Article by Ben Graham for Strategy Eye, November 26, 2014
Corporate VC firms are proving more active than ever this year, with Google Venture’s highlighting an increasing openness towards earlier-stage investments that are less certain of return. Following Google’s acquisition of Google Ventures portfolio company Nest, we’ve been keeping a close eye on its investments. For many firms venture arms offer opportunities to further fuel industries they want their tech to power in future. Intel Capital was one of the last month’s most-active investors and earlier this month backed 16 early-stage companies with USD62m in total ranging from big data and cloud computing to wearable devices and an innovative braille primer.
German software behemoth SAP’s venture arm was founded in California in 1997 and spun out as an entirely independent entity in 2011. Having since rebranded as Sapphire Ventures the company still maintains a close relationship with the firm. Here we look at how this ongoing relationship differentiates the firm and benefits startups.
SAP To Sapphire
SAP is one of the giants of the software market, but founded in 1972 it faces many of the same challenges as companies like Cisco and Oracle. With an increasing number of startups gathering venture capital momentum and new technologies like cloud computing disrupting their traditional markets, it can be difficult for big enterprises to keep up. To avoid missing future enterprise trends, corporates in the space are investing more than ever with Cisco pledging more than USD150m for investments in the internet of things space.
While these venture arms allow companies to feel out new areas of interest Sapphire Ventures emphasises the importance of its independence with managing partner Andreas Weiskam telling StrategyEye: “We were never a strategic investor or an investor trying to fill gaps or holes in the SAP product road map or strategy we’re independent and then in 2011 we actually spun out from SAP.”
Now Sapphire Ventures has more than USD1bn under management, writing checks of between USD10m to USD20m for later-stage companies and maintaining it’s close ties with SAP. “The investments are based not on SAP’s strategy but financial return,” says Weiskam. “However, most of the time we can find an angle where SAP can be helpful to companies that we invest in.”
For young companies, corporate VCs can offer access to an extensive range of resources in a more direct manner than many normal VC companies could offer. While this could include access to more powerful computing or research, it can also mean potential revenue generating connections to would-be customers. The resources offered by corporate firms also makes them more capable at leading rounds or acting as sole investors as Sapphire often does.
“Our differentiation is that we can offer help with SAP’s ecosystem of customers and partners. That’s a big ecosystem. Probably one of the biggest in the world and it’s interesting that since SAP has become more acquisitive than previously, that ecosystem is growing,” says Weiskam. “With the acquisitions in analytics, mobile, databases, as well as e-commerce this connection to SAP becomes more and more relevant.”
While SAP is German in its origins, its reach is truly global and for startups it can be an invaluable tool of launching overseas, one of the key barriers to reaching that next level of growth.
Weiskam highlights SAP’s overseas software users as a key advantage for startups: “We were the ones who could help LinkedIn, for example, when they went into India to launch, with the right connections to the press and media through SAP in India. None of the other investors could do that right. Through SAP’s global reach we can help almost any company in almost any industry.”
Route To Acquisition
Of course when it comes to investing every VC’s ultimate goal is the big pay out at the end. When looking at corporate VC firms it seems that the parent company is always a likely contender. Connections have already been made and technology and resources may already be shared. However, that’s not always the case and Weiskam says: “Funnily enough Oracle and IBM have acquired more companies from us than SAP, but we make sure there’s a process, that if there’s interest and there might be a role for SAP, that they get an opportunity.”
However, when it comes to the actually process of negotiation an investor is looking for the highest possible price and the firm buying it is looking to knock that down as much as possible. Obviously that creates potential clashes and even if Sapphire is independent of SAP it’s close ties mean it does not take part in discussions.
“It’s the interest of everyone, the entrepreneurs and the other investors, because the more interested parties when there is a sale going on the better for the price,” says Weiskam. “But we’re not involved. We make the right intros, we connect the companies to right people within SAP, but then we remove ourselves from that process so there’s no conflict of interest.”