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Will Venture Capital Give Intel Back its Edge?

The once-revolutionary Intel has fallen behind its many rivals. But can Intel Capital, the firm's venture capital arm, be the chip maker's savior as it faces down the smartphone and tablet threat?

In the 1960s it was Gordon Moore, one of the two co-founders of chip-making giant Intel Corp., and his fellow engineers who were the true revolutionaries, not the long-haired, jeans-wearing hippies who would later claim that tumultuous decade as their own. The work of Moore and his colleagues would lead to the microprocessor that would power computers and change the world. Moore, who has a Ph.D. in physical chemistry from the California Institute of Technology, was also a technology Nostradamus.

In a prescient 1965 academic paper he published three years before founding Santa Clara, California–based Intel, Moore conjured a world in which integrated circuits — which put more than one transistor on a chip of silicon — would lead to such “wonders” as home computers, automated controls for automobiles and what he called “personal portable communications equipment.”

Moore did more than just create the personal computer out of sand. He accurately predicted how people would stuff increasingly reliable devices into their pockets — devices with almost limitless computational power. Though he failed to imagine Starbucks and the coffee revolution, Moore described a world in which executives and teenagers alike would use Androids, BlackBerries, iPhones and iPads to communicate with colleagues and friends, store information and grab data at will from a vast decentralized network. Moore saw how computing power would be everywhere even if there was no actual computer in sight, enabling people to ditch newspapers and magazines for electronic versions on a tablet computer, tap into portable libraries of music and books, and stay connected 24 hours a day using gadgets the size of their palms.

The first part of Moore’s predictions — the home computer — would power his company’s revenues and profits for decades, making Intel a stock market darling for an entire generation of investors. But Moore’s beloved Intel is failing to enjoy the fruits of his prophecy about mobile devices. The Android, the iPad and the iPhone do not have Intel inside. Instead, almost all smartphones and tablets run on low-power chips based on designs by the U.K.’s ARM Holdings, which licenses the designs to companies like Apple, Broadcom Corp., Qualcomm and Samsung Electronics.

Smartphone sales are expected to reach almost 500 million units in 2011, a 60 percent increase from 2010, according to Stamford, Connecticut–based research firm Gartner. Tablet sales are projected to grow from 19.5 million in 2010 to 54.8 million units in 2011 and to more than 208 million units in 2014, says Gartner, and are expected to take a 10 to 12 percent bite out of laptop sales. But Intel is nowhere to be seen in the smartphone and tablet world. Its core business is still powering the personal computer — and its plans to make a big splash in smartphones and tablets won’t become reality before 2012.

Competitors have gotten a large leg up on Intel as the chip maker’s mobile strategy has been mired in mistakes, including the sale of its ARM-based processors to Marvell Technology Group in 2006; Intel, the dominant power behind PCs, with 60 percent-plus gross margins, didn’t believe it could maintain those margins in the hypercompetitive phone market. The missteps have cost Intel and current CEO Paul Otellini. On September 1 the company’s stock closed at just under $20 a share, virtually unchanged from where it traded five years earlier and more than 70 percent below its August 2000 high of $75.81. The market is skeptical. Intel recently reported its fifth consecutive record earnings quarter, but its stock has done little after each announcement.

The smartphone and tablet threat is real. Historically, many people have purchased PCs for tasks like checking e-mail, viewing photos, browsing the Internet and watching movies. Corporate employees rarely touch the advanced features on their desktop machines. Smartphones and tablets, now dominated by the iPad, are sexier and cheaper alternatives to heavy laptops or immovable desktop boxes — for employees as well as mainstream consumers. They check their e-mail, view data, do research and keep in constant contact with friends and staff on their mobile devices. Analysts say the next damaging transition for traditional computing players will be when smartphones and tablets crack the corporate market.

Indeed, signs of a post-PC world are everywhere. Hewlett-­Packard Co. is hiving off its PC business and focusing instead on software and services, much like IBM Corp. transformed itself after its mainframe computer business went south, in part because of Intel’s chips. HP’s CEO, Léo Apotheker, has said that it isn’t possible to invest what is needed in PCs while making other changes to his company. Once-unassailable Microsoft Corp. also is facing questions about its business model now that people are increasingly turning to smartphones to do what they have traditionally done on a desktop or laptop PC. That trend leaves fewer consumers for Microsoft’s Windows franchise. Apple, for its part, has single-handedly created demand for sleek new products that consumers didn’t even know they wanted until they saw them, and the rest of the industry is trying to play catch-up.

Manish Goyal, an analyst and portfolio manager at TIAA-CREF, which has $469 billion in assets under management and is one of the largest institutional owners of Intel, says watching his 90-year-old grandfather and his toddler hunker together over a tablet recently convinced him of the power and simplicity of these devices and how they will change the face of computing.

