The Gold Standard

In six years as president of Intel Capital, Arvind Sodhani has turned the chipmaker’s venture capital arm into an active instead of passive investor.

The impact of this more aggressive approach goes several layers deep. Intel Capital now leads the majority of its deals, takes board seats where it never used to and works aggressively with portfolio companies, unlike many corporate VCs.

It also continues to expand internationally, putting down roots in countries that don’t yet appear on the radars of most general partners. The organization has a presence in 26 countries and is focused not just on China and India, but on Japan, Taiwan and Poland. In June, it made its first investment in South Africa, the 50th country where it has money at work.

“What hasn’t changed is the focus we have on both being strategic as well as financial,” Sodhani says. “So we seek to invest in companies that are strategically relevant to us, strategically relevant to technology as well as financially viable.”

He boasts that if Intel Capital were a standalone venture firm, it would generate top quartile returns.

“We are very focused on adding value to our portfolio companies,” he told VCJ in a recent interview. “Over the last three or four years we perfected our model and we’re continuing to fine tune it and figure out more ways to add more value.”

Sodhani says he is seeing more corporate interest in venture investing. He also is confident that if new entrants are to be successful, they will need to adopt models similar to the one he created at Intel.

Here is an edited transcript of Sodhani’s conversation with VCJ.

Q: When you became president of Intel Capital in 2005, you brought a more aggressive approach to the organization. You began to lead more deals, take more board seats and make faster decisions. Is this new approach still guiding your investing?

A:

All of the things you mention are true and we are doing more of them than before. We are leading well over 60% of our investments, with a higher percentage outside the U.S. We’re sitting on boards. We are very aggressive.

Q: What benefit has this brought the organization?

A:

We used to be a passive investor. We are now a very active investor. We are able to facilitate the completion of deals more rapidly. We are able to syndicate deals. Our investment managers work with our portfolio companies to help them be successful in a variety of different ways. There is a huge difference between a passive investor and an active investor where you have a large enough stake and your stake is such that success matters to you

Q: Describe your investment focus this year and how has it changed from past years?

A:

Three years ago our big goal was WiMax and particularly bringing broadband wireless to every part of the world. The overarching focus this year is compute continuum.

Compute continuum refers to the ability of all applications to work on all devices, including handhelds, laptops, netbooks, as well as your desktop and your TV screen. All applications working on all types of screens, and the way we enable that is through the use of Intel architecture in all those devices.

Q: Last year, Intel Capital invested $327 million in 119 deals. So far this year you’ve put $177 million in 49 transactions. Where do you expect the year to finish?

A:

Our goal is to invest $300 million to $500 million a year. I suspect we will come in line with that goal. It is hard to predict, but based on the deal flow we have today, I’m very comfortable we’ll get in between that goal.

Q: What kinds of companies are you investing in?

A:

The areas of focus for us currently are enterprise, which includes the data center and cloud computing, software and services, consumer Internet and mobility.

Mobility can be broken into a number of different areas, Network deployment, for instance. There are tablets and smart phones. Then there is digital home, which would be smart TV, green tech, and manufacturing. As you know, Intel is a semiconductor company, so we tend to be very big on buying equipment, and we want to keep the industry and the eco system continuing to produce the latest and greatest equipment, satisfying both our needs and the industry’s needs.

Q: You don’t release a lot of detail about your investment returns. If Intel Capital were a standalone firm, how would its returns compare with other firms?

A:

We measure ourselves very methodically and very carefully and keep all kinds of data and slice it and dice every which way. Because we invest such a large amount of money every year, we consider each year as an investment fund.

Then we track the return on that particular year and compare ourselves against the Cambridge Venture Capital Index, pre and post expenses. And we consistently rank in the top quartile on that comparison.

Q: Intel invested 44% of its dollars outside of North America last year. What countries get you most excited?

A:

We are most excited about China and India. Apart from China and India, the other geographies we are very excited about are Brazil, Russia and Poland. I think those are growth opportunities.

Q: I know you pride yourself on finding countries that are off the beaten track. Where are you looking today that most people are not?

A:

Turkey is country that is experiencing very rapid growth and very rapid expansion of technology utilization and technology adoption.

We also are very present in places like Korea, Taiwan, Japan, countries where VCs typically don’t go and typically don’t have a physical presence. We’ve done deals in Chile.

We’ve done deals in Vietnam, Malaysia, countries that typically are not on the radar screens of most VCs.

Q: Any other opportunities you are investigating?

A:

Another country we are very excited about, but haven’t done anything yet in, is Indonesia. I was just recently in Indonesia. This was my third or fourth trip. We’re spending a lot of time and energy. Our guy from Singapore covers it. He’s there probably once every two weeks or so.

Q: What is your mix of early and late stage deals?

A:

We tend to be a stage agnostic investor and do not target a specific ratio between early and growth.

However, I would say we are heavy on the B and C rounds. We do some pre-IPO companies and we do some very early stage. In fact, we do some seed stage companies in the consumer Internet space.

Q: How much are you putting into rounds, and how does that compare with your past activity?

A:

Our typical investment now is somewhere between $5 million to $15 million. A lot of our investments tend to be $8 million to $10 million. And that is up from $5 million to $7 million in the last few years.

Q: You put together a syndicate program over the past couple years. How is it going?A: We now have 29 partners who co-invest with us. The idea behind the syndicate program is to provide a complete financing option to our portfolio companies, so our portfolio companies do not have to go find multiple investors.

Q: How does a venture firm become part of the syndicate program?

A:

If a firm is interested, what we do is we sit down with them and see what commonality of interest there is. That commonality of interest could be geographic deal flow, it could be sector investing. Many of our partners are very specifically interested in investing in a particular sector.

Q: Are you seeing an increase in corporate venture investing?

A:

We are now seeing more corporate VCs across the board. We get a lot of incoming requests for information about how to set up a program like Intel Capital’s. That would suggest the activity has picked up quite dramatically.

Q: What impact could the rise in corporate venture investing have on the venture capital industry?

A

: It’s probably too early to tell. I’ve seen this before. This is a business that has cycles in it. What happened in the last several cycles was the corporate investors disappeared.

It is too early to tell at this stage whether they are properly organized and whether they are set up for the long haul or whether we will just see a repeat of the old phenomenon one more time.

Disclosure: Mark Boslet owns shares in Intel Corp.