Comcast Corp. has bold plans to grab a piece of the lucrative business-phone and high-speed-data markets. But it must clear a few hurdles first.
The company's cables run near thousands of businesses, but often stop just short of them, so Comcast needed a way to connect directly - without the time and hassle of digging up streets and parking lots.
That's where Comcast's venture-capital arm, Comcast Interactive Capital, or CIC, comes in. Two years ago, CIC invested in Arcwave Inc., a Silicon Valley firm that uses wireless technology to solve the "last mile" problem.
Now, as Comcast begins to roll out its business product, one the company estimates could bring in $2.5 billion in revenue over five years, it plans to use Arcwave to reach some businesses. As a result, Comcast is Arcwave's biggest customer.
Not every match becomes a mutual admiration society, of course. But some do, and the company's venture arm helps it create an ecosystem of businesses that advance new cable technologies and, if all goes well, goose CIC's bottom line.
"By investing in different companies, corporations develop new competencies, which, in turn enhances their business," said Gary Dushnitsky, a Wharton professor who has studied corporate venture capital. "At Intel, for example, if I come up with a new generation of semiconductors, what I want to do is nurture software companies that take advantage of my processor."
Dushnitsky's research shows that companies that focus on venture investments as a source of strategic benefits, as opposed to just financial gain, show greater rates of innovation.
Venture capital, long the province of cash-slinging private firms, remains a rarity in the more staid world of public corporations. Corporate venture programs grabbed attention during the dot-com boom, but many did not survive the bust that followed.
Comcast, whose venture arm was started by former chief financial officer Julian Brodsky in 1999, benefited handsomely from the hot market for initial public offerings of the boom era. It rode stocks such as Internet Capital Group Inc., of Wayne, to huge gains, though others, such as Pets.com, were losers.
Toting up CIC's investment returns is all but impossible for an outsider. It typically does not disclose how much it invests in an individual company, or how much it gains or loses when it sells one. But CIC managing partner Sam Schwartz said returns had been strong.
CIC's investments are diverse:
Home Decor Products Inc., an Edison N.J., company, runs Web sites such as HomeClick.com that sell high-end home products.
Florida's Intellon Corp. makes integrated circuits that enable home networking over power lines. That means no new wires are required to allow personal computers, broadband modems, set-top boxes, gaming consoles and audio/video devices to communicate.
Community Connect Inc., of New York, runs niche social-networking sites, such as www.blackplanet.com and www. migente.com, that bring together people of the same ethnic backgrounds. Dating is one popular use of these sites, but they also feature exclusive content from certain artists, such as Janet Jackson and Enrique Iglesias.
CIC's offices on the 42d floor of Comcast's Market Street building are intentionally set apart from the rest of the company. Getting there requires taking a separate elevator and wandering down a long hallway - a tangible reminder that CIC is supposed to operate like an independent firm.
In part to make sure that the new technologies find their way into Comcast's products and services, Schwartz also is executive vice president of Comcast Interactive Media, the company's Internet arm.
Schwartz and his team of six deal-makers check out about 800 potential investments yearly. They back six to eight. Initial investments range from $2 million to $10 million. CIC has about $500 million under management, the total value of the roughly 80 companies it has invested in since its founding in 1999.
CIC employees travel to Silicon Valley weekly, and one of them usually takes a seat on the board of a portfolio company.
"It helps us discover the small companies where innovation has occurred and then we partner them up with some of our bigger vendors," Schwartz said.
Bigger vendors, such as Motorola Inc., whose cable-box unit is in Horsham, help the smaller company develop the scale required to sell to a large cable company such as Comcast, Cox Communications Inc. or Time Warner Cable Inc.
"You can call it a matchmaker or a dating-service kind of thing," Schwartz said.
The partnerships boost the value of the smaller company - and of CIC's investment.
"It gives them sort of a window on technology, and it helps to keep track of where technologies are going," said Thomas Hellmann, a professor at the School of Business at the University of British Columbia. "There's something nice about maintaining the best of both worlds - the entrepreneurial spirit and the corporate structure and support."
Sometimes, the matchmaking leads to marriage. Last summer, Cisco Systems Inc., the networking company, bought CIC portfolio company Arroyo Video Solutions Inc. for $92 million.
Schwartz said Arroyo and another CIC company, Broadbus Technologies Inc., which was acquired by Motorola, will dramatically expand the amount and type of content Comcast and other cable companies can offer on demand.
Comcast, for example, offers 3,000 hours of on-demand content now.
"I'm sure we'll look at that in five years and laugh at that number," Schwartz said.
That's not to say there's no downside. Smaller companies may find their innovative culture crushed by the demands of big companies.
On the investment side, the current market for mergers and acquisitions and public offerings is considered weak, possibly diminishing CIC's returns.
Schwartz, however, notes that CIC was able to sell six portfolio companies last year, all for "good gains."
And while a smaller company risks losing independence by taking on a big investor, it often benefits, too. Backing from the country's largest cable company confers legitimacy and recognition. Portfolio companies also nab potential partners and customers - Comcast, for one - but also the other companies in the CIC portfolio.
"We get the benefit of their knowledge of the industry," Arcwave vice president Chris Martin said. Comcast and other big cable companies that Arcwave sells to - including Time Warner and Charter Communications Inc. - helped Arcwave executives understand how to operate in a market where about five companies dominate.
"One of the things they helped us understand is, you have to be patient and persistent," Martin said. "You can't go to one meeting and, although it was positive, think that you've cracked the egg."