IBM courting VCs and small fry

IBM is wooing technology entrepreneurs with its people rather than its pocketbook.

The company used to make investments in smaller companies, but has since dropped that practice in favor of outright acquisitions and partnerships with venture capitalists and start-ups, company executives said on Thursday. At a roundtable discussion at an IBM testing center in Waltham, Mass., representatives of IBM and some partners gave a progress report on an IBM program, started about three years ago, to actively court venture capitalists and the companies they invest in.

IBM said the outreach is part of a bigger partnership initiative to get independent software providers to sell applications in conjunction with IBM's software infrastructure, hardware and consulting services. Established relationships between IBM researchers and venture capitalists also allow IBM to have some insight into emerging technology trends.

"IBM is more dependent than ever on ensuring that we look outside of IBM for innovation," said Matt Doretti, managing venture development executive for IBM in the Americas.

But rather than dive directly into new ventures, IBM provides partnership-oriented resources, such as joint sales support and access to its cadre of experts. A small business process management company called RulesPower tapped IBM's telecommunications consultants. With their help, the firm made a bid on - and won - a project in that industry, said RulesPower CEO Stephen Campbell. IBM was also willing to lower the price on its hardware and software to create a bundle of goods that included RulesPower's workflow application. The company's flagship product is a "rules engine" that automates decision-making.

RulesPower decided to build its software specifically for IBM's WebSphere Java application server because it did not want to spend its limited budget on integrating its software with many other products. "Early on, we decided our core competency is technology and rules, not integration," Campbell said.

Well-heeled partners are increasingly important to smaller companies because securing investment capital and finding a good product distribution network is harder than ever, said Scott Tobin, a general partner at venture capital firm Battery Ventures. "Companies have to do a lot more with capital than they used to."

IBM's strategy stands in contrast to chip giant Intel. Venture investment at Intel Capital peaked at $1.3b in 2001 and was $7m last year, the total value of about 120 deals. Microsoft's model is similar to IBM's, in that it kept venture investing at arm's length.

To help partners better "navigate" IBM, the company is trying to streamline communication between IBM employees and venture investors, Doretti said. IBM now has 18 business development executives dedicated to working with venture capitalists and their portfolio companies.

One IBM partner said he values IBM's "resources" even more than its money.

ProfitLogic said it works with retail consultants at IBM to sell ProfitLogic's price optimization software. It has also gotten technical support from IBM in bringing its software to Linux. "It's not about the money," said David Boyce, vice president of strategic initiatives at ProfitLogic. "It's about building the business."

Martin LaMonica writes for CNET News.com