Let’s go to market together, IBM tells partner start-ups

So it shouldn’t surprise many when the IT major says it is intensifying its search for innovative start-ups and is willing to enter new geographies. From launching an innovation centre in Dublin on 11 July to hosting an innovation forum in May in Bangalore, to evaluating Romania and Hungary as new innovation sites, IBM Venture Capital Group is leaving no region unexplored. “Innovation is happening everywhere, we do not favour one geography over another,” Drew Clark, director of strategy at IBM VC Group told ScienceBusiness.

After quitting the applications business in 1999, IBM decided to specialise in infrastructure. But it started the VC Group in 2000 to have a presence in other areas by partnering with young VC-backed companies. Does IBM use its partnership to sell its in-house technologies to the start-ups? “We don’t expect to sell these companies anything,” Clark said.

“Our real value proposition to start-ups is that they become our strategic partners and we go to the market together,” he said. According to him combining the start-ups’ unique technologies with IBM’s reach and “obvious success” leads to an unbeatable combination. Moreover, these venture partnerships are also part of IBM’s plan to complement internal R&D with external innovation.    

Profits from the portfolio

IBM today works with 120 venture capital firms worldwide and claims that these are gaining insight into its strategy and learning to create profits from their investments in portfolio companies. “We’ve seen a steady increase of VCs investing in portfolio companies that are building solutions based on our open standard technology platforms, growing from a base of 3 per cent in 2000 to more than 30 per cent of companies in 2006,” said Clark.

Of course, IBM is not alone. Corporate VC investment is on the upswing, though the model may vary from company to company. For instance networks giant Cisco looks at the supply side and integrates the newly partnered or acquired technology with the existing technology, says Alok Shende, Vice President of ICT Practice for South Asia and Middle East at Frost and Sullivan.

“For every dollar spent, Cisco gets more global footprints. But IBM looks at the demand side and wants to reach more customers through its partners and hence has to work with them more closely,” says Shende.

Clark agrees every company is trying to do something, although differently. “Cisco has a very successful VC programme but it is very different from ours. Hewlett Packard tried to make it work, but couldn’t,” he adds. Microsoft and Oracle are part of the battalion also but IBM believes it is ahead of the pack. “IBM had more lead time to do this and it made a success out of it; Microsoft is trying to get there,” says Shende.

How does IBM make it work?

The start-ups gain access to IBM’s technological expertise, routes to market, greater credibility and validation of their solutions. Clark’s favorite example seems to be the company’s partnership with a Chinese e-commerce start-up YeePay (Chinese for “Easy Pay”).

YeePay joined hands with IBM to build an open standard-based infrastructure to support its growing customer base. In addition, YeePay has a single point of contact for support, maintenance and post sales service.

As a result, IBM today has a partner that managed to increase its monthly revenue tenfold to $1.2 million in just five months. On top of that, in April, YeePay was named a China Internet 100 and Innovator 50 Company in the China Internet Survey Report 2007.

“When YeePay approached us four years ago with its unique business model, its technology was rough and it did not have a way to succeed. So the VCs called us,” said Clark, implying the rest of the success story is writ large.

IBM VC Group has similarly provided guidance to InstaCall (backed by Hotmail founder Sabeer Bhatia), and Persistent Systems in India and hundreds of tech start-ups in other parts of the world. But where does IBM intend to go next?

Follow the money

While IBM VC Group denies any geographic preference it concedes it follows the money. “We go where the venture capital goes,” said Clark. Refusing to be drawn into specifics of IBM’s regional ambitions, Clark said a look at where global venture funds are concentrated would give an idea where IBM is headed, noting that of about $34 billion global VC money, $24 billion is concentrated in the US, some $6 billion in Europe, another $1 billion in Israel, some $1.5 billion in China and over $700 million in India.

Next in preference is the growing economies. “We definitely want to be in high growth economies like Brazil, Russia, India, and China. We are also discovering that Eastern Europe is a good place to be,” said Clark, noting that Poland, Romania, and Hungary look particularly promising in innovation.

IBM is particularly buoyant about its newest innovation centre in Dublin, Ireland, which it thinks has a high concentration of quality technologies, particularly in areas like life sciences, traditional IT such as storage and security, and clean energy technologies. It has partnered with 10 start-ups in Ireland.

Another technology that IBM is excited about is Web 2.0. But it thinks only two countries, India and China, are innovating in Web 2.0, probably because of their pedigree in services, which has helped them leverage the Internet better.

With “partnership in its DNA”, IBM is perpetually on the prowl for newer partners and better technologies. In the event it is also leaving a trail of innovation in how large companies can steer the tech bull by its horns.