Each week, Stephen Nachtsheim, VP of corporate business development at Intel spends an full day reviewing investment proposals. At 7.30am Nachtsheim and his team sit down to sift through equity investment opportunities in Europe. By lunchtime they have moved onto the US and around 4pm they will usually be investigating business deals in Asia. Intel is a serious investor in high tech companies. The very fact it has a corporate business development team of 75 people that dedicate four days a month to searching out suitable investment candidates bears this out.
Currently Intel’s investment portfolio tops 200 companies and is worth $1.5 billion, plus or minus gains. The company typically invests no more than $10 million in any concern although a $500 million equity investment in Direct DRAM supplier, Micron Technology, in Q4 1998 proved to be the exception to the rule (as might the $500 million it is rumored to be thinking of pouring into Hyundai’s Korean semiconductor manufacturing unit). In 1998 Intel made over 100 new equity investments, pumping a further $275 million into companies in as divergent fields as 3D design software, speech recognition, internet portals and e-commerce software – and that figure excludes the Micron investment.
When Intel explains its equity investment strategy it sounds like a benevolent parent: We provide equity to the smaller private companies out there. Our investments are strategic. Unlike pure venture capitalists, who ride the profit tide when a company goes public to exact the maximum return from an investment, we don’t look primarily for a financial return. We take a portion of the profits and invest them in up and coming companies to seed the market, an Intel spokesperson told ComputerWire.
However, such benevolence belies an altogether more pragmatic vision that is proving to be a lucrative way of both stimulating processor sales and adding yet more profits to Intel’s already overflowing coffers. Take Intel’s investment in digital non- linear editing company, Avid Technology. Back in March 1997 Intel paid Avid $14.25 million for roughly 1.5 million newly-issued Avid shares thereby buying it a 6.75% stake in the company. Avid’s stock stood at $9.50 a share at the time the deal was cut. By October 1998, when Avid’s share price had more than tripled in value, Intel decided to reduce its investment by selling 500,000 shares back to Avid. At the time Avid stock was trading at $33 which meant that Intel made a $16.5 million profit on its original equity investment in 18 months.
There is a common thread running through Intel’s investment strategy. The chip giant will only make an investment play if the benefactor of its investments agrees to port its products over to the Intel architecture. Intel has had a pronounced effect on our product strategy. Most, if not all, of our new product development is on Intel says DJ Long, director of business development at Avid.
The Intel influence has also had a dramatic impact on Avid’s revenue mix. Where the digital non-linear editor used to develop product and see the lions’ share of revenues from the Macintosh platform, sales on Intel now account for just under a third of revenues. At the beginning of 1997 almost 90% of revenues came from the Mactinosh platform with the remainder coming from Silicon Graphics. By the end of 1998 the percentage of Mac sales had fallen to 65%-70%.
The same pattern emerges with other Intel investments. The company bought 30,000 shares in e-commerce pioneer OpenMarket last year. The investment, which was worth $5 million based on OpenMarket’s share price on June 4th, gave Intel a 1%-2% minority ownership. But the ramifications for Intel’s processor sales were far greater. Intel would only buy stock if OpenMarket agreed to develop its Transact e-commerce backbone for Intel’s next generation IA 64 processors on NT – prior to the agreement Transact had been available only on HP-UX and Sun Solaris. The deal was clearly a platform play for Intel. Once the development work is complete Intel will use its powerful marketing machine to build a new market for the IA 64 on the new Transact platform. (The port is currently in development and should be ready within the year.) Intel, no doubt, will hope to repeat the success it had with Avid and make a healthy profit on its OpenMarket stock, taking advantage of the over inflated value of e-commerce stocks. It could be argued that this is the reason it invested in CyberCash, too.
It is fairly clear what Intel gets out of its equity investment program. Wall Street validation could be one benefit, as could brand awareness which comes with being associated with a company the size and prominence of Intel – a co-marketing agreement often comes with an Intel golden handshake.
But at what cost? Intel often asks for intellectual property rights from the company in which it invests. We didn’t grant them IP rights, says Avid’s Long, we didn’t need the money that badly, but there is some suggestion that other more cash hungry start-ups have accepted Intel’s requests. Furthermore, there are no guarantees that a corporate investor will not divulge product plans to competitors. Corporate investors, unlike pure venture capitalists, will often work on development projects at a very detailed level and there are few obstacles in place to prevent them from leaking details to competitors in a bid to accelerate product development cycles.
Aside from investing in Avid, Intel, for example, has also bought equity in two of Avid’s competitors, Canadian video editing company, MGI and US CAD/CAM company, Autodesk (which is currently being absorbed by Discreet Logic). Unlike VCs, which usually make a pure profit play in a company, corporate investors may also invest in small agile start-ups to gain exclusive rights to technology or garner market intelligence which it can then use to its own advantage. Start-ups are clearly caught between a rock and a hard place when it comes to raising funds. But they should perhaps think twice before choosing VC money over corporate equity funding. The outcome could potentially be far reaching.
