Lucent Looks Within

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March 01, 2001 (2:50 PM EST)

By Will Wade,

SAN MATEO, Calif.—Lucent Technologies has added a new twist to the standard model of running an in-house venture capital fund. While many major high-tech companies have business units that exist solely to invest capital in—and secure equity stakes from—promising startups, Lucent's New Ventures Group (NVG) goes an extra step.

Drawing on the technology pool emerging from its sister unit, Bell Labs, the New Ventures Group provides not only some of the seed money but also the core technology, finds a management team, and sets up the company.

"What we are doing is trying to take advantage of the technology that comes out of Bell Labs, which has commercial potential," explained Tom Uhlman, president of the group.

This is a very different strategy from the venture capital funds run by other companies, including Texas Instruments Inc. (stock: TXN), Intel Corp. (stock: INTC), and Dell Computer Corp. (stock: DELL), which seek out startups with potential and fund their operations. Along the way, these traditional venture funds secure equity stakes in the companies, which should later provide a return on the investment and also give the parent company an insider's view on the nascent ventures' operations. It's not uncommon for these firms to be acquired by the parent company later.

But the Lucent (stock: LU) model is exactly the opposite. It takes in-house technology and tries to free it by creating separate companies. "We are not trying to look outside for investment opportunities in other companies," said Uhlman. "We want to take advantage of opportunities within Lucent that have not been exploited."

The NVG is now two years old, and so far it has created 32 independent companies. Of these, 26 are in operation, three have folded, and three more have been brought back into the fold as part of larger Lucent operations, although Uhlman said the business plan generally does not include reacquiring these fledgling companies once they have been launched.

"What Lucent is doing is quite different from what other companies like TI or Intel are doing," said Hank Chesbrough, an assistant professor at Harvard Business School who has studied different the different means that companies use to bring technology to the marketplace.

"Those companies have as their goal to fund startups that will help grow the overall market for DSP technology, in TI's case, or microprocessors, in Intel's case. What Lucent is trying to do is find technology that is languishing on the shelf, and then bring that new technology into the market."

None of this would be possible without the company's relationship to Bell Labs. As a research facility, Bell Labs has produced some of high-tech's most important developments, not least of which was the basic transistor that sparked the entire industry. Innovations coming out of the labs continue to drive Lucent's technological edge as a leading telecommunications vendor.

But with a focus more on pure research than on commercial ventures, the labs also produce some interesting work that is not in demand by Lucent's own product development teams. As Chesbrough noted, pure research is a slow process, and it could take years from the time a basic idea becomes a proven technology with potential commercial applications. In that time, the market has grown and evolved, and something that may have appeared to be the perfect solution to a key problem several years ago may no longer seem the ideal fit. "There will always be mismatches between what the researchers develop and what the different business units at Lucent say they need," he said.

The NVG is trying to exploit these ideas. Uhlman said the group closely examined more than 150 different technologies to create the 32 companies, and without his unit, these ideas may have otherwise languished in the research lab. "The New Ventures Group's entire premise is based on the vitality of Bell Labs," he said.

Some of these new ventures include E Ink, which is using proprietary plastic transistors as the foundation for digital "ink" on electronic books; InPhase Technologies, which is developing holographic data storage applications using photosensitive plastic; Flarion Technologies, which is developing low-cost wireless data networking components for mobile access to the Internet; and Siros Technologies, which is developing a new optical disk technology that the company claims will offer 10 times as much storage as magnetic disk drives.

While its ownership in these companies will give Lucent a revenue stream, Chesbrough said it will be years before there is any kind of significant return. However, there are more immediate returns to Lucent, to Bell Labs, and to the individual researchers who develop the key technologies. While some scientists may want to remain in the world of pure research, he said, others will want to take their ideas all the way through to commercial development. Moving into the corporate realm offers them not only a financial reward but also the chance for the satisfaction of watching their work become actual products. And their turnover can also provide room to recruit new researchers to Bell Labs.

More significantly, the NVG re-evaluates technology that's not being used. This scrutiny may turn up some exciting ideas, which the in-house business units may snap up after the ventures group has initially vetted the concepts. If individual business units pass on the technology and the ventures group decides to push forward and create a new company, this process allows new ideas to enter the market that might otherwise have sat unused.

"The main benefit from the NVG is that it will accelerate the path for a technology to get to market, and it provides an alternate path for some of these ideas to become commercial products," said Chesbrough.