, Cisco Systems and Oracle accounted for 11.3 percent of the total dollars given in the third quarter, according to Venture Economics and the National Venture Capital Association (NVCA). In the second quarter, they accounted for 11.7 percent of all VC funding, down from 16 percent in the first quarter.

They held to that level even as funding overall fell 31 percent to $7.7 billion in the third quarter from the second, according to Venture Economics and NVCA. And despite that drop, funding is still on par with historic high levels.

Analysts acknowledged that corporate giants have cut back on their funding a bit, but said it's parallel to what's happening in the VC market overall. Many technology companies prefer to ride shotgun with traditional venture capital firms, so when the firms cut back, tech companies do the same.

"These numbers don't indicate that corporations are getting out of venture capital," said Jeanne Lazarus Metzger, vice president of business development for the NVCA. "Some have cut back, but we haven't had a mass exodus."

	Funding as a tool Some tech companies invest in others to get a peek at new technologies. These were the top tech corporate VC players from Oct. 1, 1999, to Sept. 30., 2001.
	Company				Number of companies funded				Total funding
	1. Intel Capital				211				$996.8 million
	2. Cisco Systems				73				$581.7 million
	3. Internet Capital Group				46				$494 million
	4. Dell Ventures				62				$451.85 million
	5. Comdisco Ventures				94				$449 million
	6. CMGI @Ventures				48				$402 million
	7. AT&T				4				$367 million
	8. Hewlett-Packard				38				$259 million
	9. Qualcomm Ventures				13				$250 million
	10. Sun Microsystems				46				$234.5 million
	11. AOL Time Warner				46				$227 million
	12. Microsoft				16				$224.5 million
	Source: Venture Economics, National Venture Capital Association

In fact, some technology behemoths are just getting into the VC game. Last week, Applied Materials said it would start a fund to gain access to future technologies for making semiconductors and optical components.

"Eyes and ears" investing
So why would Applied Materials and other companies want to get into the VC game when there's no immediate payoff?

"We hope to prospect new technologies and bring them to maturity more rapidly," said Joseph R. Bronson, chief financial officer for Applied Materials.

That reasoning was echoed by a host of corporate VCs.

Intel's Manetta said the rationale behind Intel Capital's formation in the early 1990s was "eyes and ears investing."

By throwing its considerable cash pile around, Intel can gain access to new technologies it either wants to pursue or at least learn about. Investments in optical networking enabled the chip giant to use the technology in new products.

For example, Intel has made a few investments to learn about MEMS (micro electro mechanical systems), a topic the company is researching.

Most technology companies try to keep their VC investments limited to what's strategic to their business. While Intel talks of an "ecosystem" for its chips, Dell Computer's VC arm, Dell Ventures, focuses on companies that develop server and storage technology, network infrastructure enterprise software and wireless applications.

"We're not looking to make a quick buck," said T.R. Reid, a spokesman for Dell, adding that access to technology is as important as making a buck.

And that's a good thing since many tech giants are taking investment losses on their portfolios. Although Dell's VC fund, which was launched in March 1999, is "ahead of the game" when it comes to net returns since inception, it did have to write down the value of its portfolio in the second quarter, Reid said.

It helps to have cash
Companies like Dell and Intel can afford to lose money in the name of technology--at least in the short term--because they have a war chest of cash.

Intel had a $350 million investment loss in the third quarter and is projecting a loss of about $280 million on its portfolio in the fourth quarter, Reid said.

But that's the price you sometimes pay, said Manetta, who quickly added that Intel Capital has had $4 billion in net gains since it was launched.

Indeed, Microsoft reported a $980 million investment loss in its latest quarter due to investments in cable and telecommunications companies. But don't cry for Microsoft--the company ended its second quarter ending Sept. 30 with more than $36 billion in cash and short-term investments.

For technology companies, starting a VC fund is almost a rite of passage; it proves there's a lot of money in the bank.

"It's a nonoperating activity you do when you have critical mass and a lot of cash," said A.G. Edwards analyst Christopher Chaney, who covers Applied Materials. "When you have cash, investors want to see you do something with it."