Many longtime followers of Intel are quick to discount the chip maker’s future because of its lack of capabilities for a post-PC world. Mike Kwatinetz, a partner at San Francisco–based venture firm Azure Capital Partners and a former top-ranked analyst on Institutional Investor’s All-America Research Team, says there is a major transition under way that existing technology leaders like Intel must figure out how to play. “Intel has tried to branch out into other areas, such as storage, but it’s still heavily dependent on its PC chips for the brunt of its profits,” he explains. “The inability to diversify its revenue sufficiently has changed the long-term outlook on growth and held down the stock.”

Intel’s stodginess is reflected in its financials. Last year the company had $43.6 billion in revenue and $11.5 billion in net income, up from $35.4 billion in revenue and $5 billion in net income in 2006. That translates to a 3.9 percent compound annual growth in revenue and a 12.9 percent compound annual growth in earnings per share — respectable numbers for an established technology company but a far cry from the high double-digit growth rates that Intel enjoyed during the 1990s. In 1997, for example, the company had annual revenue of more than $25 billion and net income of $6.9 billion, and a ten-year compound annual revenue growth rate of 30 percent.

But don’t count Intel out quite yet. The Silicon Valley tech giant has a secret weapon at its disposal: Intel Capital, the company’s venture capital arm, which has a $2.2 billion portfolio and has invested more than $10 billion over the past two decades. Led by 57-year-old Arvind Sodhani, who joined the company in 1981 as assistant treasurer for Europe, Intel Capital works with its parent’s operating divisions to develop the technologies, innovations and companies that will support its products — what Sodhani and other executives call the Intel ecosystem. Sodhani, one of just four Intel Corp. executive vice presidents who report directly to CEO Otellini, says the corporate venture capital arm extends Intel’s reach into start-up companies’ innovation efforts, investing its parent’s cash to nourish entrepreneurial efforts that can help it sell more chips. “We’re Intel’s eyes and ears,” says Sodhani.

Even though Intel Capital is charged with getting information about the industry, Sodhani is stubbornly secretive. He rarely talks to the press except to announce a new investment. Still, this spring he agreed to make himself and members of his team available for a series of interviews with Institutional Investor.

Intel Capital is a rarity: a corporate venture capital effort that has withstood the vagaries of its corporate parent and successive CEOs. It has served as Intel’s ground forces for more than two decades and has allowed the chip maker to enter new markets and avoid big-company syndrome — what Marc Andreessen describes as companies turning inward and living in their “own private Idaho.”

“The thing about any industry is that most smart people don’t work for you,” says Andreessen, co-founder of Netscape Communications Corp., which created the dominant Internet browser in the 1990s. “Most of the innovation is happening outside your company. Intel Capital gives the company a rationale to stay connected to all that.”

Intel Capital dwarfs most traditional venture capital firms in size and reach. The group has 200 people, about half of whom are investment professionals, and operations in 26 countries. Since 1991 it has invested in 1,140 companies in 50 countries. As innovation has gone global, the group has increased its international investments, from less than 5 percent of its total dollars in 1998 to 44 percent last year. In 2010 alone Intel Capital invested in 119 deals worth $327 million. The venture arm’s investments span enterprise and cloud computing, embedded computing and communications, energy management and autos, software and services, mobility, digital home, consumer Internet, clean technology and manufacturing.

Andreessen, co-founder of Menlo Park, California–based venture capital firm Andreessen Horowitz, says Intel Capital is one of Silicon Valley’s best-kept secrets. While other technology companies, including software giant Oracle Corp., have gotten into and out of venture investing, Intel has stayed the course. “I tell my entrepreneurs that if they accept money from corporate venture groups, they have to assume these investors will be out in a year,” says Andreessen, whose firm invested alongside Intel in Kno, a web-based textbook company headquartered in Santa Clara. “But not Intel.”

Although Intel Capital does not release its investment performance, the group does calculate it annually, treating the total investments each year as individual funds. Viewed this way, Intel Capital’s performance ranks in the top quartile of the Cambridge Associates U.S. venture capital index, according to Sodhani.

Intel Capital’s investments have also had an impact on its parent’s revenues by helping to create new markets and increase demand for Intel chips. The venture group worked hand in hand with Intel executives to develop the market for wireless computing, seeding companies that would provide the plumbing and infrastructure for Intel’s blockbuster Centrino chip, whose built-in wireless technology enables users to connect to the Internet remotely. Intel Capital did the same for the open-source software movement, seeding businesses that broadened computing generally and created enterprise-quality software that could be used in server computers powered by Intel chips.

