SAP Ventures –

PALO ALTO, Calif. – The classic marketplace impression of corporate venture capital shops is certainly unflattering, if not downright dismissive: corporate VCs are simply glorified business development groups that do not care about their returns, because they are investing for strategic reasons anyway. However when looked at from this perspective, SAP Ventures, the venture unit of German enterprise software giant SAP AG, definitely is not a classic.

“We make traditional venture capital investments with one objective: to generate a positive return,” said Jeff Nolan, an investment professional with SAP Ventures. “We are not a corporate development or business development group,” he added, noting “we do not do any strategic investments or M&A transactions.”

SAP AG founded the venture group as an autonomous unit of the company in 1997 both as a way to support innovation and because the company was generating a lot of unused cash that was beginning to act as a drag on its balance sheet, Nolan said. In addition to benefiting from the fund’s financial return, SAP AG also gains some benefit from getting a chance to see developing, aggressive companies within SAP AG’s ecosystem, he noted.

SAP Ventures engages in early- to middle-stage VC deals, Nolan said, adding this means the fund is involved mostly in series B and series C round financings. When it was launched, SAP Ventures received a very simple mandate from its parent: invest wherever it could generate returns, Nolan said.

The venture fund initially decided to target enterprise software and infrastructure companies, because this focus allowed the new VC shop to leverage its parent company’s resources when appropriate, he added. These two sectors soon morphed into what is now seen as the business-to-business Internet area, so SAP Ventures now invests in Internet applications and infrastructure plays, he explained.

SAP Ventures has also started to target companies in the persuasive computing sector, Nolan, said. Persuasive computing companies are enterprises, like wireless software services businesses, that are extending software applications to new devices, audiences and interfaces, he said. The fund does not allocate capital specifically between its various areas of focus, Nolan noted, saying the fund invests opportunistically within these various sectors, while making sure it pays attention to keeping its portfolio of investments diversified.

While SAP Ventures technically scouts for deals throughout North America, it has recently decided to focus on deals coming from areas near its Seattle, Palo Alto and Boston offices, Nolan said, noting the motivation for this decision was basic time management considerations. At some point in the future, the firm would like to open an Austin, Texas office to tap into the city’s burgeoning entrepreneurial community more efficiently, he added.

The fund sources deals in a number of ways, Nolan said. One major conduit of deal flow comes from people within SAP AG, who feed the fund information on promising young companies they have encountered. The fund also gets referrals from other venture firms and investment banks, as well as from entrepreneurs with whom it has previously worked. “We are most proud of the entrepreneurs that have worked with us in the past, who want to work with us again,” he added.

The Right Approach

One unique part of SAP Venture’s strategy is that the fund never leads any of the financing it participates in; nor does it take board seats, Nolan said. The purpose behind not leading any funding rounds is two fold, he explained. “We don’t think any corporate venture groups should lead rounds, because corporate funds tend to overpay and they also generally cannot syndicate deals as effectively…because they might not have the cachet to bring in certain investors,” he said. Moreover, the fund does not want other venture firms it likes to co-invest with to start perceiving SAP Ventures as a competitor, he added. Instead the fund prefers having traditional firms see SAP Ventures as an able and willing co-investor, he added.

The fund also avoids taking board seats for a number of reasons, he noted. Besides wanting to keep its parent company’s name out of any potentially nasty lawsuits that could arise from a venture deal gone bad, a corporate VC fund sitting on a board could also encounter situations were they may be accused of having a conflict of interest, he added. “Maybe a portfolio company is considering selling a key technology to a competitor of my parent company. That could be a difficult situation for a corporate VC on the board,” he noted.

These restrictions do not mean SAP Ventures is simply a passive investor, Nolan said. The fund does work actively with its portfolio companies, he noted. “We will do whatever our companies need help with: recruiting or marketing strategy. Or, if an entrepreneur’s customer is hesitating about buying their product, a phone call from us can often help that process,” he said. In addition to this, the fund can provide its portfolio companies with access to experts inside of SAP AG that other developing companies never get, he said. SAP Ventures also tries its best to ensure that its parent company does not partner with other businesses that are competitors to its portfolio companies, he added.

