November 16, 2010
By Olivia Oran @ TheStreet.com
NEW YORK (TheStreet) — Investors look to giants like Google(GOOG) and Cisco(CSCO) for clues to where the market is headed, but where do the giants themselves look when it comes to discovering the next big thing?
In many cases it’s small tech startups, which some corporations invest in via venture arms. Corporate venture capital — or investments in startups that will serve some strategic purpose for the parent — can also provide a way for large companies to boost innovation within their own core businesses.
“Corporate VC is a fantastic opportunity to get in early on companies they might later buy or partner with,” said John Taylor, director of research at the National Venture Capital Association in Arlington, Va.
It’s often easier for a large corporation to invest through a separate venture arm rather than build a new product itself, particularly if the technology is disruptive — market-shaking — in its sector. “Public corporations have to be focused on bottom line profit each quarter, so it’s easy to deemphasize long-term research and development,” Taylor said. “With so much going on in universities and government labs, large companies can just place a few small bets on startups to see what’s really happening on the front lines.”
The relationship, of course, is symbiotic; startups that take investments from corporate venture arms gain access to a larger Rolodex than they would with a traditional venture capital firm, said Curt Nichols, vice president at Intel(INTC) Capital. They can also benefit from the credibility and technology-expertise of their corporate partners.
“At the most basic level, our scale and our scope is extremely valuable to a startup,” said Nichols.
Since peaking during the dotcom bubble when corporate venture capital dollars comprised 15% of all VC dollars, the segment makes up 8.6% of all venture investment today (through the first nine months of 2010), according to PricewaterhouseCoopers. That’s up from 7.5% last year.
While the uptick has been led by crazy growth in the biotechnology and clean-tech sectors, Internet and software firms that focus on the booming mobile device market have also seen gains.
Read on for profiles of five cutting-edge startups backed by tech’s biggest names.
Corporate Investors: Nokia, Qualcomm, Societe Generale, Citigroup
What it does: Mobile Payments
Obopay, based in Redwood City, Calif., creates technology that allows people to send and receive money using their cell phones. Competing in a crowded market that includes PayPal and startups like Boku, Obopay has raised about $139 million in venture funding from a number of large names, including Nokia(NOK) and Qualcomm(QCOM).
Qualcomm led a $7 million Series B funding round in 2006 and contributed to a subsequent $29 million round a year later. As one of the first providers to hit the market, Obopay impressed Qualcomm with a payment technology that the mobile industry had not seen before, said Nagraj Kashyap, a vice president for Qualcomm Ventures. “Payments was the one area that had not come to mobile very elegantly, and we saw Obopay as a solution,” he said.
Qualcomm was also drawn to Obopay’s strong potential in emerging markets. While mobile payments has yet to take off in the U.S., the technology is valuable in India and Africa, where many people have phones — but not bank accounts.
The number of mobile payment users worldwide is expected to jump 54.5% from 70.2 users in 2009 to 108.6 million in 2010, driven by strong growth in developing markets such as Asia, Eastern Europe, the Middle East and Africa, according to Gartner.
Obopay partners with carriers like AT&T(T) and Verizon(VZ), financial institutions like MasterCard(MA) and hardware manufacturers like Research In Motion(RIMM), where a mobile money app is available in the Blackberry App World.
Up next for Qualcomm investments: More mobile technologies, including augmented reality — the overlaying of digital data on a view of a real world environment seen in mobile apps like Yelp. The technology is used extensively in gaming and military applications on computers, but has also come recently to mobile to improve mapping and location-based services.
Silver Spring Networks
Corporate Investors: Google
What it Does: Smart Grid Technology
Smart grid companies provide hardware, software and services to help utilities reduce carbon emissions and manage energy consumption. Silver Spring Networks, based in Redwood City, Calif., provides an entire platform — including modules that gather data from electricity meters — to utilities that service 25% of the country’s population, like California’s Pacific Gas and Electric Company.
Silver Spring, which is reportedly prepping for an IPO, has raised more than $250 million in venture funding from investors including Google Ventures.
While Google has already made investments in renewable energy, including solar thermal company eSolar, electric car maker Aptera and wind company Makani Power, Silver Spring is its first foray into smart grid tech, which promises to decrease power usage and reduce costs for consumers.
As a major consumer of electrical power, Google benefits from clean-tech investments — anything the company can do to make that power less expensive will impact its bottom line, said Dallas Kachan, a managing partner at Kachan & Co, a clean tech analysis and consulting firm.
Investing in clean-tech also has a corporate social responsibility benefit, Katchan said, if Google can claim that it is offsetting its power requirements with renewable energy.
The clean technology sector received the third-highest level of venture capital investment in the most recent quarter with $625 million in funding, said a recent report from PricewaterhouseCoopers.
Google Ventures would not say how much it had contributed to Silver Spring, although its investment last year was part of a $100 million funding round with Foundation Capital, Kleiner Perkins Caufield & Byers and Northgate Capital.
