Visa International, which has built a $400 million portfolio out of $30 million of investments in technology companies, wants to let banks in on the action.
Having obtained approval from its board of directors last month, the card association is hatching plans to establish the Visa Technology Fund, a venture capital partnership that will be open to member banks.
It will build on the Visa strategic investment program, which since 1994 has brought the company early and immensely profitable positions in high- flying Internet start-ups such as Yahoo Inc. and Verisign Inc., and in more modest and still privately held payment services ventures such as Cybersource Corp. and Trintech Group.
"This is a great way to gain some advantages and make some money in the process," said Todd C. Chaffee, the Visa executive vice president who has been running the investment program and will head the expanded fund now in formation.
He said the San Francisco-based organization is "still sorting out" how big the fund might get and what it will take to manage it. But he said based on directors' and other Visa bankers' initial reactions, "we have a lot of support. With our financial returns, we should have healthy demand."
The size and complexity require Visa to create a separate, professionally managed offshoot, which Mr. Chaffee said should be operational later in the year.
Though novel for an association and, until this point, a surprising if indirect financial boon to all 21,000 Visa members, venture investing by technology companies is well established.
Josh Lerner, assistant professor of business administration at the Harvard Business School and a student of corporate venture investing, said "98% of corporate venture funds are single-company affairs."
One that is not, Kleiner Perkins Caulfield & Byers' Java Fund, attracted money from many technology companies interested in developing Sun Microsystems Inc.'s Java programming language-and in the process competing against Microsoft Corp. and its Windows standard.
Microsoft is the champion of corporate venture capital, with $3 billion invested, Mr. Chaffee said. Intel Corp. has put $750 million into companies that it views as interesting or complementary, and numerous other corporate investors are at or above the $100 million level.
"Venture capital programs are part of these companies' genetic code," Mr. Chaffee said. "Visa is faced with the reality that technology is impacting our business, and so we watch technology companies carefully."
Visa's own $30 million was relatively modest, but the Internet-fueled initial public offering boom increased that 13 times, with annual rates of appreciation exceeding 200%. Visa has made 20 equity investments, half domestic and half international. Also, half the funding went to early-stage companies and half to those in later, pre-IPO phases of their life cycles.
A $300,000 stake in Yahoo, $1.4 million in Verisign, and $1.5 million in the electronic commerce software company Open Market Inc. brought more than $200 million in gains after they went public.
Visa does not just view an expanded venture program as a potential gold mine for member institutions. It is also a way to gain access to top talent, and to share in the most advanced research and development more cost-effectively than could be done internally.
Harvard's Mr. Lerner said he is studying performance differences between corporate funds that have a purpose linked to business strategy, as Visa's does, and those that do not. "Strategy really is almost everything," he said.
With continuing interest in the Internet and appreciation in stock values, the boom in corporate venture activity shows no sign of letting up. Just last week, BroadVision Inc., a $36 million Silicon Valley company, announced a plan to "give back" by making $10 million available to "venture-funded e-business start-ups." They would join what BroadVision calls the BE4 Network Fund, implying that they are linked to strategy. BroadVision pioneered Internet-based marketing technology and works with American Airlines and Citigroup, among others.
Along more traditional investment banking lines, former Electronic Data Systems Corp. vice chairman Gary Fernandes and ex-First Boston and Kidder Peabody banker Murray Holland said they have formed Convergent Partners, a private equity firm focused on technology and business services.
"Corporate venture capital is always a challenge, and (Visa's proposal) is sure to be one," Mr. Lerner said, because the large number of consortium participants will need to be in tune with the general direction. "It may be that these banks are sufficiently facing common problems and are not so competitive with each other that this will be able to work."
Inviting voluntary bank participation fits into a philosophy espoused by Malcolm Williamson, who became Visa International chief executive officer in October. Whereas all member institutions historically paid the freight for all products and services, Mr. Williamson has said it should be possible for a bank to pay for and use only what it wants. Those who commit funding or equity, as in the Visa Technology Fund, should expect to be rewarded over time.
