Large Technology Firms Betting on Smaller Ones: Survey finds 39 percent financing start-ups, incubators

After first taking care of their own financial needs, nearly 40 percent of large high-tech firms are making big bets on their smaller brethren. According to a newly published report, many large technology firms are channeling a stream of extra cash into three areas: incubation programs; stocks of publicly traded companies; and private investments. And, compared to firms that have avoided external investments, they have achieved far higher revenue growth, much greater productivity, and considerably more direct revenues from e-business, said the Technology Barometer report from PricewaterhouseCoopers.
    "This is a virtuous situation, where success begets success," said Paul E. Weaver, global technology leader for PricewaterhouseCoopers. "Companies that took initial financial risks with others have prospered, and this has enabled them to build a continuing external investment program into their operations."
    According to the report, there are three types of corporate investments practiced by these large technology businesses. The first is called a formalized business incubation program, which is practiced by about 15 percent of the companies. This involves taking a stake in start-ups located in a separate, sponsored facility, where they are exposed to a regimen of services to accelerate growth. Most executives so invested (78 percent), say the incubator is part of a strategy to eventually bring externally-developed technologies, processes, products or services into their business.
    "This is a noteworthy percentage of large technology businesses embracing the concept of incubation," said Weaver. "They recognize they can't hope to develop all needed innovations entirely on their own. They are looking for a hands-on stake in synergistic start-ups likely to yield a big dividend down the road. Those investing in their own incubator, though already 20 percent above the norm in size, have generated five-year revenue growth more than three times above the average."
    Most of the incubators receiving investments have been designed internally (78 percent). However, 13 percent were custom-designed by an outside consultant and nine percent were adapted from a model in use elsewhere. Almost all incubator sponsors (83 percent) expect viability of start-ups within two years. Corporate executives seldom manage their incubation programs as extensions of their R&D department (only 22 percent). Instead, they are run as either new product development programs (39 percent), as part of a business investment strategy (35 percent), or as separate, freestanding programs (30 percent). Looking ahead, 61 percent expect to increase their incubation program over the next 12 months, 26 percent plan to maintain its current size and none will be cutting back, though 13 percent are not sure.
    The next type of investment, practiced by 16 percent of the firms, is a securities investment portfolio for which companies buy and sell stocks of other companies. The average portfolio includes shares of 20 other companies, and has been in operation for five years. Income from investments in securities averaged 2.5 percent of total corporate revenues over the past year, and is expected to grow to 3.6 percent over the next 12 months, an increase of 44 percent. During this same period, a 21.7 percent average rate of return is expected. Looking ahead, 50 percent expect to increase investment in this program over the next 12 months, 21 percent plan to stay about the same, eight percent will be decreasing, and the remaining 21 percent are not sure.
    "It should be noted these investments are financial and corporate," said Weaver. "They are not part of a 401(k) investment program for employees."     About 18 percent of firms have a formal or informal fund making private investments in businesses with products, services or technologies attractive to their own corporate objectives. The total number of investees is limited, averaging 15 companies. Most (74 percent) view these investments as having strategic implications, while only 19 percent see them as being financial in nature. As a part of this investment strategy, nearly all (89 percent) take an equity stake, of typically less than ten percent. Investments are made in businesses of all sizes: start-ups (82 percent), midsize companies (19 percent), and other large public companies (19 percent). The majority (52 percent) does not have a limit on the dollar amount that can be invested in any one company; 44 percent have a limit, and four percent did not report. Looking ahead, two-thirds (67 percent) expect to increase investment in this program over the next 12 months, 19 percent will stay about the same, none will be cutting back, and the remaining 14 percent are not sure.
    "The large technology businesses involved in one or more of the three corporate investment programs we've described have brighter prospects and higher productivity than those without one," noted Weaver.
    Collectively, these businesses 36 percent higher revenue growth projected for the next 12 months -- 23.0 percent, versus 16.9 percent, respectively. They also have a 33 percent productivity advantage -- revenues-per-employee of $482,000, versus a norm of $362,000; and a 20 percent higher share of revenues coming from e-business over the next 12 months -- 15.7 percent, versus 13.1 percent. In addition, 37 percent more are planning to expand to new markets outside the US -- 52 percent, versus 38 percent; and 55 percent more are considering purchase of another business over the next 12 months -- 62 percent, versus 40 percent.
    "These businesses are excelling because they have been willing to risk their hard-won gains in outside investments," said Weaver.
    PricewaterhouseCoopers' "Technology Barometer" is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research Inc. For more information about the report contact Pete Collins, survey director, at 212-259-4496, or e-mail to pete.collins@us.pwcglobal.com. Information about Barometer surveys, including recent economic trend data and topical issues, is available at www.barometersurveys.com