How IBM Venture Capital Group succeeds without any venture capital
By Tom Foremski
Late last year I met with Drew Clark, co-founder of IBM Venture Capital Group which operates out of the heart of Silicon Valley, in Menlo Park.
There are just half-a-dozen specialists and their support staff, yet the group has been very successful, and doing it with OPM (other people's money).
Drew Clark, explains: "In the late 1990s we saw the many billions of dollars invested by the venture capital community and we thought about the best way we could participate and leverage those investments. That's when we set up the VC group. Since then we've helped IBM acquire key startups and also partner with hundreds of others in business ventures."
IBM's Venture Capital Group does not manage a fund as do other VC organizations. The company doesn't even have a strategic VC fund such as Intel, which makes billions of dollars in investments. Instead, it tells the VC community, and the startups, what types of technologies it is interested in, and the direction of its business strategies.
Then it waits for the magic innovation engine of Silicon Valley to spit out companies with technologies that it can leverage across its global business platform.
For example, Steve Mills, head of IBM's Software Group, can acquire a small Silicon Valley software company and immediately monetise its products across IBM's global distribution channels. It would take years for a software company to acquire that kind of capability.
It is a sweet deal for IBM since it doesn't have to identify, and invest in startups, and help grow them into larger businesses--the Silicon Valley VC community does it all for them and with their own money.
And the VC community is happy to do it and have an exit--selling a portfolio company to an IBM, SAP or Oracle, is very welcome.
The IBM VC group has had a hand in 15 acquisitions, and Mr Clark says that the annual rate of acquisitions will accelerate. It will accelerate because IBM is pushing harder into emerging markets, in India and in China.
"In China we helped a small startup in the financial services area where we needed a secure online payment system. We have good contacts with the banks and we were able to put together an IT and business solution that has been very successful," Mr Clark says.
It is such IT services projects that IBM can help startups find customers, and help refine their technologies. Big Blue is creating "innovation" centers around the world where its engineers and researchers help startups develop their technologies, and bring them into contact with IBM's client companies. It partners with about 1200 startups.
IBM benefits from the IT/business services contracts that build the complex IT and business infrastructures. Services is more than half of IBM's revenues and increasing--so it is a smart strategy. It makes more money from services than it would as a vendor of hardware and software.
Mr Clark is particular impressed with China and the startups that are emerging over there. He sees a lot of innovative thinking in China, and emerging technologies that IBM could leverage.
We spoke for a while abut innovation and Silicon Valley and the unique culture of this place. Mr Clark fully appreciates the value that Silicon Valley continues to produce, despite innovation occurring in many other places around the world.
I see Silicon Valley as unique because it tolerates massive amounts of failure. Here, people are allowed to fail, and fail often--something that other cultures punish.
Mr Clark and his teams regularly meet with VCs to tell them what they are looking for. One current area of interest is in Service Oriented Architecture.
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Drew Clark of IBM's Director of Strategy and CoFounder of IBM's Venture Capital Group talks about the formation of a new Venture Capital Advisory Council ...
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