In
1994, researchers at British Telecom developed a piece of software that
has revolutionized the company's ability to deploy its 28,000 field
technicians. Created in the company's BT Exact research labs and called
Taskforce, the software delivers real-time data and has enabled BT to
reduce the appointment time for new customer installation from all day
to two hours. Over the years, as BT's service offerings grew more
complex and its customers more demanding, Taskforce kept pace, growing
steadily in sophistication and capability.
Which posed a problem, actually. By 2001, maintaining Taskforce was
costing BT several million dollars a year - difficult to justify inside
a company focused on communications services, not software. On the
other hand, there were likely other companies that could use Taskforce
to manage their field technicians - making it a prime candidate for
BT's spinout process, instituted in 2000. Thus, after two years in BT's
technology incubator, where it was nurtured with seed capital and
management attention, Taskforce emerged in March 2003 as a new company,
Vidus Ltd. BT maintained a stake in Vidus and became its first
customer. "When we find a unique solution," says Mike Carr, BT's senior
vice president for research and venturing, "the problem is how to give
it market scale. Creating a standalone company is a good way to do
that."
As technology spinouts go, the tale of Taskforce is a noteworthy
success story. It has a happy outcome, both for BT and for New Venture
Partners LLC, the Murray Hill, N.J.-based venture capital firm that has
been working closely with BT on such deals since 2003: In February
2005, mobile resource management provider @Road acquired Vidus for more
than $54 million. Vidus was no fluke, either; BT has spun out eight
other startups in the five years since it created a technology
incubator as a strategic component of its $650 million R&D
operation (see chart). A team of four works with New Venture Partners
to identify technology with commercial potential inside BT's labs.
But BT's promising spinout program is the exception these days.
Indeed, in the whole challenging field of corporate venture capital,
consistently crafting spinouts is proving to be one of the toughest
tasks of all. Yes, there have been some stellar deals over the years -
Xerox Corp. spun 3Com Corp. out of its Palo Alto Research Center in
1979. You can even point to a few successes in the flurry of activity
in the late 1990s, when the IPO markets and venture investing of all
kinds soared in sync; during that period, New Venture Partners
originated as part of telecom equipment provider Lucent Technologies
Inc., a prolific spinner of startups before corporate mismanagement and
the telecom meltdown led to a drastic retrenchment. Still, companies
that can make spinouts a reliable tool are rare. Building a small,
nimble company inside a large, conservative corporation is twice as
hard as building a startup externally, says Heidi Mason, managing
partner of the Danville, Calif.-based Bell-Mason Group, which provides
consulting services to corporate venture groups. "When challenges
arise, unless the company puts the proper structures in place to
protect the new venture, the existing culture tends to win." As a
result, Mason says, the average life span of internal venture groups is
a dismal three to five years.
This isn't because technology spinouts don't have some compelling
logic behind them. As with BT's Vidus, a big company can create a small
one that sells something it would like to buy. A spinout can also
provide an alternative pathway to market for technology not being used
by the corporation. In either case, the methodology is the same:
Identify technology with outside sales potential, incubate it, build a
management team around it, attract outside investors and execute an
exit that nets a return, financial or otherwise, for the corporation.
The incubation period typically lasts between six and 18 months, and
seed funding can range from $50,000 to several million dollars.
And there's still plenty of willingness to attempt spinouts. Along
with BT, Xerox, Unilever, Royal Philips Electronics NV, Agilent
Technologies Inc. and Chevron Corp. are among the companies currently
active in the field. The research-rich information technology,
pharmaceutical and biotech industries find spinouts especially
attractive, but a heavy-industry stalwart such as Caterpillar Inc. can
get in the game as well; it spun out analytical software company Akoya
Inc. in November 2004.
Still, corporate-backed startups face most of the same challenges
that regular startups face, as well as a few that are particular to
them. Intriguingly, some companies, notably Intel Corp. and Boeing Co.,
have maintained their technology incubators but have shifted from
spinning out new companies to spinning the technology back in to
support existing business (see
box). After all, spinning out a new venture means overcoming shifting
economic fortunes, fickle venture markets, management shakeups,
intellectual property concerns and a host of other variables. Finally,
the value of the investments necessary to incubate a startup isn't
realized until post-spin, and many companies just aren't that patient.
That lack of parental patience is, of course, just one aspect of a
cultural divide that hampers all kinds of corporate venturing. Luck is
always part of the startup equation, and most ventures don't survive
incubation.
Of the seven to 15 ventures in the pipeline of Intel's New Business
Initiatives technology incubator at any one time, half fail during the
seed phase; 50% of the remainder don't survive business development,
according to NBI general manager Angela Biever. No amount of due
diligence or market probing can anticipate the hurdles between a good
idea and a viable startup. "A complete buy-in of higher-level
executives is critical," says Jai Das, investment manager for Agilent
Ventures - itself a 1999 Hewlett-Packard Co. spinout. "A spinout is not
always the first priority in the CEO's mind. What he sees is the
possibility of 14 engineers walking out the door. But the more deals a
CEO sees, the more he realizes the opportunity." Plus there's nothing
stopping an employee who believes in an idea from turning entrepreneur
and pursuing the idea on her own, Das adds. Why not negotiate a stake
in the venture?