One of Intel Capital’s strengths is its deep integration with the business units of Intel Corp. If, for example, the company wants to improve its semiconductor manufacturing, it works with Keith Larson, who oversees Intel Capital’s manufacturing-related investments. When Otellini wanted to create a whole new category of devices called Smart TVs, he brought in Intel Capital. Every year the general managers of Intel’s various business units each give Intel Capital a letter grade for its performance.

Otellini, 60, who joined Intel in 1974 and ran the PC and server microprocessor division as well as global sales and marketing before becoming CEO six years ago, dismisses the notion that the post-PC era is dawning.

“No one debates that people worldwide will demand and need more and more computing in their lives,” he tells II. “One can argue with the form factor: smarter TVs; smaller, lighter laptops that are more like tablets than today’s notebooks; smarter phones; connected systems; smarter, more pervasive cloud infrastructure. Everything one can imagine in this space is based upon the transistor. This is our core competency and will allow us to compete effectively in any arena of this new computing landscape that we choose.”

The CEO has been adamant that PC unit sales will experience double-digit percentage growth this year, despite much lower expectations from the high-profile technology analysts on whom the industry relies. Otellini has emphasized the role of emerging-markets PC buyers, hungry for computer power, whose quickly rising incomes are enabling first-time purchases.

“There was a lot of discussion around our conference calls and in writings this year about the perceived lackluster growth in the PC industry, and we said we didn’t see lackluster,” Otellini told a roomful of investors and analysts at the company’s annual investor day in May. “We said we see a pretty decent year. One of the reasons for that is growth in emerging markets. China is at 12 percent; that’s a big number. In fact, China will become — it’s the second-largest market for computing today — the largest market for computers next year.” True to the CEO’s word, Intel generated $7.4 billion in revenue from the Asia-Pacific region in the second quarter, up from $6.2 billion for the same time period in 2010, representing 57 percent of its total $13.1 billion in revenue.

Otellini has also stuck by the bet he made in 2006, shortly after becoming CEO, that the mobile market would demand Intel’s high-performing chips to power smartphones and other devices. These chips would compete directly with the ARM-based chips that had become the standard. Otellini wasn’t interested in creating a copycat product. Instead, he wanted to leverage Intel’s dominance in computing and in process technology — Intel’s closely guarded methods and procedures for producing chips — to create the best transistor.

Intel is powered by three silicon divisions, including the data center group, which analysts expect to sell $10 billion worth of microprocessors and related chipsets for the server, workstation and storage segments of the market this year, and a $3 billion-in-revenue device business that makes chips used in netbooks, tablets, consumer electronics and embedded applications in products such as cars (part of Moore’s 1965 prophecy). The third piece is the big moneymaker: the PC client group, with $30 billion in revenue and $13 billion in profits. In addition, Intel has a software and services group that is on track to deliver $1.9 billion in revenue in 2011 following its February acquisition of Santa Clara–based McAfee, a leading technology security company.

To meet its latest challenge — the rise of smartphones and tablets — Intel is again turning to Intel Capital. Sodhani’s group is focused on developing critical technology for ultrabooks, Intel’s initiative to combat tablets and redefine the PC. Ultrabooks are the perfect combination of a tablet and a traditional laptop PC, says Intel’s 48-year-old CFO, Stacy Smith, who is responsible for determining the funding for Intel Capital. The thin and light design combines the ease of use of a tablet with the sophisticated content creation of a PC, as well as a keyboard. Yes, Intel may have been late to the tablet market, but it’s now coming up with the next-generation PC, the first version of which will be available at the end of this year. The company expects ultrabooks to make up 40 percent of global laptop sales by the end of 2012.

Sodhani’s first investment to support ultrabooks was made in July, in an Israel-based company called Omek Interactive, which provides tools for incorporating gesture recognition and full-body tracking into applications. Omek’s software will ultimately enable users to interact with their computers using body movements such as hand gestures — a significant step beyond the tablet’s popular touch screen. Omek is just one part of the rich ecosystem that ultrabooks will need to thrive. Intel needs battery makers, graphics firms and software providers, among others, to make ultrabooks work.

Otellini is putting significant funds into Intel Capital. He has just approved a new, $300 million venture capital fund dedicated to ultrabooks, one of the largest pots of money that Sodhani has ever had at his fingertips. David Flanagan, who heads up the mobility group for Intel Capital, says the fund will invest in much-needed technology for ultrabooks, including companies that produce innovation for slim components ranging from batteries to memory to displays. Flanagan says the new fund is needed to support innovations that will allow the ultrabook to be used in new ways. Intel Capital doesn’t plan on investing just around the edges; it will make some major investments.

“We stole a page out of our trusted playbook” for the ultrabooks fund, says Flanagan, 42. “When we championed Centrino, we asked how we could get the industry to move at a faster cadence.” He says it’s the same question today with ultrabooks: “How do we embed these technologies to catch up to what consumers want?”

