Tech savvy
At the Intel Capital CEO Summit 2010 held last week in Huntington Beach, AVCJ sat down with the corporate VC’s senior executives - Arvind Sodhani, Keith Larson and Richard Hsu - to talk technology investing, emerging markets and what makes an investment-worthy entrepreneur.
Q: Being the venture capital arm of a large, technology company, how does your investment process differ from traditional venture capital firms?
AS: All of our investments are funded by Intel’s balance sheet, and the returns from our exits go back into the balance sheet, so that part is very straightforward. However, we do not have a specific allocation process. We invest in companies that make strategic sense – where we can add value.
RH: Our model is more unique than most of the VCs out here ,because our team is [made up of] senior people who find the deals, lead the deals, structure them, find the strategic rationale, and find the strategic resources within Intel to help the company.
AS: We have people in 25 markets and from there they cover 48 countries. The bulk of the interaction takes place between our local investment managers and the various portfolio companies in that part of the world
Q: All of the companies you invest in have multiple investors. How do you ensure that you have a similar vision for the company?
RH: I think everyone in this industry has come across situations where you get down the road and wonder who what happened. And there are no guarantees, but you try and sort that out as much as you can by knowing your partners. We’ve been in China since 1998, so we’re one of the longest-serving VC funds out there, so we know most of the people in the market and what their reputations are, and we’ve probably worked with them before.
KL: We also know not to break deals by trying to make them completely Intel-centric, because what happens with that is that you don’t get the financial success that comes from the company being self-sustaining.
AS: We’ve done over 1,100 investments and worked with everyone in the industry, so we have gotten to know people by now. They know our team and we know theirs, so there is a level of comfort and confidence already established.
Q: How active are you in emerging markets, and have you been able to avoid many of the common pitfalls in countries like China and India related to regulations and overvaluation?
RH: There is always the danger of doing deals [in China or India] and then having to handle changes in regulations. I think that is just part of the reality of being on the ground, and it is certainly part of the reason we have people on the ground: to be closer to those changes and really understand them.
KL: In terms of the valuation, we are a strategic investor. I think we get some operational credit because we are Intel. I also think it depends on the entrepreneurs that you select. The ones who are smart and have been around the block a few times are not the ones that are going to negotiate for that last penny. They realize that they are looking at a longer-term relationship that makes sense for everyone.
AS: The challenge is really the same everywhere, but we know from multiple cycles of experience that, when valuations get out of whack for the stage of development of the company, you always end up with grief.
We are seeking to grow our investments in emerging markets because innovation is taking place everywhere and technology adoption is taking place everywhere. We need products and services that are tuned and adopted and made for consumption in markets around the world, so we continue to grow that percentage.
Q: Then what does make an investment-worthy entrepreneur; one that you are willing to pay up for?
AS: First of all we are looking for the strategic relevance to us, and we are looking for our value proposition to the company. If we cannot add value or there is no strategic relevance, then it is not our investment-to-be. We then look at the management, their capabilities, their vision, the funding landscape for the company, as well as who the other investors are.
KL: Another important component is how relevant the company’s product, technology or services are to Intel’s corporate goals. When it comes to deal size, some of the larger deals are those that are more directly aligned with Intel’s direction on a group level.
Q: How does Intel differentiate itself in competitive markets?
AS: Our brand is strong and is well-known as the pre-eminent technology investor globally. We bring a very unique value proposition, which is to help our portfolio companies to find customers. This is the biggest challenge for small-to-medium-sized start-ups. Because of our reach, we are able to introduce our portfolio companies to their eventual customers, which is very powerful.
KL: And we have a very senior team. The average tenure is about 12.9 years, so we have really experienced people now who are on the ground and really understand how the industry is evolving.
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