John and all:
Here's the WSJ article about Intel Capital:
Intel and Vadasz Roll the Dice
On Upstarts -- and Hit Jackpot
By DEAN TAKAHASHI
Staff Reporter of THE WALL STREET JOURNAL
SANTA CLARA, Calif. -- Alto Web. VenturCom. Primarion. Synchronicity. Flashcom.
Few investors have ever heard of any of these fledgling technology companies. But at least one very important investor has: Leslie L. Vadasz, a man with deep pockets. Very deep pockets.
As head of corporate investments at Intel Corp., he invested $1.2 billion last year alone in these and 245 other startups, mostly Internet companies but also desktop and server computing concerns.
Some, no doubt, will go bust. And, based on past experience, Mr. Vadasz knows he will be ribbed mercilessly for missing megawinners among the 4,750 investment deals turned down in 1999 by Intel Capital, the company's acquisitions and investments arm.
"I personally missed on Yahoo!," he says, raising his hand with mock pride. "It was a search engine, and it wasn't the best. I missed the novelty about how it would change into an Internet portal." And that's just for starters. Other memorable rejections, he confesses, were Netscape Communications Corp., Amazon.com, America Online Inc. and eBay Inc.
No matter. He is confident that a few of the tiny unknown companies that Intel invested in yesterday will become wildly successful tomorrow, more than making up for any losers. In the past couple of years, Intel has scored blockbuster gains with investments in CMGI Inc., Red Hat Software Inc., Broadcom Corp., Broadcast.com Inc., Geocities Inc., Inktomi Corp., Covad Communications Inc., eToys Inc. and iVillage Inc.
Mr. Vadasz and Intel represent the new breed of venture investor: the successful multinational, often in the technology business itself, that views investing in start-ups as a strategic mission with an added fillip -- the prospect of staggering profits. "You judge your return on how you met your strategic goals, and count the money later," he notes. Microsoft Corp., Cisco Systems Inc. and Dell Computer Corp. have also poured large sums into start-ups.
Intel's portfolio alone consists of 350 companies valued at $8.2 billion at the end of 1999, compared with just 50 companies valued at $500 million two years earlier. In the latest fourth quarter, Intel sold off investments that netted it a $327 million gain, and its current portfolio has almost $6 billion in unrealized gains. Intel's investment "track record is among the best anywhere," says Stephen Smith, a managing director at Broadview Investments, an investment bank. "Les is a very strategic guy."
Regardless of returns, Mr. Vadasz says his main goal is to expand the "business ecosystem" in which Intel operates -- even if, he concedes, that means Intel moves too slowly on occasion, or is unwilling to accept the wildest Internet valuations and skips deals.
Mr. Vadasz, 63 years old, isn't the usual investment guru. An engineer at heart, he, like Chairman Andrew Grove, fled Hungary in 1956, arriving in the U.S. without speaking English. He became a top chip technologist when Intel was founded in 1968. He got company identification badge No. 3, one ahead of Mr. Grove, because of a clerical error. "I never let him forget that," says Mr. Vadasz, who is executive vice president in charge of Intel Capital.
Mr. Vadasz headed the company's research lab and was the leader of the group that in 1971 created the DRAM, or dynamic random access memory chip. He is on the company's board, and his stock is valued at hundreds of millions of dollars, enough to let him indulge in his love for wine by buying a Sonoma Valley vineyard.
Mr. Vadasz and his lieutenant, Avram Miller, took over corporate investments in 1991. For several years, the company invested in companies such as chip makers and makers of manufacturing equipment and chip design software, all technology "ingredients" that could return direct benefits to Intel. Mr. Vadasz almost always co-invested with other venture capitalists, benefiting from their expertise in determining the valuation of the start-up.
Later, Intel began investing in companies that complemented or expanded Intel's markets by creating "new uses and new users" for the personal computer. For instance, Intel invested in companies creating three-dimensional graphics chips, which led to an explosion in the market for 3-D games on the PC.
The company learned some early lessons. Mr. Grove once fretted that Intel could have been Cisco Systems Inc. if it had poured as much money into networking as it had into video phones. In 1996, Mr. Vadasz put $750,000 into online soap-opera company American Cybercast Inc., a company that has since gone bust, with Intel losing its entire investment. Mr. Vadasz quips, "I got a hat, a T-shirt and some valuable insight." Though it sounded like a good idea, he says, the potential audience and advertising base were too small, and thus lacked the mass appeal to support the cost of big productions.
By the mid-1990s, Mr. Miller, a longhaired executive with eclectic interests, was investing in "broadband," or high-speed communications, sensing the Internet would drive sales of PCs. Now the strategy is much broader, with investments going into chips, computers, software, communications gear, electronic commerce and Internet plumbing. Investments range from an $8 million stake in Quokka Sports Inc.'s Web site in 1997 to a $500 million stake in chip maker Micron Technology Inc. in 1998.
Even as it looks farther afield technologically, Intel is looking farther afield geographically, too. The international arena accounted for 30% of investments last year, up from a mere 1% three years ago. Mr. Vadasz says he is willing to invest in regional plays like an Internet portal in India, whereas he is unlikely to invest in the maturing portal business in the U.S.
One area where Intel's investments haven't paid big returns yet is in the broadband market. Phone companies and cable-TV companies have been slow at upgrading networks to hook consumers to the Internet at high speeds. After five years of trying, cable modems and high-speed phone lines are only now beginning to reach consumers in the millions. Mr. Vadasz considers the slow growth of the broadband investments to be one of Intel's strategic setbacks.
Intel has done a number of deals with "dot-com" companies, even though the valuations can be exorbitant. "Sometimes, we need to participate in a technology, and so we just swallow and invest," he says. "Sometimes we just walk." But, compared with some venture-capital investors, Mr. Vadasz says Intel remains cautious, and is unwilling to play "Russian roulette," where deals come up on Monday and it has to invest by Wednesday.
Typically, Intel Capital -- which now has a cadre of 100 financial advisers, including vice president Stephen Nachtsheim, reporting to Mr. Vadasz -- launches a series of reviews. It sends in an engineering team to review the technology, drawing upon Intel's vast nuts-and-bolts expertise. A treasury-department team looks over the financial data, and other Intel Capital people check references with customers, suppliers and the financial community. Midway, venture capitalists are consulted. The whole process typically takes 30 to 45 days, and sometimes longer.
Intel took about four months to invest in Primarion Inc., a Tempe, Ariz., company that makes analog chip technology that can improve the speeds of microprocessors. Primarion hopes to solve the problem of keeping electrical interference to a minimum in chips as wires are laid closer and closer together within chips. Used in Intel's microprocessors, the Primarion technology could enable Intel's chips to run at higher speeds than they otherwise could.
One of Intel's investment officers liked the Primarion deal so much he joined the company as vice president of marketing. That underscores another of Mr. Vadasz's problems. He can reward his underlings with stock options and high pay, but he can't match the deals they can get working at the start-ups or by becoming venture-capital partners. Indeed, Mr. Miller left last year to become a venture capitalist himself.
While the Internet frenzy is unprecedented in the annals of venture investing, Mr. Vadasz notes that the Web is spurring a fundamental change. Looking ahead, he says, "If anything, I could foresee a soft landing where the more successful Internet companies buy the weak ones, and so no one loses." It's hard to justify the valuation, he says. "But let's not kid ourselves about how the Internet changes the way we work, live and entertain ourselves."
Write to Dean Takahashi at dean.takahashi@wsj.com |
