Who’s Buying Now?

The stock market downturn is putting corporate investing to the test: If now isn't the time to acquire new technology, when is?

It’s no secret that the same portfolio investments that once boosted corporate earnings are now starting to have the opposite effect. And no surprise that companies that once boasted of their corporate venture initiatives are now backing away.

Starbucks Corp. is a prime example. The Seattle-based operator of upscale coffee shops developed the venture itch in April 1999, investing in such companies as Living.com, an online furniture retailer, and Kozmo.com, an online delivery service. But since last year’s fourth quarter, when charges for such investments nearly wiped out its profit, Starbucks has decided to invest only in “core” opportunities, according to a spokesman. Fellow Seattle-based retailer Nordstrom Inc. has had a similar experience, and is also pulling back.

More companies are likely to retrench or quietly exit from venture programs if the recent stock market downturn persists, simply because too much money has been chasing too few good deals. “The Johnny-come-latelies, they raise a billion, and they have to find something to do with it,” says The St. Paul Cos. CFO Paul Liska, who has helped develop St. Paul Ventures, one of the biggest corporate funds dedicated to early-seed investing, with $1 billion in assets under management. “I think a lot of people are going to get killed in this area.”

Other observers don’t go quite so far. “It’s clear there will be a retrenchment,” says Josh Lerner, a Harvard Business School professor who specializes in venture activity. “Whether there will be a wholesale bloodbath is another question.”

But merely the prospect of retrenchment raises a fundamental question: What has happened to strategic investing; that is, buying not so much for financial returns as for a chance to get a toehold in a promising new technology? With Nasdaq down some 40 percent since its high last March, and many high-tech companies down even more, bargains should abound if, in fact, the technology is all it was cracked up to be. Indeed, this should be an opportune time for CFOs of technology-hungry companies to acquire a stake in emerging and experimental technologies, from software to fiber-optic infrastructure.

“Not to be involved in strategic investing when so much innovation is happening at start-up companies places you at a huge disadvantage,” says Peter Gardner, a general partner at Allegis Capital LLC, a San Francisco venture firm that provides a passive venture-investing outlet for corporations. “The concept of innovation shifting into the start-up community is permanent. The engineer has been liberated. It’s going to be impossible to put him back in the box.”

Of course, Gardner’s observation assumes that healthy venture activity and big gains through initial public offerings will continue. Yet the feverish IPO activity that drove so much venture investing before the stock market peak last winter has clearly subsided, at least for now.

Taking Profits

Some of the biggest players in this arena — including Microsoft Corp., Cisco Systems Inc., and Intel Corp. — have avoided the fate of Starbucks and Nordstrom, not only by investing more wisely, but also by pulling in their investing horns soon after the market’s peak. Intel, for example, took gains of $2.1 billion on its venture programs in the second quarter of 2000, almost equaling its operating income for the period. The Goliath chipmaker then realized gains of $716 million in the third quarter, more than a quarter of its net income of $2.5 billion. And while Intel still had investments in more than 500 companies at a value of $5.85 billion at the end of its third quarter, it anticipated gains of approximately $950 million for the fourth quarter.

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