The Wrong Move

Sure, you can blame Comdisco’s dizzying spiral into

bankruptcy on a multitude of management faux pas. But the last straw was the red

ink flowing from the company’s investment arm, Comdisco Ventures.

The unit, which halted its investments in January, lost $149

million in the first half of this year, largely because of stakes in struggling

tech startups. Says a Morningstar analyst, "They were trying to grab hold

of the tech gold rush, and it bit them."

More like swallowed them whole. And Comdisco, which filed for

Chapter 11 in July, isn’t the only company sporting teeth marks on its venture

unit. Thanks to the tech downturn, a near-shutdown of the initial public

offering market, and now increased economic worries because of the terrorist

attacks, scores of corporations that set up venture-capital arms are slamming

the brakes on investments. KPMG Consulting folded its venture unit after the

firm went public this year. Internet consultant Scient shut down its venture arm

and wrote off all its investments in December.

And many more have done the same, says Darrell Rigby, a

director at management consultancy Bain & Co. He says a survey of 245

executives with venture funds found that 45% had abandoned those efforts this

year. "These are silent shutterings rather than loud proclamations,"

Rigby says.

Huge drop

Corporate cash may be disappearing with a whisper, but its impact is loud and

clear. Granted, overall VC investment is down: It dropped 63% in the first half

of this year from the same period in 2000. But investments by corporate venture

units in the first half of 2001 plummeted 91% from last year’s levels,

according to a PricewaterhouseCoopers study. Last year, corporate venture

funding totaled $6 billion. This year "we’re getting close to the

vanishing point," says Kirk Walden, director of VC research at PWC.

That’s tough news for both startups and corporations with venture funds.

The pullout of corporate cash will make it that much harder for new businesses

to get off the ground. But it also can hurt the funders themselves: Many

corporate VC units act as adjuncts to companies’ research and development

departments, helping fill the pipeline of new technology.

"We really look to these tech startups to bring us ideas," says

Warren Holtsberg, director, venture investing, Motorola. Last year, Motorola

pumped $3.5 million into Centerpost to get its hands on the Chicago startup’s

messaging technology. This year, Holtsberg expects to do 40% fewer deals–a

potential blow to innovation.

Try harder

While corporations have been willing to forgo this source of ideas in past

tech downturns, the stakes may be higher this time. Given the current pace of

technological evolution, you can get left behind a lot faster now. Even if it

means skimping elsewhere, corporate VCs should try harder to keep their funds

active in this downturn than they have in the past.

That’s advice Chevron is heeding. After investing $60

million in 2000, Chevron Technology Ventures is having a tougher time unearthing

deals for the $100 million it has earmarked this year.

As the tempo slows, those still in the dance can be more

choosy about their partners. So much money was flying around tech startups over

the past two years that investors felt pressured to act fast and skimp on due

diligence, says Julian Brodsky, vice-chairman of cable TV operator Comcast.

"Now, you have time to do the job right," says Brodsky. So far this

year, Comcast has made just two investments. Although he won’t discuss details

of either one, Brodsky says both should pay off better than anything he got last

year.

Many more companies have closed the spigot on VC investing

without completely shutting down their venture units. Autodesk, a software maker

based in California, has made no new investments in 2001, saying it just wants

to focus on managing its current portfolio. Same goes for the venture arms of

software maker Vignette and TV giant NBC, although they declined to discuss

their reasons.

Lack of discipline

Few corporate funds have fared worse than Comdisco’s. The

market value of Comdisco Ventures’ public holdings plunged from $683 million

on September 30, 2000, to $5 million on June 30, 2001. Among Comdisco’s losing

Internet bets: furniture e-tailer Living.com, which filed for bankruptcy last

August; the now-defunct real estate site IProperty.com; and hardware e-store

Homewarehouse.com. Comdisco CEO Norman Blake acknowledges that the venture unit

suffered from a lack of discipline.

"Some basic questions about each investment should have

been asked but weren’t," Blake says. That hit the bottom line: Comdisco

Ventures contributed $110 million in profits in the quarter ended December 31,

2000. By March, that had turned into a $30 million black hole.

The slowdown in funding is sure to hobble cash-starved

startups. But if their erstwhile corporate patrons choke off an important source

of innovation, they may suffer as well.

By Darnell Littlein BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc