Intel Capital squirms as chipmaker looks to cut $1B: Arvind Sodhani remains steadfast, tells PE Week he forsees growth

Arvind Sodhani won’t be able to get a good night’s sleep until August.

The president of Intel Capital has to wait until the end of July to find out if his changes at Intel Corp.’s venture arm – which have increased overall cost in hopes of bigger returns down the road – will be allowed to stand or have to be dialed back.

In a response to Wall Street’s complaints about the chipmaker’s declining profits, Intel Corp. CEO Paul Otellini announced on April 27 that he was launching a 90-day “wholesale” company review aimed at cutting $1 billion in costs. “We are very well aware of the realities of our current and future business outlook and we are taking actions to address these realities,” Otellini told securities analysts. “No stone will remain unturned. We will restructure, resize and repurpose Intel for the future.”

Wall Street applauded Otellini’s remarks, but Intel Capital watchers sounded the alarm. “Is Intel Capital’s cycle about to end?” asked Paul Kedrosky, who writes a popular VC blog and is a venture fellow with Canadian venture firm Ventures West. After all, why wouldn’t the 200-person investment unit be on the chopping block if the company were serious about shedding non-core assets?

Sodhani tells PE Week he doesn’t expect his group to be shut down or spun out. In fact, he buoyantly predicts additional growth. “We will continue to spread ourselves out globally, and continue to expand the programs we’ve already laid out,” he says. “I don’t foresee too many more changes.”

But when pressed, Sodhani admits that the 90-day review is still in its early stages. What this means is that Intel Capital stands at a possible roadblock on its path toward continued growth.

Intel Capital is 15 months into a strategic abandonment of its passive “drop and run” investment philosophy. Sodhani, a 25-year veteran of Intel, took the helm of Intel Capital in March 2005. Since then, he has taken it in a new direction with a more hands-on approach that could best be described as “stay and build.” Intel Capital is now leading more deals in more countries than ever before.

Sodhani has instituted a four-pronged plan to transition Intel Capital from a passive to active investor: One, Intel Capital began leading a significant number of deals, contributing at least 50% of the capital to the deals that it led and participating in follow-on rounds.

Two, it started to do more to help portfolio companies with programs like Intel Technology Days, during which Intel Capital pros spend a full day at a portfolio company and introduce it to various outside executives.

Three, it began to aggressively court the global market, with 60% of the amount it invested in 2005 going to companies based outside of the United States, up from 45% in 2001.

Four, Sodhani changed Intel Capital’s antiquated compensation structure to better compete with independent VC firms, partially tying Intel Capital’s investors to the unit’s internal rate of return.

Sodhani’s changes seem to make sense, but they have also increased Intel Capital’s short-term cost of doing business at a time when the corporation is looking to make broad cuts.

Some current Intel Capital staffers are unsure if they are viewed as essential or expendable. “We get told all the right things, but I’d be lying to say people aren’t a bit apprehensive about the 90-day review,” says one Intel Capital employee who asked not to be named.

Most people interviewed for this article, however, believe that Intel Capital still does not cost its parent enough money to be worth cutting down. They point out that the $265 million it spent on investments in 2005 is chump change for a company with $114 billion in revenue, particularly because Intel Capital’s deals are balance sheet transactions without an impact on profit and loss statements.

“I think there is zero possibility that Intel Capital would ever spin out, at least with its current management,” says Claude Leglise, a former Intel Capital vice president who left last year to become a managing director at W.I. Harper Group. “There might be pockets of people who think it’s a lovely idea to be independent, with Intel as an LP, but the two sides gain too much from one another to seriously consider separating.”