Feeding the venture capital fever
Venture capital fever is burning among a host of companies seeking to nab a piece of the Internet economy by nurturing start-ups.
In the past week, several companies have announced venture capital units they plan to use to nab a piece of the lucrative Internet economy.
Consulting giant EDS today said it will launch the EDS-A.T. Kearney Ventures fund. That news follows similar announcements by Big Five consulting firm Andersen Consulting, systems integrator Cambridge Technology Partners, Net services start-up Breakaway Solutions and others.
A separate venture fund unit provides several advantages for these companies that not only stand to reap the rewards of a successful IPO, but also nab the opportunity to be the consulting provider of choice to dot coms as they grow into the next Amazon.
Even media giant Time Warner got in the game this week, announcing plans Wednesday to create a $500 million venture fund to invest in digital media companies in areas such as e-commerce and interactive television.
Bill Loomis, a financial analyst at Legg Mason, said companies are jumping on the VC bandwagon to avoid letting opportunity pass them by.
"The trend started with the new wave of e-business and [Internet services] companies like Scient and others who all already have a similar unit," said Loomis.
In recent months, larger, more established services firms that are making an aggressive push to recreate their companies as Internet players have followed their smaller, more nimble counterparts' VC strategies.
In the longer term, Loomis said services firms, some of which are privately held such as Andersen and the other Big Five consulting firms, will use their VC arms to help provide financial incentives to employees.
In today's announcement, Plano, Texas-based EDS said its new $1.5 billion venture unit will aim its investments toward Internet and business-to-business companies over five years, taking equity stakes in its clients.
On Monday, EDS rival Andersen said it has formed Andersen Consulting Ventures and plans to invest up to $1 billion over the next five years to create new electronic or Internet-focused businesses.
Boston-based Breakaway Solutions, which offers services such as applications hosting, systems management and strategy consulting, formed Breakaway Capital to offer minority venture funding to clients and help start-ups speed through the IPO process.
"We want to put skin in the game and share the success of [our clients]," said Gordon Brooks, chief executive of Breakaway. Brooks said the company, which is partnering with Katalyst, a firm that streamlines the IPO process for start-ups, will share investment proceeds with key executives and top performers. Breakaway also said it has taken an equity stake in Katalyst.
Meanwhile, Brooks' former company, Cambridge Technology Partners last week launched NEWCO, a new incubator program with an emphasis on retaining employees through providing new financial incentives.
As the young companies that Cambridge invests in enter the IPO stage, 20 percent of any appreciation on those investments will be returned to Cambridge employees, the company said.
Despite all the VC initiatives, Loomis said there aren't a surplus of potentially successful companies around in which to invest.
"Clearly there's a lot of money chasing [deals] and a finite amount of deals," added Loomis. "It will be difficult for some of these companies to [quickly] fill up their portfolio with quality investments."