SAP Goes on the Startup Hunt

The software company's corporate venture arm will be critical

   

SAP SAP Goes on the Startup HuntSoftware giant SAP (NYSE:SAP) turned 40 this week, and while the company continues to be a dominant player in the business software category, a cloud is looming.

Actually, the cloud is looming.

Cloud technology allows businesses to access software from remote data centers, which translates into much lower hardware and personnel costs. The applications tend to be easier to use and usually are sold on a monthly subscription basis.

The good news is that SAP has taken some big moves to move into the cloud. Of course, late last year the company shelled out $3.4 billion for SuccessFactors, a top player in cloud-based human capital management (human relations).

But this is not the company’s only strategy. SAP also is leveraging its corporate venture fund, according to a Bloomberg report.

It’s true, corporate venture funds have a shaky track record, but SAP has put together a good structure. The fund — totaling $353 million — is independent from its parent, which helps to reduce the politics and bureaucratic inertia. The goal of the fund is to generate strong returns — not to be a way for the parent company to form partnerships or pull off acquisitions.

The fund needs to analyze a company as an investment, looking at its product line and management team. It also must have a good grasp of the potential market. This process is far from a science and failure is common. Such things are scary for a corporate parent.

But to be successful, a venture arm must be free to take the risks. So in the case of SAP, it has the possibility of getting nice returns by making bets on breakout companies. It also will help SAP learn about new ideas, business models and product concepts — things that could be critical as SAP moves further into new categories like the cloud.

So far, it seems to be working. The SAP fund has snagged big wins like ExactTarget (NYSE:ET) and even LinkedIn (NYSE:LNKD). It also had some portfolio companies that were sold to Oracle (NASDAQ:ORCL) and Tibco (NASDAQ:TIBX).

SAP will still has a big fight ahead. The cloud is a disruptive change, and it will mean reinventing the core business. But so far, it looks like SAP is serious about the climate change and is willing to make the necessary moves to celebrate many more birthdays.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”“All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.


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