SAP's Big Bankroll

The Oracle foe backs new NetWeaver partners.
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Locked in a struggle with

Oracle

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and

IBM

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to dominate the software landscape,

SAP

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is making small but carefully targeted investments in innovative companies.

The German software giant has run its own venture arm for a decade, but now the company has started a new fund that will funnel money to partner companies that are developing applications around NetWeaver, SAP's software platform.

SAP expects the investments to be profitable. But the real goal of the fund is finding companies that will propagate NetWeaver, a large and complex set of software that competes with Oracle's Fusion Middleware and IBM's WebSphere, says Zia Yusuf, an executive vice president at SAP and co-manager of the company's NetWeaver Fund.

SAP, whose initial investment of $125 million in the NetWeaver Fund isn't large, will not sink more than $5 million into any of the companies that NetWeaver backs. And unlike the typical venture fund, Yusuf's organization will only talk to companies that already have a solid working relationship with SAP and have technology that will add value to NetWeaver.

But the NetWeaver Fund, says Gartner analyst Yvonne Genovese, is part of a much larger plan. "Building an ecosystem is the most important thing SAP can do. Ultimately, SAP wants to make itself the de facto standard for software," she says.

SAP is building an ecosystem, or network, around NetWeaver that is composed of companies selling related applications and developers who write to it, as well as reseller partners and consultants.

The issue of standards has become critical as the industry has moved to embrace trends, such as service-oriented architecture (SOA), which enables the creation of applications that are built by combining loosely coupled and interoperable services.

SAP's approach to SOA is complex, but simply stated, the company is breaking up its large applications into modules that can be delivered as a service, explains Genovese. Each component, or mini-app is "wrapped" in NetWeaver and delivered to the customer. "It's sort of a stealth strategy for world domination," she jokes.

But getting NetWeaver in the door is a serious business. After a slow start, SAP has done well selling NetWeaver into its huge installed base, but growth has slowed, says Bert Hochfeld, who runs a research firm under his own name.

"SAP needs hot applications. At the end of the day, it doesn't have them," he says.

Moreover, SAP

missed its targets in the second quarter, a stumble that led some investors to fearing that the company -- and IT spending in general -- may be slowing.

SAP, of course, would take issue with Hochfeld, but the addition of new and useful applications is a big plus for any software provider.

Consider Redwood City, Calif.-based

Questra

, the first company to win the support of SAP's NetWeaver Fund. Its software can be installed on "intelligent devices" -- complex equipment controlled by embedded microprocessors.

Once installed, technicians can monitor the performance of it from the factory and find -- and sometimes correct -- malfunctions before the customer is even aware of the problem.

In the future, says Questra CEO Emil Wang, his company's application will exchange information with SAP's industrial-strength enterprise-resource-management applications to locate parts, or schematics or other information now kept in separate data stores.

SAP's plan is not new.

Sun Microsystems

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, for example, had success in the 1990s using a similar fund to seed the development of Java, a now-ubiquitous programming language.

Additionally,

Intel's

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venture arm, Intel Capital, closed 2005 with a balance of $1 billion, money used to develop the market through investments in firms that are developing related technology.

For its part, IBM

acquired two software companies in August, both developers of SOA-related products --

MRO Software

(MROI)

for $740 million in cash, or $25.80 a share, and privately held

Webify Solutions

.

Oracle's major SOA effort is within Fusion Middleware, a rapidly growing segment of its portfolio. The database giant claims its middleware business grossed $1 billion in fiscal 2006, although

there is some dispute about that number. In any case, Oracle is dead serious about middleware in general -- SOA in particular.

SAP is serious, too. But whether it's serious enough to beef up the NetWeaver Fund is unclear. A company representative said that SAP will evaluate the fund's success when the money is used and then decide what to do.

Small or not, Stein Rowe analyst Chuck Jones calls the move "an incremental positive. It shows customers they really are behind the platform," he says.

"But it will take a number of investments and new software to make companies that aren't already SAP customers seriously consider them as a supplier," says Jones whose firm has a "small" position in SAP.