As a result of its approach, SAP Ventures has not experienced any difficulties in working with other VC firms on their deals, Nolan said. “We really do try to have good relationships with other professionals in this business, including our colleagues at other corporate venture groups,” he said, adding “in fact, we have co-invested with our traditional competitors, including Oracle Corp. and PeopleSoft Inc. on a couple of deals.”

SAP Ventures is an evergreen fund, which received an initial capital commitment of $25 million from SAP AG in 1997, Nolan said. Since that time the firm has received an additional $175 million in commitments from SAP AG after asking for more capital, he added. The fund likes to invest enough money to take an ownership stake in a portfolio company that ranges from 5% to 14% post-money, he said. Nolan declined to reveal the fund’s average investment size. He also declined to reveal SAP Ventures’ future funding plans, beyond saying when the vehicle needed more capital it would ask SAP AG to provide more. To date, the vehicle has done 30 deals, he added.

The fund has considered opening itself up to outside limited partners, Nolan said. However, that would have required a different legal structure, he added. “We were cognizant of the legal requirements and the time requirements of fund raising, and we already had our hands full – so we did not see the benefit of bringing in outside limited partners,” he said.

SAP Ventures has no preferred exit strategy, Nolan said. However, the fund wants to avoid deals that seem to present only one option for exiting, he said. “As long as a particular exit offers the best return for a company’s shareholders, we do not care what it is,” he added.

The fund’s investment team is consists of four professionals: Executive Vice President Howard Lau, Nolan and two associates.

Following are some of SAP Ventures’ portfolio companies:

Commerce One Inc. (Pleasanton, Calif.) provides e-commerce solutions for businesses and has built global e-marketplaces which enable buyers and sellers from around the world to trade in barrier-free environments.

There were no co-investors.

Extricity Software Inc. (Belmont, Calif.) provides XML-based business-to-business integration software for managing e-commerce interactions over the Internet.

Intel Corp. was a co-investor.

HotDispatch Inc. (Mountain View, Calif.) is an online marketplace dedicated to the needs of software developers.

Co-investors included New Enterprise Associates and Accel Partners.

Idapta (Atlanta) provides enterprise level business-to-business e-commerce software solutions on which vertical B-to-B e-markets can build and operate real-time marketplaces.

CMGI @Ventures was a co-investor.

Isochron Data Corp. (Austin, Texas) is an application service provider of enterprise information solutions and wireless devices for companies seeking to communicate with their distributed field assets.

Co-investors included TL Ventures and WR Hambrecht Co.

MarketFirst Software Inc. (Mountain View, Calif.) has developed an end-to-end automated marketing platform that leverages the Internet to identify potential customers and market to them quickly and efficiently.

Co-investors included Enterprise Partners, Sprout Group and Sand Hill Group LLC.

Sequencia Corp. (Phoenix) provides e-business solutions to automate the deployment of new product and process innovations into the manufacturing supply chain within the specialty chemical, pharmaceutical, food and beverage and consumer packaged goods industries.

Norwest Venture Partners was a co-investor.

SkillsVillage.Com Inc. (Sunnyvale, Calif.) provides applications and services across the entire procurement lifecycle for finding, hiring and managing contract workers.

Co-investors included Technology Partners and Atlas Ventures.

Slam Dunk Networks Inc. (Redwood Shores, Calif.) operates a global, multipath distributed infrastructure overlaying the Internet to provide a secure, managed business quality network with guaranteed delivery, while maintaining the affordability of the Internet.

El Dorado Ventures was a co-investor.

SpeechWorks International Inc. (Boston) provides over-the-telephone automated speech recognition solutions. The company completed an initial public offering in August 2000.

Co-investors included Atlas Ventures and Intel Corp.

SAP Ventures is located at SAP Labs Inc., 3475 Deer Creek Road, Palo Alto, Calif. 94304. Tel: (650) 849-4043, Fax: (650) 849-4243.