By Francis Moran and Leo Valiquette
Recently, tech heavyweights from around the world lined up to bid for Nortel Network’s portfolio of more than 6,000 telecommunications and web-related patents. When the dust settled, the portfolio had been sold for five times the opening bid and at least twice as much as analysts had expected.
“Since the market took off in the last eight years or so, intellectual property went from being an unused asset in the corner to a prime financial asset that can be traded,” he said, adding that, “there is no shortage of capital for the right invention. It’s one of the most differentiating aspects of business today.”
While the hot trend of buying and selling unused IP may be a recent phenomenon, levering it as a resource for new company creation is not. Both are fundamental to Henry Chesbrough’s concept of open innovation, which we blogged about last week. In a world of widely distributed knowledge, companies can’t afford to rely entirely on their own research, nor can they afford to let internal innovations sit idle. They have to open their doors to let innovation in and out.
In a guest post, Jason Flick supported this view, citing Nokia’s dismal return on its massive R&D investments in smartphone technology.
“There is seldom a correlation between what a company invests in R&D and its future success in terms of revenue,” Jason wrote. “Startups are famous for having successful technology R&D because they can iterate and adapt so quickly and tend to be closer to the ground – e.g. the customer. Rather than invest billions in internal R&D, many of our large technology enterprises may find their money better spent if they put a percentage into incubating startups.”
Frank Rimalovski is an avid supporter of corporate incubation and open innovation. He is a co-founder and a former partner of New Venture Partners, a venture capital and strategic management consultancy that works hands on with global technology companies to help them commercialize their unused IP through spin-out ventures.
In his eight years with New Venture, Rimalovski led more than 50 spinouts from the R&D labs and business units of companies that included Lucent/Bell Labs, British Telecom, Philips, Agere, Boeing, Intel, Telstra, IBM, Avago, Freescale, Unilever, IDEO and Maxim.
New Venture itself was a spinout from Lucent Technologies. It began as an operating unit in 1997 called the Lucent Technologies/Bell Labs New Ventures Group. Over the next several years, this team created and financed 28 companies based on Bell Labs’ technologies and pulled in a total of $350 million in financing from VC firms and strategic partners. In 2001, the group left Lucent’s nest and became New Venture Partners, applying the methodology it had developed to help other tech heavyweights execute successful corporate spinouts.
These days, Rimalovski is heading up the NYU Innovation Venture Fund for New York University, which we will talk more about next week. We caught up with him to discuss the fine art of helping the big guys make the most of “those juicy leftovers that don’t have a path to market inside the company.”
Secure senior support
“Senior management support as high up in the food chain as you can go is really key,” he said. The challenge, however, is that big tech firms seldom think as monolithic entities. Instead, they are a sum of departments, each with its own agenda and set of priorities. In order for a spinout to succeed, that big supporter is needed who can herd the cats and ensure the necessary resources are allocated.
Seek out entrepreneurial fortitude
The engineers and other employees inside the parent company who were involved with the development of the technology are vital. They must continue to have hands-on involvement for successful technology transfer. They must have passion and a willingness to give up the comfort of their corporate environment for a startup environment.
Build a business savvy team
However, these innovators often lack the fundamental business development and marketing skills necessary to turn a patent into a validated product that will be embraced by the market. As with any startup, outside talent must be brought in to drive the new business forward.
In his work at New Venture, Rimalovski’s biggest challenge was often building that team of knowledgeable insiders and business savvy outsiders.
Don’t shoot the horse
A successful spinout also demands significant due diligence to ensure there is a viable business case for the technology and sufficient interest from potential investors and other key stakeholders to make it happen. However, as Rimalovski and his team saw when the downturn hit in 2008, companies eager to cut costs and liquidate assets can suffer from an itchy trigger finger that is counterproductive.
“We asked them not to shoot the horse while we were in the middle of examining it,” he said, reiterating the importance of having that senior-level support. A spinout is therefore more likely get the care and feeding it needs if the parent firm is on a sound fiscal footing rather than in crisis mode.
Keep skin in the game
So what’s in it for the parent company? For Rimalovski and his team, the payout of choice was a piece of pre-market equity in the new venture rather than a payment of royalties that would “take money out of the hands of a startup when they desperately need it. Cash is a precious resource. If we shared an equity stake, it gave them a more vested interest in helping the company succeed.”
Counter the cultural bias
In Rimalovski’s experience, the attitude within an organisation toward intrapreneurship and playing that role of champion is a significant barrier to more corporate spinouts.
“In a lot of cases it is a cultural issue,” he said. “Most companies are optimised to protect and keep things inside. The ideal of letting go something that has been invested in goes against the grain of a lot of companies. I think the best thing to encourage people to do it is to show success stories.”
In an upcoming post, we’ll take a closer look at commercializing innovation from the university campus.