INTEL HAS HAD JUST FIVE CEOS since 1968, when Robert Noyce, a pioneer of the integrated circuit, and Moore, whose famous eponymous law states that twice as many transistors can be loaded onto a chip every 18 months, left Fairchild Semiconductor to found the company. The two had helped launch Fairchild 11 years earlier after leaving Shockley Semiconductor Laboratory, whose founder, William Shockley, was one of the three physicists who had discovered the transistor. Noyce and Moore founded Intel on the back of a new invention that allowed data to be stored on silicon, which they believed could replace the magnetic core memory that was then used in computers, and rounded up $2.3 million in funding from venture capitalist Arthur Rock in a single afternoon based on their reputations alone. They soon recruited Andrew Grove, a hard-charging Hungarian immigrant who had worked for them at Fairchild, as director of operations. Grove was in charge of getting products designed on time.

By 1970 the company had burned through the money from Rock, and it decided to license Intel’s technology to Microsystems International, a Canadian competitor, in exchange for an injection of $1.5 million. That year they also started marketing the first large-scale integrated dynamic random access memory, or DRAM, chip. A year later they had invented EPROM, whose memory could be reused over and over once the data was erased using ultraviolet light. Two Intel engineers created the first microprocessor that year.

In October 1971, Noyce, then CEO, and Moore took the company public. Their combined stake of 37 percent was worth about $20 million at the time. Meanwhile, Grove was honing his management style and philosophy. He created his “late list” that same year, requiring employees who arrived after 8:00 a.m. to sign a roster that went straight to him.

Intel’s competition grew. Motorola entered the fray in 1978 with a clearly better microprocessor, but Intel went on the marketing offensive with what it called Operation Crush, the first real demonstration of the company’s competitive zeal. Intel set the audacious goal of 2,000 design wins for its microprocessor by 1980. Not only did Intel meet that goal, but one of the contracts turned out to be a defining victory: to power the first IBM PC. That contract made Intel microprocessors the standard for the emerging personal computer and set the stage for the company’s explosive growth in the 1990s.

The India-born Sodhani, who got an MBA from the University of Michigan in 1978 after earning a BS and an MS from the University of London, joined Intel in 1981 as assistant treasurer for Intel Europe, based in Brussels. At the time, Intel’s business was all about memory chips. In July 1984 he was promoted to assistant treasurer for the entire company and moved to its Santa Clara headquarters. In that role he was responsible for all mergers and acquisitions.

By 1984, Japanese semiconductor companies, including Hitachi, Fujitsu and Toshiba Corp., were eating Intel’s lunch in the memory chip business. In 1985, Grove and then-CEO Moore exited the memory chip business and concentrated on microprocessors.

The company bore down even more on execution. Craig Barrett, a former Stanford University professor who had joined Intel in 1974, instituted its Copy Exactly program, which made chips absolutely uniform across Intel’s factories, increasing yields. Barrett was instrumental in process improvements, still one of the keys to Intel’s success.

As president and chief operating officer, Grove developed his now-legendary business philosophy: “only the paranoid survive.” His experience in getting the company out of memory chips was the crucible that forged his thinking on strategic inflection points, which he defined as a huge shift in the business environment from changes in technology, regulation or even customer values that could make or break companies. Sodhani took notice.

In 1987, Grove succeeded Moore as CEO. A year later Sodhani was promoted to treasurer. That same year Smith, who had just received his MBA from the University of Texas, joined the finance group, impressed with what the chip maker was trying to do. “I had a feeling that the products that Intel built would change the world in a positive way,” he says.

With Sodhani as treasurer, Intel gained a reputation for its skill in actively trading swaps, options, forwards and futures to hedge the currency risk in its increasingly global business. Not long after becoming treasurer, Sodhani brought his venture capital idea to Grove. Although Intel’s decision to pull out of the memory chip business to focus on microprocessors has been branded as brilliant in hindsight, many analysts and investors criticized the company at the time for being late to put out that fire. Sodhani, a quiet man who has more in common with Intel’s technologists than with the Silicon Valley pitchmen at independent venture capital firms, sold his idea to Grove by describing several trends he was seeing.

Sodhani viewed his brainchild as a way to extend Intel’s reach into start-up technology companies’ innovation efforts. Having its own venture capital business would also help Intel keep some of its more entrepreneurial employees. “First of all, we were losing people who were going to start their own companies,” Sodhani explains. “Secondly, we were finding that we did not have enough R&D dollars to invest in and pursue every technology opportunity that was out there.” Most important, Intel needed software applications to make the just-emerging PC more usable. “At that time, Windows didn’t exist,” Sodhani stresses.

