More large corporations than ever are taking a position in or acquiring outright young venture companies to gain access to new high-technology products, according to industry officials.
"There were 49 large company acquisitions of venture capital-funded firms last year," said Stanley E. Pratt, chairman of Venture Economics, a firm that tracks venture capital investment. "At the current rate, the number of acquisitions this year will more than double that."
Much of that acquisition activity is a direct result of the continuing shakeout in the personal computer hardware and software industries. In the last several years, dozens of personal computer companies were funded by venture capitalists and the result, says Pratt, has been "rather wild competition in many product areas."
While many of the venture companies offer good technology, they lack the marketing and distribution strengths necessary to successfully compete in the marketplace. The collapse of the initial-public-offerings market has made it even more difficult for many venture companies to get the capital they need to stay afloat or expand.
So in addition to producing a wave of bankruptcy filings, the glut of companies has prompted large companies, which do have marketing and distribution channels, to consider purchasing the venture firms as an effort to bolster their own product line offerings.
"We're going to be able to get some very good technology at fire sale prices," asserts a senior executive at a major computer company who asked not to be identified.
However, there are other variables encouraging companies to explore venture acquisitions.
For one, the product life cycle of many high-technology products -- such as personal computers -- has shrunk from several years to close to a year and a half. In many cases, it is simply faster and cheaper for a company to acquire a technology than develop it internally.
Moreover, other large high-technology companies are going the acquisitions route.
IBM, the dominant company in computers, recently purchased a telecommunications equipment company to speed its efforts to blend computers with communications.
"IBM's acquisition of Rolm put the 'Good Housekeeping Seal of Approval' to high-technology acquisitions," said Archie McGill, a former IBM and AT&T executive who is now president of Rothschild Ventures, a New York-based venture capital firm.
McGill asserts that the quickening product cycle and the need for a broad product line will not only mean more high-technology acquisitions, but also will encourage large companies to make early investments in start-up companies.
"Corporations are going to play a major role in the earlier stages of a company," said Joy London, a venture capitalist with Adler & Co., "and they're going to be more active as partners."
She points to AMP Inc., the Harrisburg, Pa.-based cable and connector company, which is making a million-dollar investment in Polytel Corp., a two-year old firm that makes a special personal computer keyboard. AMP has distribution channels that support the new product's technology, she maintains.
"There is much more minority investment by companies now," says Venture Economics's Pratt, "and there's a tremendous increase in joint ventures between established companies and venture firms."
Pratt predicts this activity will be "dramatically increasing" over the next two years.
But Adler's London says, "I don't think corporations want to take on companies that aren't making money just for the sake of a hot technology."
But she does see a greater level of cooperation between large companies and venture capitalists as the former look for new business opportunites and the latter seek ways to protect their investments.