Chris Duggan knew it wouldn't be hard to rustle up a first round of outside financing for his start-up, Digital Orchid. The two-year-old San Diego company -- which provides images and ring tones that can be downloaded onto cell phones -- already had a stable of high-profile clients, including NASCAR and the National Hockey League.
But instead of trying to attract a traditional venture capital firm, Duggan pitched Digital Orchid to the fledgling private capital arm of the wireless giant Qualcomm. "We were looking for something other than money," Duggan explains. "We wanted someone who could provide a strategic fit." And with more than 150 million people in some 50 countries using Qualcomm's technology, the company seemed like a perfect match. Qualcomm apparently agreed, investing an undisclosed sum in Digital Orchid late last year. "By aligning ourselves with them," Duggan says, "we'll have a better shot at deploying our products around the world."
Back in the boom days of the 1990s, everyone wanted to be a venture capitalist -- including many of corporate America's largest companies, which launched their own in-house funds. Corporate investors sank $17 billion into small and midsize companies in 2000 alone. But when the bubble burst, VC investing suddenly seemed a lot less sexy, and many of these funds scaled back or shut down operations entirely.
But corporate America is getting back into the game. Corporate-based venture capitalists invested $1.4 billion in 2004, an 8% jump from 2003 and the first increase since 2000, according to a recent survey by the National Venture Capital Association, PricewaterhouseCoopers, and Thomson Venture Economics. And although corporate money remains less than 10% of the overall private capital market, some major players, including Amgen and Nokia, have launched new funds while others, such as Intel, have begun investing with renewed vigor.
Corporate funders don't differ much from their traditional VC peers. Both groups look for promising young companies on the verge of a big spike in sales. But there are some distinctions. Corporate funders, for example, tend to be more risk-averse, avoiding early-stage companies in favor of second-round deals. And while all investors lust after big returns, corporate VCs are often just as interested in getting an inside track on hot new technologies, reducing the costs of their own research and development.
When pitching to a corporate venture fund, it's important to stick to your niche. For example, Xilinx -- a publicly traded computer chip and software developer in San Jose, Calif., that recently launched a $100 million fund, its second VC initiative -- is almost exclusively interested in start-ups that are developing new chip technologies. Corporate funders also tend to be more circumspect than traditional venture capitalists and less inclined to scout deals, making them harder to find -- though that is beginning to change. The NVCA, for example, sponsored its first corporate VC conference in September 2004.
Bear in mind that corporate money can come with its own set of headaches. It's not uncommon for corporate backers to balk should you try to do business with one of their competitors, and they may even try to prevent you from doing so. That's why you have to do as much due diligence as they do. Bret Bergman, CEO and president of Qcept Technologies, a three-year-old Atlanta company that has developed a new way to detect chemical contamination in semiconductor chips, recently picked up about $2 million in funding from Siemens, the German manufacturing giant. Bergman needed the money, but he asked plenty of questions before agreeing to the deal. "We all had to get comfortable that Siemens had a good track record of working with its partner companies," he says. "We needed to know that it was willing to do something good for Qcept that may not necessarily be good for Siemens."