Two weeks ago, Morgan Stanley surprised even the most weathered of venture capital investors.
On its own dime, the Wall Street financial giant hosted a dinner in which Guy Chiarello, the company’s chief technical officer, and his deputies spoke to VCs about the IT problems they’re facing at Morgan Stanley and how they’d like to solve them.
Why is this a big deal?
Because even in a recession, this year Morgan Stanley will spend about $1.3 billion on software and hardware for its gargantuan IT infrastructure. The speakers at last month’s dinner will ultimately decide what Morgan Stanley will buy.
These are folks the VCs want to know well.
Encouragingly, according to investors who attended, Morgan is interested in buying from startups, unlike many other big corporations who fear that small companies might not have the staying power to support their products.
“Rather than battening down the hatches,” they’re opening up to the ven- ture community to say, ‘Please fund innovative companies’,” said Lou Shipley, an entrepreneur-in-residence at Highland Capital. “Technology innovation gives them a competitive advantage.”
Morgan isn’t the only financial firm that has reached out to venture capital investors. Senior IT management at Goldman, Sachs & Co., for example, came to Boston in June to talk to individual VC firms.
Nevertheless, “this was fairly unusual,” said Mike Hirshland, a general partner at Polaris Venture Partners.
Shipley and other attendees report that Morgan is looking to startups for innovation not in hardware but in software, a sector that many venture capitalists were dismissing just last year.
“The single greatest point they made was that the innovations are in software,” Shipley said. “Period. Full stop.”
Morgan has good relationships with big hardware providers like IBM Corp., Intel Corp. and Cisco Systems.
“But I don’t think they’re looking for software innovation to come from them,” Shipley said.
Specifically, attendees said, Morgan is making a big commitment
to Linux-based systems running on commodity hardware. It gives them more flexibility and allows their in-house programming staff, which investors say is substantial, to better develop applications.
That said, Morgan is looking for good software products from outside vendors to beef up security, ease the management of desktop computers and their applications and improve management of data storage.
“There’s definitely a huge need to manage more with fewer people,” said Jo Tango, a general partner at Highland.
That echoes what AT&T CTO Hossein Eslambolchi said at last month’s Next Generation Networks conference in Boston. Innovation in carrier networks will be born of software, not hardware, he said.
But given recent trends in software investment, that innovation may be hard to come by. These days, software companies seem to get funding only after they’ve landed a customer or two.
Bootstrappers, take notice.
Morgan, of course, wasn’t just looking out for its IT department by hosting the dinner.
“If we hear about new companies that can service our IT needs, fantastic,” said Chris Pasko, the head of Morgan’s East Coast technology group. “But (the CTO and his deputies) are marketing the firm the way we’re marketing the firm.”
There’s precious little investment banking business flowing from the VCs right now, but Morgan Stanley expects that will eventually change. Pasko is preparing for that day by making sure his VC relationships are solid.
“It’s basically a way by which Chris Pasko endears himself to the venture community by bringing us a significant customer,” said Charley Lax, managing general partner at GrandBanks Capital.
But if Lax is any indication, Pasko scored big points with the 45 to 50 investors in the audience, even if they were aware of his motives.
“It was awesome,” Lax said. “Absolutely fantastic. This is a recessionary market where our IT companies have to fight for every customer, and here’s the CTO and his lieutenants presenting to us at an intimate dinner their failures and plans for mission-critical technologies. Any firm that wasn’t there did a disservice to their portfolio companies.”
