IBM Joins Forces With VC Firms

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 had several options for VC money, but went with Battery Ventures because of its ties to IBM. ProfitLogic develops software to help retailers rein in all their data to optimize their decisions around buying, selling and pricing merchandise. It counts major retailers among its customers, including Home Depot, the Gap, JC Penney and Federated Department Stores.

ProfitLogic closed funding with Battery Ventures to grow its business in January 2002. Battery then connected the company with IBM as a potential business partner. Boyce says he was drawn to IBM in large part due to Big Blue's strong retail-industry focus. So far, he says, IBM has delivered in terms of technology enablement and testing, among other things, in moving ProfitLogic's apps to Linux and go-to-market and services help.

Steve Campbell is CEO of the kind of ISV company IBM wants to partner with. His company, RulesPower, sells rules- and workflow-oriented business-process management 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 that Kodiak Venture Partners understood when it brought RulesPower to IBM's attention. Campbell, who admits he did not expect a warm welcome at IBM, has been surprised at the response. Among other things, IBM provided its domain expertise in telecom to help RulesPower formulate a successful customer RFP. And in another instance, IBM aggressively priced a bundle of IBM middleware and hardware with RulesPower's applications that sewed up another deal.

Such assistance is invaluable to young companies, according to Elliot Katzman, general partner at Kodiak Venture Partners.

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