The idea of Intel Capital fit well with Grove’s paranoia. In 1988 the CEO approved Sodhani’s plan to make strategic investments on behalf of Intel, giving the company tentacles into the forces that could extinguish potential threats to its business. Sodhani’s first transactions were done on an ad hoc basis. After about 20 investments Sodhani set up a formal corporate development group and ran it in addition to his treasury role until 1991. That year Leslie Vadász, one of Intel’s original employees, who had helped design one of the company’s first chips, took over the operation, which was spun out as a separate unit.

That year the company launched its Intel Inside marketing campaign, agreeing to share advertising costs with PC makers that prominently displayed the Intel logo on their products. By the end of 1991, some 300 PC manufacturers had joined the program, which Intel supplemented with splashy television advertising. The hugely successful campaign cemented Intel’s primacy in the PC market.

The 1990s also saw the emergence of the Wintel duopoly: computers running Intel chips in combination with Microsoft’s Windows operating system. With Intel delivering continually faster and higher-performing chips and Microsoft building better software products and new applications, consumers and businesses were upgrading their PCs every three or four years.

In the mid-1990s, Intel created the Pentium chip, which would transform computers into multimedia entertainment devices that could serve up more than spreadsheets and word-processing software. The Pentium, combined with the new Windows 95 operating system, gave a big boost to Intel’s sales in the late ’90s.

Intel’s venture capital business, meanwhile, was experiencing growing pains. Some of its early investments lost money, prompting Vadász to develop a 17-page document that included venture industry standard terms and conditions and laid out the due diligence process by which Intel would identify and invest in companies.

The goal from the start was to gain knowledge of and promote key technologies. In the late 1990s, Intel expanded its investments beyond PCs into Internet-related companies such as EToys, IVillage and CBS SportsLine. Intel also plowed money into companies building the semiconductors, software and other infrastructure underlying the information superhighway, including Broadcom, Inktomi Corp., Marvell, Red Hat, Research in Motion and VA Linux Systems. But the Intel venture capitalists didn’t sit on boards or get into the daily management of companies. Vadász felt the venture group’s strength was in strategy, technical areas and marketing.

In 1998, Barrett became CEO. He faced, among other things, skeptics who worried about the continued dominance of the Wintel duopoly in the Internet age. Apple’s computers, resurgent in the dot-com era, didn’t use Wintel, while Sprint Corp. and Palm Computing offered devices that downloaded information from the web without Intel technology. Analysts said the PC was dead.

While Intel senior management worried about the Internet and the effect it would have on the company, Intel’s venture capitalists were busy investing. In 1999, Vadász changed the name of the group to Intel Capital; that year it invested $1.39 billion in 279 companies. At the same time, other technology companies, including Dell Computer Corp., Oracle and Sun Microsystems, were imitating Intel’s corporate venture efforts. U.S. companies accounted for $7 billion of the record $48 billion invested in start-ups that year, helping to fuel the frenzy among public and private investors for Internet-related technology enterprises.

Barrett presided over Intel during a turbulent market. He recognized the Internet revolution and the possible shift away from PCs. He spearheaded Intel’s expansion into the communications networking business, acquiring a string of companies. Under his leadership Intel also built chips around an ARM core for mobile phones and set-top boxes. Barrett’s stated objective was for Intel to become a communications company. He recognized that PCs and servers could become commodities, and he wanted to expand.

Intel Capital got a big test of its strategic importance when its parent was looking to grow demand for its Centrino laptop chip. The chip’s mobile technology was sophisticated and could be a boon to users, but it needed hotels, coffee shops and other hot spots to be equipped for wireless. In 2002, Barrett said Intel would invest $150 million in companies developing Wi-Fi technology, in addition to the $500 million it had already committed. “We invested in companies to make wireless ubiquitous,” says mobility group head Flanagan. Intel Capital invested in services companies IBahn and IPass, and in hardware and software makers AeroScout, AirMagnet, Bluesocket and Nomadix.

Sodhani was appointed president of Intel Capital in 2005, after more than 15 years managing Intel’s cash and structuring deals, and he started to fix what he perceived as the limitations of the group. Intel Capital had been criticized for being unfocused, but it also had a huge success under its belt as a result of supporting Intel’s wireless move. That same year Otellini took over from Barrett. He immediately recognized that Intel’s strengths were in computing and its process for making chips. Seeing the success of Intel Capital and Centrino, Otellini wanted Sodhani to turn that trick for what he calls the digital home, in which computers are a part of everyday appliances such as televisions.

“Arvind was bowled over by our technology, but you wouldn’t get this impression from him initially because he’s a man of few words, to say the least,” says Bazylevsky. “This guy’s brain is working overtime. He’s already thinking about the next several chess moves that Intel has to make to stay ahead of the curve.”

