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Apple Doesn’t Need VC

Apple, Apple, Apple. It’s a drum the business/tech press loves to beat because it supplies a veritable treasure trove of page views. People love reading about Apple.

So it’s no surprise that journalists have taken to speculating on what the iconic company should do with its $12 billion cash stash. BusinessWeek’s Arik Hesseldahl dismisses buybacks and dividends out of hand with little or no explanation before concluding Apple should launch an in-house VC arm.

This is a bad, bad, bad idea that should be assiduously avoided by the computer maker. Apple needs a corporate VC arm like Google needs another YouTube related lawsuit. Corporate VCs gamble shareholder money based on obscure and often poorly defined strategic parameters that can shift unpredictably.

Hesseldahl points to Intel Capital as an example of a successful venture arm supported by a large technology parent company. No doubt the Intel Capital team represents smart money and they’ve been leaders in the globalization of venture capital investing. But it is an organization in flux. We covered staff cuts at the firm last year and the group finally made a profit for Intel last year after five straight years of losses.

But even if Intel Capital doesn’t make bank, at least it has a clear mandate: create demand for Intel chips. Can other corporate VCs boast such a purpose? Most that could not have since folded or spun out.

What then, would be the purpose of an Apple VC? Creating demand for its products seems silly, since the company targets consumers directly with flashy marketing. Spawning an ecosystem of small developers for the Mac OS might have been a useful goal five years ago, but interoperability is at an all time high and I certainly haven’t heard any complaints from Mac users, or even Mac skeptics, about a lack of software. It seems like less of a pressing issue as more applications migrate online.

If Apple wanted to do something useful with its money, it could tackle a stock repurchase program. Academic research shows that small buybacks can goose up share price by 3% the day they’re announced and that buybacks involving 15% or more of the shares see stock prices shoot up an average of 16 percent. The market usually interprets a repurchase program as a sign of strong financials and future confidence about it operating results. It’s also possible, of course, to view the repurchase as a sign that management doesn’t see any big opportunities on the horizon.

Maybe the best move for the company is to use its cash reserves to streamline its production facilities and lower its component costs. The company successfully did that with flash-memory—a move that no doubt improved the margin on each iPod it sells. Maybe there’s an opportunity to do that with some key component of the iPhone.