Corporate venturing on the edge

With little surprise, large enterprise investment in new technologies and IT startups took a hit in the past year. Some innovations – wireless for instance – will get funding even with corporations and venture capitalists putting the brakes on investment.

“I don’t suspect that 2002 will be a big year for corporate venture fund investment,” says Ken Dickman, a Chicago-based executive at Accenture Ltd.’s strategy and business architecture division.

Still, CTOs have taken the corporate venturing route – spinning off internally developed technologies, incubating startups, and activating R&D departments to foster hot technologies – for a reason. CTOs still “need to get a jump on the market; they need to see what’s coming down the road,” says Kirk Walden, the Austin, Texas-based national director of venture capital research at PricewaterhouseCoopers LLP. Corporate venturing “can be an excellent way to do this,” he says.

With no expected flood of new offerings from startups in the coming year, some enterprise CTOs will take other routes. They will engage in joint ventures and equity alliance work – investment and resource sharing with technology companies – that’s “a much lesser version of a joint venture,” Dickman says. “People want to spread the risk.”

Against the odds, major enterprises have soldiered on. Eastman Kodak Co. is moving into WPANs (wireless personal area networks) and backing a new architecture for densely populated, cost-effective memory chips. British Telecommunications PLC (BT) is delving into digital radio offerings mixed with wireless service. ABN Amro North America, the Chicago-based branch of banking giant ABN Amro Bank NV and New York-based Reuters Group PLC are grappling with bringing legacy applications into the Web services age. And X-Rite Inc., a measurement equipment manufacturer, is exploring nanotechnology and MEMS (microelectronic machines).

WPANs and more

Reaching a new realm, Rochester, N.Y.-based Kodak will be investing in the three-dimensional CMOS (complementary metal oxide semiconductor) technology developed by Santa Clara, Calif.-based Matrix Semiconductor Inc., says Jim Stoffel, senior vice-president and CTO.

The first generation of vertically built memory cards will be targeted at portable electronic devices such as digital cameras, Stoffel says. “It’s a technology that can have a big impact.”

The Matrix offerings are less expensive than state-of-the-art flash cards because they’ll offer high capacity and “storage that’s relatively permanent,” Stoffel argues. “Think of this as the replacement for film in some ways,” he says.

Kodak also has wireless intentions, having spun off Rochester, N.Y.-based Appairent Technologies Inc. this past January. The startup will use Kodak-developed technology to advance wireless transmission of high quality video, still images, and data for confined areas such as homes or offices, Stoffel says.

Corporate venturing is key to Kodak’s growth and competitive edge. “You can’t guarantee you’re going to get great success from all of your R&D investments,” Stoffel says. “I think if you ran it that way you wouldn’t get any big hits – it would all be incremental.”

Conversely, Stoffel says corporate venturing helps to sidestep the major pitfalls of new technologies. “We learn a tremendous amount along the way about [technology] roads not to take,” he says.

Telecom looks to wireless

Taking a different tack, telecommunications giant BT has breathed new life into its BTexact Technologies R&D arm with its Brightstar corporate technology incubator, says Chris Winter, CTO of Brightstar Information Group Inc.

“Research departments have almost been like a charity organization inside a big company,” Winter says. “People have done research feeling somehow it must be good for the company but not been able to put their finger on it. … We’re looking to aggressively exploit the intellectual property developed by research and generate real returns for companies.”

In that vein, BT’s forthcoming spin-off Rocking Frog, an Ipswich, England-based provider of wireless personalization services is talking to a major commercial radio group in the United Kingdom about uniting wireless and digital radio services, say Winter and a representative for Rocking Frog. The project under discussion will use next-generation GSM (Global System for Mobile communications) cell phones with built-in FM digital radio service, enabling cell phone users to interact live with digital radio programs, Winter says.

Brightstar also created and spun out Venation Ltd., an Ipswich, England-based startup that provides content distribution via a transport layer of the networking infrastructure. Winter also oversaw the BT spinoff in December, 2000 of Psytechnics – BT’s software for modeling human hearing and measuring the quality of speech as perceived by the end-user. The spinout, targeting VOIP (voice over IP) and cellular networks, represents 25 BT patents and a decade of research.

Enterprising end-users

The ABN Amro banking group has focused on leveraging its internally developed, XML-based integration technology, dubbed WOLF (Web Objects for Legacy Functions). The effort grew into Neogration Inc., a spinoff of the Amsterdam, Netherlands-based bank, says Louis Rosenthal, executive vice president of ABN Amro Services. The next step for Neogration will be to “facilitate Web services through XML and Web services standards,” says Rosenthal, who declines specifics about the bank’s intentions.

Hype aside, Web services are still cutting edge for many firms. And for news and market data provider Reuters, they are still in the experimental stage, says James Powell, head of technology strategy in Reuters’ CTO office. “Can we build those systems cheaper, more effectively, faster using Web services?” Powell asks. Reuters has begun Web services pilots that are expected to be complete by the middle of this year.

Reuters, which has a history of corporate venturing activities, recently spun off one of its best known resources, Greenhouse Fund, launched in 1995. Last year, Reuters assigned the $415 million fund to RVC, an independent, London-based venture capital firm, led by ex-Reuters officials.

Nanomaterials investments

Echoing his colleagues, Richard Cook, CEO and technologist for X-Rite, a Grandville, Mich.-based manufacturer of color measurement instruments, says corporate venturing is vital to growing the business.

To sell into new product bases, X-Rite has invested in Cambridge, Mass.-based Medpanel Inc., which creates online focus groups of medical professionals; Fremont, Calif.-based Nanogram Corp., a nanomaterial manufacturer; Santa Rosa, Calif.-based Triformix Inc., a manufacturer of precision, molded optical components; and San Francisco-based UrbanPixel Inc., a platform provider for very large Web spaces of multiple Web sites.

For enterprises and their startup partners, the arrangements often include direct or joint sales as well as OEM and distribution agreements, Accenture’s Dickman says. “It’s all very situational,” he says, and almost secondary. Enterprises make alliances and engage in corporate venturing to get new technology, Dickman says, that’s “not part of the strategic direction but will enable the strategic direction.”

New rules

These pitfalls could doom a venturing program.

– Inexperienced management at helm

– Poor definition and alignment of strategic intent

– Weak portfolio strategy

– Lack of appropriate governance skills and a poorly designed incentive structure

Source: Accenture

Funding the future

Major enterprises are investing in technologies they see as promising.

– BT: Digital radio service combined with wireless

– Kodak: WPANs (wireless personal area networks)

– Kodak: OLED (organic light-emitting diode) flat panels

– ABN: Web services married to legacy systems

– X-Rite: Nanotechnology and MEMS (microelectronic machines).