Though the Intel Capital president turned to his lieutenants outside the room and told them the investment was a go, Bazylevsky didn’t know whether he had gotten a thumbs-up or a rejection. After Sodhani approved the investment, Bazylevsky talked to other venture firms that were expressing interest in his company. But Music Mastermind came back to Intel Capital because Bazylevsky knew the firm had real staying power; was flexible on the terms of the deal, including its willingness to invest alongside angel investors; and could offer industry relationships he couldn’t get elsewhere.

Under Sodhani, Intel Capital has developed an investment process that allows it to compete for deals swiftly while conducting thorough due diligence. The first step is the deal concept meeting, held every Tuesday, to decide whether Intel Capital will pursue an opportunity. The meeting includes Sodhani, who ultimately must approve every deal; the managing director and investment manager of the investment sector involved in the deal (such as software); plus representatives from treasury, legal and the appropriate corporate business unit. They focus on whether a deal meets Intel’s strategic objectives and discuss the business model, competition, high-level strategy, management team and valuation of the company in question.

If the deal gets a green light, the team kicks off the formal due diligence process, including primary and secondary reference checks, conversations with customers, financial modeling and some discussions with the company of terms and conditions. Intel Capital will pull people from Intel Corp. to assess the technology itself. The team puts together an investment proposal authorization document and PowerPoint presentation — summarizing all aspects of the company, the due diligence, strategic alignment with Intel, deal terms, status of the negotiation and marketing plans — to be delivered at Sodhani’s Tuesday management review committee meeting for final approval. The group looks at 3,000 to 5,000 companies a year and makes about 150 investments, including follow-ons. (The managing directors, such as Flanagan, have some authority to approve follow-on investments on their own.)

Sodhani redefined Intel Capital so it would be the lead investor on more deals, take more seats on the boards of its portfolio companies, put money into companies regardless of their stage in the development cycle and start to do follow-on investments. “Our view had been that we wanted to get the companies going and then we wanted other investors to do the follow-on,” says Sodhani. “It’s probably a flawed logic.” From his experience as treasurer and overseeing M&A for Intel — he’s worked on every deal except the McAfee acquisition (70 acquisitions in total) — he knew that follow-ons were critical to the long-term health and strategic success of investments.

In 2006, Otellini decided to sell the ARM-based chips to Marvell and move on. He didn’t want to be a me-too producer of ARM products. Instead, he believed that mobile phones and other gadgets would evolve from simple communications devices into minicomputers. Otellini started pushing Intel down the path of taking its own computer architecture that was already in desktops, notebooks and servers and creating a very low-power chip that would go into a phone. The software community could then reuse the applications they had designed for Intel architecture for any device. Otellini believed that Intel could reduce the power consumption of its chips to be competitive with those based on ARM technology and also offer a tremendous amount of differentiation, while providing architecture consistency and software compatibility. The trick was to convert Intel’s chip-making road map in a reasonable amount of time. Changing chip manufacturing doesn’t take months; it takes years.

Sodhani, meanwhile, was busy reorganizing Intel Capital. Widely known in the technology industry as a deal guy who negotiates terms that leave both parties smiling, he consolidated the treasury staff that had been working on transactions into Intel Capital. More important, Sodhani ramped up the group’s global footprint, especially in the emerging world. With two out of three PCs being sold outside the U.S., Sodhani has used Intel Capital not only to find innovation abroad and support its products but also to develop fledgling computer markets in burgeoning regions.

Intel Capital was one of the first venture capital investors in Brazil, which is on track to be the world’s third-largest market for PCs this year. David Thomas, who joined the treasury group to work on deals 12 years ago, just as the dot-com bubble was about to burst, and now heads Latin America for Intel Capital, says “Brazil wasn’t even on the map” when he went to São Paulo with his wife in the mid-2000s. “At the time, that was where Intel Corp. was headed, so that was where Intel Capital was headed as well,” explains Thomas.

Intel Capital initially focused on what it calls IT acceleration: building a computer-­friendly environment complete with online gaming and other software and hardware so consumers ultimately would buy more PCs — and Intel would sell more chips. Intel Capital invested in infrastructure such as Chile’s Sonda, a motherboard manufacturer. To make its process more efficient, Intel Capital asked Intel’s manufacturing group to send a team to Sonda and helped the company build a world-class foundry.

