10:56 AM

No money down: How IBM leverages Silicon Valley's VC billions

IBM, the world's largest computer company, has a successful venture capital group operating  in the heart of Silicon Valley, yet it makes no investments in startup companies. Instead, it tells VC firms what types of startups it might want to acquire and waits for the Silicon Valley innovation machine to do the rest.

It's a very good system for IBM. There is no need to make risky investments, to spend years on boards helping to nurture and grow startup companies, and certainly no need to hit the road to raise new venture capital funds.

It is a beautiful system that leverages tens of billions of dollars of other people's money, and it can all be done with just a few people. IBM's Venture Capital Group in Menlo Park consists of just half-a-dozen specialists plus some support staff.

Because there is virtually no tech IPO market to provide exits for investors in thousands of startups, VCs are more than happy to offer IBM the cream of the startup crop. Since the IBM Venture Capital Group was formed in 2000, it has had a hand in 15 acquisitions, and that rate is increasing.

But acquisitions are just one way IBM benefits from Silicon Valley's bountiful crop of startups.  It also partners with about 1200 startups in various endeavors in which it uses their technologies in IT services deals through business partnerships. Business partnerships as a whole account for one third of its annual revenues, or about $27bn.

There is also a very nice business to be had in selling technology licenses to startups. IBM has a massive portfolio of patents and it offers favorable terms to startups. This might be a good insurance policy since Big Blue has lately become much more aggressive in pursuing companies that it believes are using its technologies without payment.  (See News.com: IBM: Amazon violates our patents – October 23, 2006.)

Tomorrow on Silicon Valley Watcher: Interview with Drew Clark, co-founder of IBM Venture Capital Group - find out what types of startups are on his shopping list.

- - -

Additional info:

VC-backed ISVs: Open Source Opens Doors

Startups to have access to IBM's entire patent portfolio with simplified terms

IBM announces formation of Venture Capital Advisory Council

IBM launches new initiative to help developers in emerging markets build skills and open standards solutions