By Sarah McBride
SAN FRANCISCO (Reuters) - Software giant SAP AG said it is allocating more than $650 million to a new venture fund, SAP Ventures Fund II, showing the growing role that corporations are taking on in funding the world's youngest companies.
Investing cash into start-ups via corporate venture arms is increasingly popular among big companies, while providing more competition to traditional venture capitalists. Some 10.9 percent of venture dollars came from corporations in the first half of this year, according to the National Venture Capital Association, up from 8.4 percent for all of last year and 7.7 percent in 2011.
The rise comes as many companies have slashed research and development operations, cutting their insights into emerging technologies in their industries. Instead, many are beefing up their venture arms.
Palo Alto, California-based SAP Ventures is set up as an independent entity, but its investment cash comes from SAP -the maker of software tools that help companies keep track of their financial, employee and supply-chain records.
By investing in start-ups, it gets an early look at the companies and ideas that might one day help it build its business. The start-ups get an introduction to a powerful global player that can help them build theirs.
"We want to be known as the best fund to come to when an entrepreneur wants to go from proven product to really scale that product," Nino Marakovic, chief executive of SAP Ventures, said in an interview. The new fund will focus on information technology for enterprises, he said.
SAP Ventures has been active already with its previous funds, which have invested in companies such as cloud-storage venture Box and storage company ScaleIO. They include SAP Ventures Fund I, a $353 million fund launched in 2011, and SAP HANA Real Time Fund, a $405 million fund that invests in venture funds run by others, including Data Collective and August Capital.
The new SAP fund stands out for its size, which puts it in a league with firms such as Bain Capital, Battery Ventures, Canaan, and Lightspeed Venture partners, which raised funds in the $600-million-range this year. While smaller than the handful of $1 billion-plus venture funds raised by players such as New Enterprise Associates, SAP's $650 million would still put SAP in the top 10.
Corporations typically do not appear in the rankings of top venture funds, because they operate differently from traditional venture funds, which raise cash from endowments, institutions, and the like.
In contrast, corporations simply furnish their venture arms with the cash they need, removing the need for outside fund raising. They usually do not have to file paperwork with the Securities and Exchange Commission about the creation of their venture businesses.
The corporations' cash comes at a time when more start-ups are launching. During the first half of this year alone, some 242 Bay Area companies raised seed money, according to consultancy CB Insights, far ahead of the pace last year. While it is relatively easy to find the early-stage funding known as seed and angel rounds, entrepreneurs say that moving onto the next stage can be tough.
Not everyone welcomes the influx of cash. Corporate venture money could be contributing to some sky-high funding rounds for young companies, venture capitalists say, and helping to drive up valuations overall.
Marakovic says the idea that corporate cash is a significant contributor to rising valuations is "hogwash" and blames the current ecosystem, where large numbers of funds are all competing for a piece of the hottest venture deals.
One of the highest-profile corporate venture arms is Google's Google Ventures, which has about $1.2 billion under management and invests about $300 million per year, including in companies such as transportation service Uber and Internet-connected thermostat system Nest.
Intel's Intel Capital invests between $300 million and $500 million per year, according to a spokeswoman, and has about $1.5 billion under management. Its investments include payments service Clinkle and wireless company Vocera.
Mobile-phone chipmaker Qualcomm has about $800 million allocated to venture capital, according to a spokesman, with investments including Chinese handset company Xiaomi, and navigation service Waze.
(Reporting by Sarah McBride; Editing by Leslie Adler)