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Sun's venture fund burns hot Redherring.com, September 14, 2000. Formed 10 months ago, Sun's Venture & Strategic Investment Fund
invested its initial $200 million in less than six months. The company
gave it another $200 million in April, and now that money is spoken
for. The VC arm expects Sun's board to sign off on another $200
million shortly.
Why the largesse? Two reasons. One, Sun wants to invest in companies
that will eventually buy its products. Two, Sun realized it was
missing the boat in the VC arena, especially after big names such
as Oracle (Nasdaq: ORCL), Hewlett-Packard (NYSE: HWP), and Dell
(Nasdaq: DELL) jumped on the bandwagon with longtime corporate VCs
such as Intel (Nasdaq: INTC).
"Sun at first tried to stay neutral, but around last fall, once
it saw the explosion of technology and the Internet, it realized
it needed to get a handle on forming a venture fund," says David
Barry, senior editor of the Corporate Venturing Report newsletter.
And the fund is "a double win for Sun since they not only gain from
their investment, but from having a successful customer," he adds.
While Sun stands to make substantial gains by funding startups,
it must be careful not to get too free and easy with its money.
"Brand is important, but if Sun throws money at a thousand companies
without bringing some kind of strategic relationship along with
their money, it's not going to mean anything," says Matt Murphy,
a partner at Kleiner Perkins Caufield & Byers and a former Sun exec.
"And companies will ask themselves why they are going with Sun over
another mezzanine fund."
FLASHING CASH So far, the VC group has invested an average of $10 million in
40 portfolio companies, says Brian Sutphin, vice president of strategic
investments for Sun. By year's end the group also plans to expand
beyond North America into Europe, the Middle East, and Asia and
start to look at wireless opportunities in Scandinavia and security
companies in Israel.
The big question for entrepreneurs is: "How do I get my hands on
some of Sun's cash?" The short answer is, you have to have a product,
technology, or service that is synergistic with Sun's technology
-- or be a consumer of Sun's technology. For example, Sun invests
in Internet companies because they are big users of both Sun servers
and Solaris, Sun's flavor of the Unix operating system.
"We are investing in Internet infrastructure companies that are
developing technology, as opposed to aggregating third-party technologies
and providing hosting services," Mr. Sutphin says. "Our companies
have some strategic connection to Sun's business from a technology,
marketing, or customer seller standpoint, since we are first and
foremost strategic investors. The overall goal of the venture group
is to invest in companies that create market opportunities that
Sun cannot gain by itself, he adds. For now the group is staying
away from seed-stage and first-round deals. "When we started, we
tended to be late-stage investors," Mr. Sutphin says. "Since then
we have developed more relationships with VCs and are now involved
earlier in the process in B- and C-stage rounds."
BASKING IN SUN "Sun's success is driven by the $200 billion plus market capitalization
they carry behind them," says Kevin Garland, vice president of broadband
ventures at Enron Broadband Services. Enron has invested alongside
Sun Microsystems as a corporate venture partner in companies such
as Fastforward Networks and EMotion.
Ransome Love, CEO of Linux company Caldera Systems, says Sun introduced
his company to a number of clients who are already licensees of
Sun's Java software but who want to deploy Linux, an area where
Sun lacks product offerings. "We have had several meetings with
Sun's management to see how we can work closely with them to provide
additional integration with Linux," says Mr. Love. Sun invested
$5 million in Caldera's second-round financing at the end of December,
prior to the company's IPO in March.
Sun has lent credibility to Corio, an application service provider
(ASP), says Mitch Kristofferson, Corio's vice president of marketing.
Sun participated as a strategic investor in Corio's third-round
financing of $30 million in November 1999. The computing giant helped
the company market itself by inviting Corio founder Jonathon Lee
to speak at Sun's large conferences, Mr. Kristofferson says.
Corio has also benefited from Sun's contacts. As the company has
looked to expand internationally, Sun has introduced it to its representatives
and prospective partners and customers in global markets such as
Japan, Korea, and Italy, Mr. Kristofferson says.
Icarian went with Sun because it wanted a strategic investor that
was focused on "proliferating Internet software and on companies
like us who are using their hardware and operating system," says
Laura Perrone, CFO of the company, which makes Internet-based software
for financial and human resource operations management. "The more
hardware we buy, the more successful Sun is." Sun participated in
Icarian's $55 million fourth-round funding in April of this year.
Sun's portfolio companies also highlight Sun's connections as a
reason for choosing them as a strategic partner. Jeff Thiemann,
president and CEO of San Jose-based Manage.com, praises Sun's ability
to connect him to the right people quickly. In one instance, he
called Sun's venture group to get some technical help for a large
financial services customer, which also happens to be a Sun customer.
"While we were on the phone with our contact at the venture group,
they not only gave us the names and email addresses of contacts
but also warned the appropriate people that we would be contacting
them," Mr. Thiemann says. "In this business, speed is our weapon,"
he adds.
Manage.Com became active on Sun's radar through its participation
in Sun's dot-com developer program. Mr. Thiemann was subsequently
invited to a Sun-sponsored golf tournament for charity in San Diego,
where he scored some face time with CEO Scott McNealy. "Later on
I sent him an email and to my surprise he emailed me back two hours
later, while he was in Europe," Mr. Thiemann says. Sun was a strategic
investor in Manage.Com's third-round financing of $25 million in
July of this year.
SOME CHANCE OF SHOWERS Global investments in its portfolio include Israel's Xacct Technologies,
which has registratered to go public, and ActivCard (Nasdaq: ACTI),
a developer of digital identity technology with headquarters in
France.
Sun's biggest challenge, according to Mr. Sutphin, "is getting
through the volumes of opportunities we see every day."
But analysts who watch the corporate investment space say there
are plenty more challenges ahead. For one, it must convince its
portfolio companies that it isn't going to bail out of the VC business
at the first sign of a downturn. Corporate VCs are notorious for
getting into the market when it's up and bailing when it's down.
Skeptical startups must be convinced that they won't be left high
and dry.
"It things go awry, corporate venture groups aren't going to stand
by the company and prop it back up," asserts Kleiner's Mr. Murphy.
"The VC is the one who is going to bail the company out." He points
out how VCs and corporate ventures are complementary but offer very
different benefits. "Sun looks at the companies they need differently
from a VC who looks at a given company for criteria like its market
and its management," he says.
Yet another long-standing issue for corporate VCs is convincing
startups to basically hitch their horse to one wagon. For example,
if you take money from Sun, it isn't likely that Microsoft is going
to want to work with you.
Sun must also convince its portfolio companies that its true intent
is to help build them into standalone companies, not eventually
swallow them to be part of its product line. On this count, Gus
Thai, a general partner at Trinity Ventures, says Sun has done a
good job. (Trinity co-invested with Sun Microsystems in Internet
software company Cygent in a $40 million third-round financing in
July.) Corporate partners typically have their minds set on eventually
absorbing a company's technology, but "Sun is different because
it helps companies become stand-alone entities," Mr. Thai says.
"Its venture team encompasses the mindset of a VC, a venture-backed
startup, and a large corporation."
�1997-2000 Red Herring Communications. All Rights Reserved.
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