China, with its enormous population of potential computer users, has been a big part of Sodhani’s global strategy. Richard Hsu, who heads Intel Capital China, says venture capital is still new to the world’s second-largest economy. Intel, one of the first venture investors in China, has a significant advantage over other companies that are scurrying to plant a flag there because of the chip maker’s strong brand and cachet. Hsu, whose family emigrated from Taiwan to the U.S. when he was six, moved to Beijing in 2004 for Intel Capital. The Chinese computing ecosystem is much less developed than that in the U.S., he says, but Intel can offer Chinese entrepreneurs eager to associate with its brand the technology and marketing know-how that independent venture firms can’t. Hsu says, however, that Intel refuses to chase hot deals.

Sodhani says that behind the restructuring of Intel Capital that began in 2005 has been a “hit-it-out-of-the-ballpark proposition.” One way Intel Capital tries to do that is by introducing its portfolio companies to its biggest global clients. Lee Sessions, head of business development and marketing, leads an organization within the firm that sponsors about 70 Intel Capital Technology days a year. For these events his staff picks ten to 12 portfolio companies to present to large corporations such as Comcast Corp. (and CEO Brian Roberts always shows up).

“They’re not going to get the time of day from the decision makers, because they are small companies,” says Sodhani. “But because they are backed by and introduced by Intel Corp. and Intel Capital, people give them a lot of credence.”

Sessions adds: “We’ve talked to some really large customers, and they say, ‘Well, why should I trust this small, dinky little company?’ The reason is because once we’ve made these types of investments, as Arvind says, we will continue to support them with follow-on deals.”

Intel Capital has redefined itself under Sodhani, who knows that corporate investing has had its pitfalls and the competition for stakes in hot companies can be fierce. He says that not only can Intel help small companies gain marquee clients, it can help start-ups gain real technology know-how.

The firm is also pitching its intimate knowledge of the capital markets to entrepreneurs. Some 450 of the companies in which Intel has invested have gone public or been acquired — a nearly 40 percent success rate. Although the IPO window has opened and closed through the years, Intel Capital has been able to help companies reach financial targets and launch the right products to make them attractive to investors.

Sodhani is quick to stress that he reshaped Intel Capital to equally emphasize the financial and strategic objectives of a deal. “If a company is financially successful, more than likely our strategic objectives have been realized, because a healthy, successful portfolio company, from our strategic objective, pays,” he says.

“We’re now graded on how our investments perform financially and strategically,” adds Latin America head Thomas. “In the old days Intel looked at us as a resource; there wasn’t accountability.”

Even in the wake of the financial crisis and the ensuing volatility, there is a lot of capital flying around in the venture world. Intel Capital’s reorganization under Sodhani makes sense in terms of being able to compete with the best independent venture firms. Keith Larson — who oversees semiconductor equipment and materials, electronic design automation tools, disruptive memories, biotechnology and health care, and nanotechnology, an Intel Capital sector clearly associated with Intel’s core business — says Sodhani has made sure that every deal is analyzed in terms of its internal rate of return, the standard practice at independent firms. Executives are compensated in part based on that metric.

“That’s a big behavioral change when you compensate people that way,” says Larson, 53, who was a general partner at a small venture capital fund for nine years before joining Intel in 1996.

Although Larson doesn’t focus on emerging technology, he is looking for innovations for Intel’s core microprocessor business, cash from which is used to fund other new businesses. One of his mandates is to keep the silicon industry on pace with Moore’s law: to make chips perform better while using less power. Larson is also investing in businesses that keep costs down for Intel manufacturing and help the company’s critical supply-chain partners stay healthy. In 2005, Intel Capital invested in a Fremont, California, company called Crossing Automation that focused on lowering the costs of chip fabrication with a unique design that eliminates a large number of moving parts in a piece of equipment. At the same time, Larson’s team was helping a troubled supply-chain company called Asyst with an acquisition and additional financing. Ultimately, Fremont-based Asyst went belly-up, but Larson’s team helped Crossing Automation buy the assets out of bankruptcy. That deal allowed Intel to maintain a healthy supply chain for its equipment and increased the size of Crossing Automation by many times its revenue.

Smart TVs are on the other side of the spectrum. This is a category that Otellini turned to Intel Capital to help create from scratch. Marc Yi, who heads the digital home group for Sodhani, says the Smart TV initiative is part of Intel’s view of the so-called compute continuum, where sophisticated computing power is part of everyday devices. Yi says Intel Capital has invested in core silicon companies, content providers and advertising firms that live in the Smart TV ecosystem.

“When I speak with the enterprise, I speak to the brain; when I speak to you, to the consumer, I speak to the heart,” Eden explains. “I’m proud of my microprocessor’s 1.2 billion transistors, the most complicated thing in the universe besides human DNA, but my wife isn’t impressed by technology. The transformation to the consumer means that we need to move from pure performance, which is relevant to the enterprise, to the user experience. That doesn’t mean you don’t need performance. It means my wife, the consumer, is interested in what the performance can deliver.”

