RealTime IT News

VCs Fill IBM's R&D Pipeline

WALTHAM, Mass. -- IBM is strengthening ties with venture capital firms and their portfolio companies to cultivate a pipeline of new technologies and partners, executives said at a news conference in their Boston-area office here Thursday.

Despite an R&D budget of $5 billion and a staff that files 14 patent applications a day, "IBM is more dependent, in every way, in needing to look outside for innovation," said Matt Doretti, IBM's managing venture development executive.

Unlike chipmaking giant Intel , IBM doesn't make direct investments in startups. Instead, the Armonk, N.Y., IT giant has a team of 18 executives from across its business units, working directly with VCs.

By tapping the VCs' portfolio companies, IBM identifies promising markets and fills gaps in its R&D plan to solve business problems for large companies.

It also limits its risk. IBM knows that the companies that have received VC financing have been vetted by the investors who have scrutinized the product, the market and the management team.

IBM's Venture Capital Group (VCG) is not new; it was started three years ago by former CEO Lou Gertsner. But as the market for IT products and services begins to rebound, and the menu of emerging technologies grows ever bigger, VCG is taking on new importance.

Among the current areas where IBM is working with VCs in scouting technology is in open source software, autonomic computing and wireless.

IBM has relationships with some of the biggest names in the VC community including Accel, Battery Ventures, Kodiak Venture Parnters, US Venture Parnters, Mayfield, Carlyle Group, Hummer Winblad, 3i, Kleiner Perkins and New Enterprise Associates.

Scott Tobin, a general partner with Battery Ventures, said the relationship is symbiotic. "Our business is getting harder and harder," Tobin said. "We're looking for all the help we can get in navigating the waters."

In the three years Battery has been in IBM's VCG program, Tobin has consulted with IBM counterparts about what technologies they see a market for. IBM's input can help decide which business plan gets funded (Battery reviewed 15,000 last year) or what strategy an existing portfolio company should pursue.

For hot startups, who have many investors to choose from, close ties to IBM could be the deciding factor. Venture-backed firms hope to achieve IBM partner status, vastly expanding their distribution.

IBM executives, who have expertise in a range of industries, can work closely with portfolio companies, devoting time resources to projects.

"We've had 12 portfolio companies engaged in some way with IBM," Tobin said, including Akamai Technologies , whose content delivery network service is resold by IBM.

Eliot Katzman, a general partner at Kodiak Venture Partners, an early stage investor specializing in communications technology and semiconductors, sees the value in the IBM relationship as well. Consulting is key, because "companies have to do a lot more with the capital they are getting," Katzman said.

Judith Hurwitz, president of Hurwitz & Associates, an IT consulting firm, said IBM's VC strategy fits its overall strategy of providing large companies and government agencies with a full menu of IT applications and services.

"IBM invests a lot in R&D, but there are areas where (independent software vendors) can add," she said.

As IBM competes with HP and others, the contributions of partners could be the difference between winning projects.

"Whoever gets more vibrant ISVs into its camp will do better," Hurwitz said.