| British Telecom's spinouts |
| BT's technology incubator has spun out nine startups in five years |
|
Spinout |
What they do |
Where they are now |
Year spunout |
|
Kymata |
Manufactures passive optical components |
Acquired by Alcatel Optronics in 2001 for $117.6 million |
1998 |
|
Psytechnics |
Develops perceptual voice- and video-quality measurement tools |
Operating independently, backed by BT, 3i, New Venture Partners, GIMV and others |
2000 |
|
Asset House |
Develops content-services infrastructure software |
Operating independently, backed by LMS Capital |
2000 |
|
Venation |
Develops content-delivery enabling software |
Closed in 2004 |
2000 |
|
Exago¹ |
Develops knowledge-management software |
Acquired by Corpora in 2004 for £4.9 million ($9.3 million) |
2002 |
|
Vidus² |
Develops software to schedule and manage large, complex mobile workforces |
Acquired by @Road in 2004 for $54 million |
2003 |
|
Azure² |
Develops revenue assurance products for the telecom industry |
Operating independently |
2003 |
|
Evolved Networks² |
Develops network-planning tools for telecom industry |
Operating independently |
2003 |
|
Microwave Photonics² |
Enables switched distribution and Radio-over-Fiber transmission of wireless signals |
Aquired by NextG Communications in 2005 for an undisclosed price |
2003 |
¹ in partnership with ANGLE Technologies
²
Spinouts completed in partnership with New Venture Partners, which
acquired exclusive rights to spinout BT technologies in 2003
Source: British Telecom |
Agilent's effort to mine internal R&D for commercial
gems is still an impromptu operation, rooted in the venture team's
familiarity with research and business unit needs. Das says the company
is exploring a more formal mechanism to facilitate spinouts. For now,
they are as much about serendipity as structure, with companywide
forums keeping researchers, business managers and the venture team
connected.
Without support from the board and corporate leadership, internal
venture groups are vulnerable to every management shakeup, every
financial bump in the road. Consider Boeing's Chairman's Innovation
Initiative, an incubator program launched in 2000 to foster an
entrepreneurial culture and generate revenue by spinning out new
companies.
Boeing employees submitted business ideas to a Web site that has
since become a treasure trove of innovation. CII spun out a handful of
companies - including message security software maker MessageGate Inc.
in 2003 - and the incubator's budget was increased to $200 million,
according to its former director, Carter Williams. But that was before
Philip Condit resigned as CEO and CFO Michael Sears was fired in
December 2003 over alleged ethical lapses involving stolen documents
and improper hiring.
"Phil Condit and Mike Sears believed strongly in the CII and
understood the subtleties of cultural change," says Williams, who left
Boeing in October 2004. "When you bring in new leadership facing
multiple challenges, it is difficult to explain to shareholders that
this investment is a good long-term strategy."
CII survived but with a new charter to incubate technologies that
are central to the core business and can be spun back into Boeing. The
company's 5-year-old practice of investing in external venture funds
wasn't so lucky. The program was scrapped earlier this year.
Even as corporations become more outward-looking in the management
of IP, the fear of allowing those assets to spin out into a new venture
can still trip up a promising opportunity. A company, after all, may
invest millions conducting research and securing patents, and there's
no precise science to calculate the risk-reward ratio of letting that
IP go. "You have to be careful at which point you make the decision
that spinning out is what you want to do," BT's Carr says. "But having
a great racehorse that you never let run doesn't work. "
Separation anxiety isn't exclusively an executive-level affliction.
The biggest deal breaker for Agilent spinouts, according to Das, is
that the development team is unwilling to let go of the job security,
camaraderie and other benefits of corporate life. "They're not always
entrepreneurial," Das says. In the end, though, the employee makes the
decision to stay or go.
Nearly every corporate spinout is accomplished in partnership with
outside investors, who ideally are invited in during the later stages
of incubation. Yet there are legitimate reasons why some VCs steer
clear, including a corporate parent that is too controlling or overly
focused on how the new venture can meet its own needs. In addition,
unlike with a traditional investment, early-stage VCs are often
presented the deal before the business plan is firm and a management
team is on board.
"Ask venture capitalists whether they would invest in a B team with
an A idea or an A team with a B idea. Most will choose the latter,"
says Robert Rosenberg, an NVP partner and a former member of Lucent's
internal venture team. "[Corporate spinouts] break that rule."
There is an upside for VCs, namely the ability to leverage the
investment already made in a viable technology with, in some cases, the
corporate parent as a large, reliable customer. A handful of VC firms
are making corporate spinouts an active part of their portfolios.
Blueprint Ventures has directed 64% of its investment activity into
corporate spinouts. NVP has exclusive agreements with Royal Philips
Electronics and BT to spin technology out of R&D labs. BT has
already benefited from NVP's ability to attract experienced and
entrepreneurial managers, says Carr. NVP also brings capital, which has
allowed BT to be more selective about the point at which it courts
outside venture funds.
"Being in an emergency situation where you've put a lot of money
into something and need help to get to the next stage is a bad position
to be in from a negotiating point of view," Carr says. "You're much
better off using your own internal fund until [the startup] is on the
front foot in terms of development and then asking for venture capital
in the expansion phase."
Sustaining an internal organization to spin out new ventures will
never be easy. There's no special sauce to doing it well, and
quantifying a program's success will always be a challenge. But with
companies such as BT able to report some successes, other organizations
are likely to try their hands at spinouts as well. - Suzanne Stevens
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