Eden loves to challenge people about the tablet’s fun factor versus its true usefulness. During an interview he offers up a free iPad in exchange for a reporter’s laptop for a month. “Tablets are to consume; laptops are to create,” he says. In a recent meeting with analysts, Eden noted that everybody was busy typing away on their PCs, writing about the world being taken over by the tablet. “Everybody is typing, so I said, ‘The first thing you do tomorrow morning, comma, is buy a new PC, comma, in order to write your stupid article, comma, about the death of the PC. Full stop,’?” he says, in a heavy Israeli accent.

The PC was a great business for many years, with Intel driving the price down and enabling the explosion of the Internet, Eden adds. “We didn’t see the consumerization of the PC,” he admits. “For this reason we didn’t move fast enough.” But he emphasizes that Intel is not necessarily behind: “I never try to close any gap. The minute you try to close the gap, your competitors move forward. We’re trying to shoot ahead and complete the PC revolution.”

Eden is busy working with Intel Capital’s Flanagan to scope out companies that can, among other things, create true user-friendly applications for the ultrabook. In the past, he jokes, “user-friendly” meant you needed many friends to learn to use many PC applications, including the popular Photoshop program. He’s looking to turn that complexity on its head, while maintaining peak performance. When asked about the continued competition from the tablet, he says, “Users will be hooked on my performance.”

As for Intel Capital’s role in readying ultrabooks for the market, Eden is quick to point to the Centrino wireless success. Wireless was the second big transformation to hit Intel; the first was the rise of video and the consumer in the mid-1990s. Intel is betting that the third will be the transition from the traditional PC to the ultrabook. If Intel Capital is the secret weapon of the corporation, Eden is ready to use it to extreme effect.

Janine Kutliroff, CEO and founder of Omek Interactive, the gesture technology company in which Intel Capital invested for the ultrabooks project, says Sodhani perked up within minutes of learning about the intricacies of the company’s technology and how it could transform the way users interact with a computer.

Intel CFO Smith, who like the rest of the executive team has spent his entire career at the company, challenges the idea that Intel was late to the mobility market, given that devices like the tablet appeared less than two years ago. “There are times when Intel is first to market, and there are times when we aren’t,” he says. “We just solve the problems of physics better than our competitors can.”

Later this year Intel will deliver its first smartphone chip, called Medfield, with phones based on it appearing in the market in 2012. Medfield uses “system on a chip” technology, in which all the components are included on a single integrated circuit, and is the first test of a strategy launched by Otellini to move the company’s whole design methodology to such chips, which offer better power consumption.

Goyal, the portfolio manager at retirement giant TIAA-CREF, says Intel’s entry into the smartphone and tablet market is essential. “This could open the computing market to 1 billion to 2 billion more people,” he says. “If these are $200 devices and you attract these people, the computing market could expand by $200 billion to $400 billion in a very short period of time, representing a significant growth opportunity for the chip vendors. We believe Intel has to participate in tablets to accelerate growth.”

Intel is in a tough spot. It still controls almost 80 percent of the chip market for PCs. That’s the profit workhorse, and it’s a market the company needs to protect. “In order to afford Moore’s law, you have to aggregate more revenue,” says Auguste Richard, a research analyst at Piper Jaffray & Co. “Intel has been successful in manufacturing because they are big. They need volume to maintain that lead.” Growth is slackening in Intel’s core market, and it’s a delicate balancing act between the new and the old, adds Richard.

Otellini remains unfazed by tablets, which he believes will merely add to the whole line of computing devices that are being introduced that will use Intel chips. The real issue, he says, is creating more devices per user and more users overall, especially in emerging markets. He points to netbooks as an example of a product that people feared would dramatically cannibalize PC sales but actually increased sales.

Indeed, Otellini and Smith say the proliferation of devices can only be good for Intel. Both maintain that Intel is the only company that will benefit from smartphones and tablets on the front end and from the demand that they create for computing power on the back end, because of its cloud and server business. The data center group is Intel’s fastest-growing division.

Can Intel Capital be the chip maker’s savior as it faces down the smartphone and tablet threat?

Sodhani is working behind the scenes to support these new devices in a variety of ways. In May alone he made $24.5 million in investments in four companies, including Music Mastermind. The other investments: CrowdStar, a developer of social games on Facebook and mobile platforms, headquartered outside San Francisco; Las Vegas–based IStreamPlanet, a provider of live web broadcast services; and PerspecSys, a Toronto cloud data security provider.

That’s where the story comes back to ultrabooks, a compelling revision of the personal computer that Sodhani and other Intel executives believe will give consumers, even in these economically challenged times, a reason to open up their pocketbooks. The ultrabook, they say, will be more than a toy, with the power to change the world in ways that even Gordon Moore didn’t envision. • •

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