Tech giants shift focus in start-up investments

The venture capital industry has had a long love affair with tech start-ups, going back two decades. Only brief interruptions by a tech stock bubble here and a global financial crisis there have slowed the pace of investment.

In most cases there is only one strategy, and that is an exit strategy, preferably with massive multiples over the initial investment. But, increasingly, technology giants themselves are the investors, with their own venture capital divisions, and, in most cases, they have no intention of exiting.

A striking example is Cisco, the world’s leading computer networking hardware supplier, which has acquired no less than 203 companies in its 33-year history. Its VC division has $2-billion (about R24-billion) invested in 120 companies

At this week’s Cisco Live conference in Barcelona, it showcased the dramatic impact some of its investments have had on the business as a whole. In particular, the $2.7-billion acquisition of network security company Sourcefire and the $1.2-billion buyout of cloud-managed networking company Meraki have allowed Cisco rapid expansion into these areas.

“When we enter new markets, our first priority is internal innovation,” said Hilton Romanski, senior vice-president and chief strategy officer at Cisco, who presided over both investments. “If we can build it, and are in a position to go faster than anyone else, we’re going to. Our strategy, in order of priority, is to build, buy, partner and invest.”

He told Business Times that those two investments represented the very best in class in their categories, and were leaders in their segments.

“When we look at an acquisition, as distinct from investments, it’s about our ability to have a meaningful impact on our business and our ability to deliver to our customers.

“Meraki is an example of something that has helped us extend into a new market, while at the same time helping us on our own journey. It allowed us to be more relevant to the midmarket, where simplicity and ease of use of deploying technology is key.

“The ongoing value delivered to the end user by that strategy was amazing, and you now see that coming through in a number of announcements we’ve made.

“It’s all about simplicity and matching the use of technology with the cost of technology, as well as futureproofing the technology environment. And we learned a lot of that from our acquisition of Meraki.”

The factor that was always lurking in the background in acquisitions was the people who would join the company in the process. But it was not only about adding to the talent pool, said Romanski.

“Talent acquisition for Cisco is about the ability to bring those teams on board to augment existing capabilities. It’s less about scale and size, it’s more about the ability to bring in the right talent and technology and seamlessly integrate it into existing efforts.

“Successful technology companies have a mix of capabilities: you need technologists, sales people, strategy people, and execution across all you do.”

Romanski sees investments in emerging areas such as artificial intelligence and drone technology as important. However, it’s as much about understanding the technologies as about being in step with companies driving the cutting edge in all areas.

Unlike venture capitalists they are not simply looking for a quick exit