VCs, Vendors, ISVs: A Powerful Trio

Intel, for example, has created its own corporate-investment portfolio to dole out $5 billion during the next five years. For its part, IBM has taken a different approach; rather than invest in companies directly, Big Blue is cultivating relationships with VC firms to jointly identify potential software-application partners. The model is akin to a venture-capital partner program.

IBM describes its initiative as symbiotic, one in which Big Blue, VC firms and ISVs each play a role and reap benefits. Matt Doretti, venture development executive at IBM, says VC partnering supplements IBM's own impressive tech-research budget of $5 billion annually and its average of 14 new patent applications filed daily. The so-called "Innovative Sourcing Model" is bidirectional: VCs steer appropriate start-up ISVs toward IBM as potential partners, while IBM, in turn, gives VCs a bird's-eye view of some of the hotter technologies incubating in its labs so they can better scout fresh ideas and talent. "IBM has never been more dependent on looking outside for sources of innovation," Doretti says. "And this gives VCs a route to market for their companies through IBM's enterprise customers and channel."

At a recent event outside of Boston, two of IBM's VC partners, Battery Ventures and Kodiak Venture Partners, and a pair of software companies, ProfitLogic and RulesPower, described how the alliance with IBM is working for them.

David Boyce, vice president of strategic initiatives at ProfitLogic, says his company went with Battery Ventures because of its ties to IBM. ProfitLogic develops software to help retailers rein in data to optimize their decisions around buying, selling and pricing merchandise. Its clients include Home Depot, Gap, JC Penney and Federated Department Stores. ProfitLogic closed funding with Battery Ventures in January 2002. Battery then connected the company with IBM as a potential business partner. So far, Boyce says IBM has delivered in terms of technology enablement and testing to help move ProfitLogic's apps to Linux, and go-to-market and services help. Steve Campbell, CEO of ISV RulesPower, sells rules- and workflow-oriented BPM software that helps companies model, automate and connect processes and IT systems. The applications fit right into IBM's vision for on-demand computing, a synergy Kodiak Venture Partners understood.

"I can't say enough how hard it is for early-stage companies to get traction in the market," says Elliot Katzman, general partner at Kodiak. "What IBM is doing is a good path for them."