Software firms play financiers

Software companies are acting like venture capitalists these days, pumping investments into strategically targeted firms.

Increasingly, software makers are grabbing an equity stake in other companies to tap into new technology or "cement" joint marketing, sales, or development relationships.

"In 1995, companies began to see how fast the Internet was taking hold. And some companies realized they didn't have the internal products to compete, so they entered strategic partnerships," said Rich Edwards, a managing director at Robertson Stephens, who works in technology mergers and acquisition.

In the past year, for example, PeopleSoft took about a $1 million equity stake in Open Horizon and Microsoft invested about $1 million in Lightspan.

Database maker Informix Software has invested $20 million in both small and large companies since late 1995, said Jeff Hudson, vice president of business development and product marketing. He noted that smaller companies usually require cash and marketing and sales support from Informix, while the database company benefits from their technology.

"We have a technology lead in the database market, and one reason we do is we focus in the technology area we're involved in," Hudson said. "Customers just don't buy a technology; they buy a solution. So we partner with a number of different companies."

A wave of mergers and acquisitions may follow the recent flood of investment deals. "We'll see a number of these investments turn into acquisitions in the future. Software companies can look at it was a way to kick the tires," Edwards said.

He noted, however, that there is no benchmark to gauge how soon investment deals by software companies turn into an acquisition. "Since this level of activity in the software industry is unprecedented, there's not much track record to look at," Edwards said.

But Hudson said that is not the game plan at Informix. "We have made no acquisitions from our investments. There is so much innovation in small companies that it helps us to partner with them," he said.