Corporate Investors: Cisco, Comcast, Intel
What it Does: Online advertising
BlackArrow, a San Jose, Calif.-based startup, has developed a way to insert advertisements in TV, mobile and online video programming so that they show up even when users try to skip them. That’s a huge opportunity for TV advertisers and networks — DVRs are expected to cut TV ad revenue in half over the next five years, according to Andy Atherton, COO of online advertising company Brand.net.
BlackArrow has raised about $60 million in funding from corporate investors including Cisco, Comcast(CMCSA) Interactive and Intel.
Intel was ahead of its time when it first funneled money to the company in 2004, when most TV programming was watched through linear broadcast. Intel, however, viewed non-linear on-demand programming as the future of television, which it figured would present new technology challenges for advertisers and networks.
“I see BlackArrow as a savior for technology in a lot of ways,” said Curt Nichols, vice president at Intel Capital who is responsible for the fund’s digital home sector. (Intel has participated in three rounds of funding since 2004, but it declined to specify the amount of money it has invested in BlackArrow.) “Without BlackArrow, the advertisers and content owners are in big trouble.”
Within the digital home space, Intel is eyeing investments in education and distance learning, home energy management and security segments. “There’s a whole set of connected consumer applications that are very nascent,” Nichols said. “They’re not there yet but as my team looks out five years down the line, those are areas we think are going to be valuable.”
Corporate Investors: Microsoft
What it Does: Online advertising
AppNexus, a New York-based online advertising platform, allows customers to examine website visitors based on demographics and location, then bid against other advertisers to place customized ads. AppNexus says Web publishers may earn more per impression while also learning more about their audience.
Microsoft(MSFT), a longtime client of AppNexus, was part of a group of investors that injected $50 million into the firm last month. While AppNexus’ real-time bidding platform represents just a small part of the display advertising market, the sector is expected to grow to 20% by 2012.
Through the investment, Microsoft will integrate AppNexus’ technology within its own advertising exchange, which will boost its impression — or transaction — volume significantly beginning in the first quarter of next year, Aaron Easterly, Microsoft’s general manager of advertiser and publisher solutions, recently told digital marketing website Click Z .
“AppNexus has brought a bunch of unique partners and has done a good job creating an open platform specific to real-time bidding,” Easterly said. “The partner approach and the openness of the platform are in general things Microsoft wants to support.”
Microsoft declined to say how much it invested in the company, but its minority stake comes with a board seat. The deal is particularly notable, as Microsoft rarely takes part in venture-type investments and does not have a discrete venture arm. The Redmond, Washington-based tech giant said it does not invest in companies just to acquire them down the line.
In total, AppNexus has raised over $65.5 million in venture funding from additional investors including Venrock, First Round Capital, Kodiak Venture Partners and Kholsa Ventures.
AppNexus was co-founded by CEO Brian O’Kelley, an executive at online ad company Right Media before its acquisition by Yahoo!(YHOO) in 2007 for $850 million. Michael Rubinstein, a former executive at DoubleClick before its $3 billion acquisition by Google, joined AppNexus as president last year.
Corporate Investors: Research In Motion, Thomson Reuters, Royal Bank of Canada
What it Does: Sells mobile apps
Pocketgear, a Durham, N.C. mobile app store, recently received $15 million in a series B round from investors including Blackberry Partners Fund. The company hosts a mobile app marketplace for smartphone platforms; it also powers app storefronts for more than 40 partners, including handset providers, carriers and e-commerce companies.
The global mobile app market is projected to jump from $6.7 billion in 2010 to more than $29 billion by 2013, according to Gartner. This leap is due to the success of Apple’s(AAPL) App Store, as well as independent app stores like Pocketgear and GetJar, where users can purchase apps across Android, Symbian, Windows Phone 7 and Palm operating systems.
Pocketgear hosts more than 140,000 apps and content titles, compared to GetJar, which has around 75,000 apps.
Blackberry Partners Fund, which invests exclusively in mobile and connected devices like tablets, views Pocketgear as a leader in the mobile app space. “The app economy is going to continue to grow at a very fast rate, and consumers always benefit from having more choice,” said Kevin Talbot, co-managing partner of the Blackberry Partners Fund. “We take the view that people will buy apps and mobile devices from a number of sources.”
In total, Pocketgear has raised almost $20 million in funding from investors including Noro-Moseley Partners, Wakefield Group, Trident Capital and Tomorrow Ventures — Google CEO Eric Schmidt’s personal investment fund.
Despite its name, Blackberry Partners isn’t a corporate venture arm backed by Research in Motion, but an independent fund whose investors include RIM and Thomson Reuters(TRI). The fund is platform agnostic, meaning it doesn’t commit its startups to focus on Blackberry. Last month, Blackberry Partners reorganized its fund structure, and Talbot said he is likely raising a second, larger fund.
–Written by Olivia Oran in New York.
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