Venture capital firms are playing a key role in Intel Corp.’s efforts to slim down and focus on its core business of designing and manufacturing microprocessors. In the last two months, the chip giant has sold two business units to venture firms that are spinning them into independent companies.
The purchases signal a desire by VCs, which have dramatically slowed their number of new investments, to find low-risk deals. In both cases, the business units offer mature technologies, long-standing relationships with A-list customers and growing revenue. Those qualities not only remove the technology risk from the startup equation, but they also suggest that a company has a short runway to profitability.
VCs are steering clear of brand new deals. Although valuations are down, the pace of early-stage investing is down considerably from last year, which itself was down substantially from the go-go days of 2000. In the second quarter of this year 207 startups received first-round funding totaling $1.2 billion, down from 313 companies that pulled in $1.8 billion in the same period a year earlier, according to market researcher Venture Economics (publisher of Venture Capital Journal).
No Risk Tolerance
VCs are much more interested in mature companies with customers, like Intel’s LANDesk business unit. The chipmaker sold the unit to a group of private investors led by Vector Capital of San Francisco and Spring Capital of Salt Lake City. In late August, Crosspoint Venture Partners of Woodside, Calif., and XML Fund of Bellevue, Wash., led a group of investors that acquired Intel’s Network Processing Group to form a new company, Tarari, based in San Diego. The two business units have less than 200 employees between them.
Underscoring the point that these deals are seen as can’t miss, LANDesk is the first significant new investment for Vector Capital in two years and Tarari is just the second new investment for Crosspoint this year.
Companies like LANDesk and Tarari “are growing and profitable,” says Alex Slusky, a Vector managing partner. “They’ve got a strong customer base, strong distribution channels and a strong team.”
Adds Slusky: “Businesses inside large corporations that are not focused on the company’s core strengths are often under-funded and under-managed, relative to the opportunity they reflect. Employee incentives are tied directly to the unit’s performance, and as a result, they don’t always attract quality management.”
Always Keep a Stake
Intel sells its business units for cash, and retains an equity stake in each newly formed company. The company, whose stock price is down about 50% this year because of weak demand for PCs, wants to focus on its core business of microprocessor development, says Robert Manetta, an Intel spokesman. “Intel is focusing on its core strengths: designing and manufacturing silicon chips.”
At the company’s annual developers’ conference in September, one Intel executive said the company has gotten out-or is getting out-of businesses where it competes with its customers.
Some of those businesses are emerging from Intel’s own research and development efforts. The chipmaker plans to spend $9 billion to $10 billion on R&D this year, counting its labs and Intel Capital as part of the efforts, says Les Vadasz, president of Intel Capital.
It is in the bowels of Intel’s R&D labs that venture capitalists may find the next killer spin-off. With an increased focus on its core business, Intel may very well want to spin off some technologies into separate companies that it will keep a stake in, says Peter N. Glaskowsky, Editor-In-Chief of the Microprocessor Report, a chip industry publication based in San Jose, Calif. Although Intel has long been developing Ultra Wide Band (UWB) technology, it may decide that it makes more sense to turn that into a separate company that it could draw technology from, Glaskowsky says. UWB devices can be used for wireless communications. The signals jump along different frequencies to carry high-speed data short distances.
Open the Package
Likewise, Intel, an expert at packaging analog and digital technology into a single product, could decide that it makes more sense to turn that expertise into a separate business because there would be such strong demand for its services, Glaskowsky says. “Intel would have a sweetheart deal with the [spin-off] company, but everyone else would get access,” he says.
Intel’s sales of its business units are managed by officers at Intel’s strategic investment unit, Intel Capital.
Since Intel Capital syndicates its deals, there are few private equity firms that have not done a deal with it. Intel Capital is leveraging those contacts to sell its non-core business units. In the two deals it has completed so far, it has worked with venture firms with close ties to Intel or to its technology.
Vector approached Intel about its LANDesk unit in January, and negotiations soon involved Intel Capital and vSpring Capital. Vector has historically financed software spinouts: In 1999 it acquired Savi Technology from Raytheon Corp. VSpring Managing Director Ed Ekstrom is the former vice president of Intel’s Communications Products Group and former general manager of Intel’s Utah Software Development Center.
Although the exact terms of the deal have not been disclosed, Vector Capital will be the largest shareholder in the newly private company, LANDesk Acquisition Corp. Up to 10% of Vector’s $200 million fund, or $20 million, is committed to this deal. VSpring is the company’s second largest shareholder. Intel retains a minority stake.
LANDesk makes software that allows network administrators to remotely diagnose and fix problems on networked PCs and wireless devices. “The business has been fairly profitable, but those resources have not been reinvested in the business,” Vector’s Slusky says. “We plan to put resources into sales and marketing, partnerships and grow the technology base through licensing and add-on acquisitions.”
LANDesk’s customers include Baylor University, Coca-Cola, Toshiba, the U.S. Army and Volvo. The company, with headquarters in Salt Lake City, plans to develop Asian and European sales and marketing efforts.
Intel’s decision to sell what became Tarari was prompted by some enterprising employees. Tarari’s high-speed content processing technology wasn’t compatible with the rest of the networking group’s efforts, so its developers approached management with another idea: Allow them to develop the technology and spin-out the technology as a private company. Intel agreed and convinced Crosspoint and XML to finance the deal with a $13 million A round.
Counting LANDesk and Tarari, Intel has spun out four companies since 2000. In the coming months that number will likely grow-but only if venture capitalists lead the drive.
Additional reporting by Lawrence Aragon.
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