Intel’s Portfolio Is Way Down. And That’s Okay.

Since the collapse of the initial-public-offering market in 2000, the venture capital business has been positively toxic. So who would keep making deals in such an environment? Well, the biggest name in venture capital these days isn’t a traditional VC firm at all. It’s Intel Capital, the venture investing arm of the world’s biggest chip maker.

In 2002, Intel Capital funded 120 companies around the world. Through the first 10 months of this year, it made another 30-plus deals. Most of those investments were small, averaging about $5 million, but Intel wasn’t afraid to swing a big bat: In September, it invested $450 million in memory-chip maker Micron Technology.


Intel Capital keeps writing checks even though its financial returns haven’t exactly rung bells. True, it made a bundle when Wi-Fi vendor iPass went public in July: iPass shares were trading at around $19 in November–and early investors like Intel paid an average of $1.77. But since the start of 2001, the value of Intel’s portfolio has dropped 67%, though part of that may reflect profits shifted to its corporate parent. (Intel claims returns over its lifetime of $8 billion on $6 billion of investments.)

Why does Intel Capital keep zigging while other investors zag? Or rather, while they (justifiably) sit on the sidelines? Because for Intel, it’s not all about a direct financial payback. Intel Capital’s investments are part of a broader strategy to drive revenue at its parent company. “If these small companies are reasonably successful,” says Morningstar analyst Jeremy Lopez, “they can drive demand for Intel’s products.”

Intel Capital’s investment in iPass, for example, was one of about a dozen it has made in Wi-Fi. Last spring, it committed to doing $150 million in similar deals. The push is meant to stoke demand for Intel’s Wi-Fi-ready Centrino processors, which debuted in March with all the hoopla that $300 million in marketing could muster. Of course, Wi-Fi service itself may yet prove a bubble. But Intel credits its Wi-Fi investments with helping to fuel better-than-expected sales of Centrino technology to laptop PC makers. As Intel Capital vice president Mark Christensen says, “What would Centrino have been if there were no hot spots to connect to?”

What matters more for Intel than the profitability of its portfolio Wi-Fi companies is the degree to which consumers groove on being wireless. Ultimately, it’s trying to drive demand for notebooks, whose processors are more profitable than those in desktop PCs.

The lesson: Intel can tolerate higher risk because it measures success differently than most VCs. It wouldn’t mind if the IPO market perked up, of course. But mostly, it seeks not to cash out but to nurture technologies that will boost its own products. The plan seems to be working. In the third quarter of 2003, Intel posted a 20% year-over-year increase in revenue–its best quarterly performance in years. That’s why, even as tech bleakness persists, Intel Capital will keep placing smart bets.