The fund, with Visa International as general partner and investing banks as limited partners, will be an example of the "commercialization" that Mr. Williamson has talked about, Mr. Chaffee said.
"I won't say it took him a nanosecond after he heard about it to understand what we were about, but it was pretty close," Mr. Chaffee said of the new boss. "Malcolm came in and said we need to do more of this. We also had tremendous support from Peter Ellwood," Visa International chairman and group chief executive of Lloyds TSB Bank in London.
"It is not always easy to work in close partnership with more than 20,000 member banks," Mr. Chaffee said. "This is a chance for us to work with them more directly."
He emphasizes the "strategic gains" that have accompanied Visa investments, which have been associated with business-development goals and working relationships with the portfolio companies.
Visa advertises heavily on Yahoo, the biggest of the Internet consumer portals, which represents the "front end" of electronic commerce, Mr. Chaffee said. Yahoo has enhanced Visa's "brand presence and positioning," he said.
Verisign of Mountain View, Calif., the leader in digital certificates for on-line authentication, is an infrastructure play, he added, while Burlington, Mass.-based Open Market brought "insight into merchant payment systems."
With Cybersource of San Jose, Calif., Visa is working to refine antifraud techniques. Trintech, which has headquarters in both Ireland and Silicon Valley, has worked with Visa on implementing the Secure Electronic Transaction protocol.
With Nuance Communications of Menlo Park, Calif., another equity recipient, Visa is exploring e-commerce based on voice recognition. Ariba Technologies of Sunnyvale, Calif., has contributed to Visa's work in the corporate purchasing arena, and its software is used at the Visa corporate level.
"This is a way for members to leverage their investments in Visa and gain insights into technologies that are changing their industry," Mr. Chaffee said.
Visa has taken advantage of its northern California base to gain entree into the region's venture capital and investment banking circles. Participating banks will likely view that as a plus in making their commitments.
"We are just down the street from Sand Hill Road," Mr. Chaffee said, referring to the main venture capital drag in Menlo Park. "We know all the VC firms and they see us as good strategic partners for the portfolio companies. We get a tremendous deal flow from these firms, investment bankers, and accounting firms. And we get a lot of unsolicited business plans from start-ups."
In this intricate game, Visa fully intends to make the big leagues.
"Visa is striving to be competitive in a marketplace where companies like Microsoft and Intel are moving at light speed," said Mr. Chaffee, who worked at Norwest Corp., American Express Co., and TRW Information Services Group before joining Visa in 1994 to take responsibility for advanced payment systems and later emerging technologies and alliances.
"Those technology players will inevitably erode the banks' payment franchise," he said. "To stay competitive, we had no option but to pursue something like this."
D. James Bidzos, the longtime president of RSA Data Security Inc. and an active member of the Silicon Valley venture capital community, has joined the board of Trintech Group.
Trintech, a leading provider of electronic payments software and a beneficiary of Visa's strategic investment program, had its origins in Europe and helped fuel a major push in the Americas with a $20 million private financing last summer.
Tolmi LLC, Mr. Bidzos' investment management company, participated in the financing, as did Security Dynamics Technology Inc., the parent of RSA and a leader in payment system and enterprise security technologies.
After 13 years as president of RSA, the data encryption company based in San Mateo, Calif., Mr. Bidzos was recently named vice chairman of Security Dynamics.
Trintech chief executive officer John McGuire said "Jim brings to our board great technical insight, notable business acumen, and unparalleled experience in the issues surrounding electronic payment security. He is committed to help shape the future strategic direction of Trintech . . . His leadership positions in Trintech partner companies like RSA and Verisign will be decisive in the development and success of Trintech."
"Real-time payments on the Internet are one of the next big waves," said Mr. Bidzos. "Trintech is very well positioned to be the world's leading provider of such products and services. In particular, their long experience in dealing with real-time clearing of payments in multiple currencies puts them out in front."