Venture capital crossing the Pacific to the U.S.

Matsushita Electric Corporation of America, better known to consumers as Panasonic, last year quietly went about setting up an operation to help high-tech start-ups get off the ground--and, in turn, help Panasonic stay abreast of changes in the consumer electronics industry.

By the end of June, the first of as many as 20 small companies are expected to start moving into the Digital Concepts Center, 20,000-square-foot office on Stevens Creek Boulevard, the closest thing to Main Street in the heart of Silicon Valley. They'll share space with Panasonic Ventures, the venture capital arm that got $50 million in initial funding by Matsushita, as well as employees of other Panasonic business units.

Panasonic's strategy is unusual for a Japanese company, but others such as Sony, too, are finding that they need to take extraordinary measures to keep pace with the constant change of the networked economy.

Matsushita, Sony, and others "have recognized that convergence is an opportunity as well as a threat," said Sean Kaldor, an analyst with International Data Corporation. "All these companies realize that a lot of innovation in technology is happening in the U.S. They come from all over the globe for access to capital and a skilled labor force."

Hit with plunging profits, Japanese companies have been searching for ways to become more competitive. The answers they come up with--and how well they execute on their plans--will significantly affect how they address the challenges and opportunities presented by the convergence of consumer electronics with digital technologies, and how all that relates to the Internet.

Differing strategies
Panasonic's operation will focus on development of emerging technologies such as home networking, Internet appliances, and e-commerce applications. Panasonic Ventures will house the start-ups, plus provide them with network connectivity and access to legal, accounting, and other services. The firm will make direct investments in about two to four companies a year, according to Charles Wu, managing director of the Digital Concepts Center.

"We are basically a form of outsourced research and development," Wu said.

Wu said the move was made because Silicon Valley employees are "driven by equity and not current salary." Companies that can't match the torrid pace of wealth creation are finding it harder to retain and recruit employees.

By and large, the big Japanese companies such as Matsushita, Sony, Toshiba, and NEC have favored partnering over investing in small start-ups--and usually when investments have taken place, it's for a specific technology, according to analysts.

Sony, for instance, has recently formed partnerships with IBM for development of downloadable music formats, Spyglass for the use of Web browser technology in cable TV set-top boxes, and Quantum and Seagate for hard disk drives.

Overall, though, Japanese companies have not been very active investors compared to U.S. companies such as Intel and Microsoft; Intel invested in four companies just since April and started a venture capital fund to seed money to software developers working on applications for its new chips.

According to research from VentureOne, NEC has made six equity investments from 1992 to 1998 in five companies such as Vadem, a maker of notebooks. Toshiba, the most active, made 10 investments in 6 firms in the past four years. Among those noted: Wink Communications, which makes technology for interactive TV broadcasts, and Planet Web, a developer of software and services that enables Internet access for consumer electronics devices.

"The Japanese are looking for very specific technology to complement their products. The U.S. companies are also looking primarily for development teams--for the human resources that a start-up can give," as well as their technology, according to Jean Yaremchuk, research director for VentureOne. "With the financial situation in Japan, these companies are scanning the environment and looking at the scene but haven't been very active lately," so by definition, Japanese companies have a limited ability to expand operations rapidly, Yaremchuk said.

Sony says it's focusing on the issue.

"Just because we haven't announced a lot of investments, doesn't mean we're not doing something," said Jim Bonan, vice president of corporate strategy and business development for Sony Electronics.

"Sony's major goal is to give each business unit the flexibility of making investments in areas they feel are appropriate, primarily because those guys are closest to what's going on in the marketplace, and will see opportunities sooner," Bonan said. In March, Sony took action to improve its competitive position by reorganizing its electronics business into four core operations.

Historically, "Sony is good example of having management take advantage of localism. How to get all of those units to work together is a major challenge, but the opportunities are tremendous," IDC's Kaldor said.

Japanese companies not as nimble
Traditionally, any Japanese company making an equity investment has to have decisions approved by the president of the corporation, Wu noted. As a result, Japanese companies infrequently make direct investments in companies, observed Wu, who was most recently with Vertex Management, the Singapore-based venture capital firm that helped Creative Labs go public. The Digital Concepts Center was designed to work independently and quickly, he said.

Wu's first investment was in Epigram this March. Epigram is a company that makes technology for networking homes over phone lines. Epigram was later purchased by Broadcom, returning what Panasonic executives say was a handsome profit.

The money is nice, but the effort is really about human relationships, according to Dr. Paul Liao, Panasonic's chief technology officer and president of Panasonic Technology.

"In the past, these start-up companies have focused mostly on enterprise applications. What's happening now is that Silicon Valley is beginning to think about turning its attention to the consumer space," Liao observes. The investments really are just a prelude to setting up long-term relationships.

"Without that human connection, you can't become successful," Liao said.