Corporate Venture Funds Focus on Core Technologies
by John Brinsley

3/19/01

There was a time, as recently as last summer, when becoming a venture capitalist was little more than a matter of calling yourself one and quickly raising $50 million to $100 million from institutional investors eager to ride the dot-com wave.

Now, with once-high-profile incubators and venture capitalists retrenching – and in some cases even throwing in the towel – one place where entrepreneurs may find needed capital is from corporate VCs.

Although Los Angeles suffers from a dearth of large corporate entities, it has a surprising number of venture funds attached to or associated with corporations. Indeed, a recent study by the Los Angeles Regional Technology Alliance found that the area has as many or more corporate VC offices as anywhere else in the country.

That said, some of these venture capitalists aren’t making much of an impact locally. Biotechnology giant Amgen Inc., for instance, has been chided by some for not investing as much as it might on local biotechnology startups.

“(Corporate venture investment) is much less than we’d like it to be, frankly,” said LARTA Chief Executive Rohit Shukla. “But there are large players here that have started to be more active in the past couple of years.”

That activity can be explained in part by the recognition that corporate VCs have some advantages over independent shops. Investors and the public markets alike are no longer interested in rewarding ventures that haven’t proven their ability to make money, and even those that have a clear path to profitability aren’t finding much interest as the stock market tumbles. Venture capitalists backed by the resources of a larger entity can promise more stability and opportunity for a company still seeking to establish a product.

“As a corporate VC arm, vs. a private one, we can beta-test a product in a lot of different markets,” said Troy Fukumoto, managing partner of SunAmerica Ventures, a subsidiary of SunAmerica Inc., the retirement asset management firm that merged with insurance and financial services giant American International Group Inc. in 1999.

“AIG is one of the largest companies in the world – it’s in 130 countries. We can test in any of them,” Fukumoto said. “It doesn’t help to test your product on six people. In this world, you don’t want to diminish the (impact of) deep pockets.”

SunAmerica Ventures is the largest corporate venture fund headquartered in Los Angeles. Founded in 1997, it has $850 million in assets. With that comes the patronage of SunAmerica founder Eli Broad, perhaps the city’s wealthiest citizen. (Fukumoto declined to say to what extent Broad has personally invested in the venture fund.)

The firm typically invests $3 million to $5 million per deal, and has made 35 investments in its four years of operation; all are in the information technology arena. Most of the companies are located in and around Silicon Valley, but several are in Southern California.

Application vs. investment

Broadly speaking, there are two kinds of corporate venture operations: those that invest in companies with products or technologies potentially of use to the parent company, and those that operate like a private VC fund, investing strictly for financial return. Microsoft Corp., Intel Corp. and Cisco Systems all run active operations of the former variety; SunAmerica Ventures is among the latter.

“We’re not trying to invest in some software company that will streamline annuity sales,” Fukumoto said.

Also among those that fund businesses that can feed product to the parent firm is Alcatel Ventures in Century City. Affiliated with French telecommunications giant Alcatel, Alcatel Ventures is run by Steve Kim, the founder of computer networking switch manufacturer Xylan, which was bought by Alcatel for $2 billion in 1999.

Around half of the $150 million fund comes from the French conglomerate, which has built up a considerable U.S. presence over the past few years and is aggressively looking for new technological advances.

Kim said that Alcatel relies on him for his entrepreneurial expertise, while he benefits considerably from the company’s resources and experience.

“I still make my own decisions, but I really leverage a lot of their capabilities,” he said. “When companies come to us, the Alcatel name gives us a lot of value, and helps with due diligence. I don’t know that much about optics. I see several companies, and could get blind-sided. I can pass along (business plans and information) to their specialists and get very good feedback.”

One of the local companies that Alcatel Ventures is backing is Ondax Inc., which last week announced the closing of a first round of financing of $7.5 million. Kim said his firm put in somewhere between $2 million and $2.5 million into the Monrovia-based company, which develops and manufactures advanced optical components.

“We are interested in investing in core technologies,” Kim said. “We don’t look at ASPs (application service providers), any dot-com stuff. We haven’t touched anything like that.”

Similar approaches

Indeed, like other VCs, corporate venture firms are only interested in looking at patented technology these days. Concept deals are anathema, as are business-to-business Internet projects. So investors are looking at startups coming out of Caltech (like Ondax), UCLA and other local universities.

“It’s going to be a different kind of game from here on in,” LARTA’s Shukla said. “It takes a much longer time to prove things out. But companies can’t afford not to stay on top of developing technology. That’s where corporate VCs can come in.”

While high-concept business plans are thrown out with nary a glance, nascent companies with proprietary technology may not find it all that difficult to find venture money.

“Raising money is the easiest part of my job,” said Denny Miu, a former professor of mechanical engineering at UCLA who is founder and chief executive of Integrated Micromachines Inc., an optical switch manufacturer, also based in Monrovia. The company raised $45 million back in November, some of which came from SunAmerica Ventures, which had also invested last April. IMMI has since grown from 15 employees to 175, and Miu credits SunAmerica Ventures’ Fukumoto, who once worked at TRW, as helping to recruit engineers for his company.

Around $25 million of the recent financing came from Cisco, which clearly hopes that IMMI will be of strategic use. But Miu doesn’t assume he can count on Cisco’s business.

“Getting an investment from Cisco was easy; getting a purchasing order from them is difficult,” he said. “It makes it easier, but not automatic. We take nothing for granted.”

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