Creating revenue out of a utility’s non-core research projects is a long-term and challenging project, but out of the partnerships that are formed can come worthwhile businesses and market knowledge.
UK-based phone operator BT Group’s experience with spinning out its corporate incubator and the partnership with venture capital firm New Venture Partners (NVP) reveals many of these challenges. It also, according to a recent academic study of BT’s incubator, "shows the emergence of a new model of corporate innovation in which working in partnership with a venture capitalist provides the firm with the ability to trial technologies in the market".
The paper, Trial by market: the Brightstar incubation experiment, by Simon Ford, research associate at the University of Cambridge, and the head of its Centre for Technology Management, David Probert, will be published in the International Journal of Entrepreneurial Venturing.
BT tried to commercialise its intellectual property using an incubator, named Brightstar, set up in February 2000. According to Ford and Probert’s paper, the genesis of Brightstar came after internal concerns about commercial returns from the 300 patents generated each year at that time.
By setting up a drop- in centre and advisory board primarily selected from non-BT Employees, Brightstar, under the aegis of Harry Berry and Chris Winter, selected four so-called incubees and a further 11 were in the process of being approved within the first 12 months, the academics said.
However, with the bursting of the dot.com bubble that year, the sources of external funding for incubees dried up and BT made a loss that year which constrained its own free cash for start-ups.
BT has also tended to avoid providing equity capital to third parties. Mark Bagley, vice-president of innovation scouting at BT, said: "In most cases we partner. The only reason to take a stake would be to influence a roadmap and in most cases that will happen if we sell a lot of the innovation."
As a result of the cash constraints, Brightstar whittled its selected incubees to five and accelerated their commercial development so they collectively brought in £31m in 2002.
To help four of the incubees develop, in March 2003 Brightstar spun itself out from BT, along with Berry and Winter, and merged with NVP, which had been formed out of a similar incubator run by telecoms equipment maker Lucent Technologies from 1997 before becoming independent at the end of 2001.
Stephen Socolof, co-founder of NVP, said: "The benefit of the merger was BT gained access to a bigger team, more experience and a footprint in both the US and UK."
The merger also gave NVP the right to roam around BT’s research and development department, exact, and have right of first refusal to provide venture backing to a particular technology.
As well as the four original incubees (APSolve, Azure, Microwave Photonics and Evolved Networks), NVP subsequently backed two others, IO Global Services in May 2005 and Real Time Content in June 2007, according to the academic paper.
Ford and Probert said while such symbiotic relationships between technology firms and investors was relatively common "the distinctive aspect of this partnership is that rather than just a single investment in a new venture, it is an ongoing engagement and investment between the two firms in which both attempt to create and capture value through combining their resources, capabilities and competences".
However, part of the value has come in less tangible ways than financial gain from the technology transfer from BT to NVP through the creation of new companies. Although APSolve was acquired by @Road in February 2005 for $54.7m, the financial return from IO and Real Time has been below expectations, insiders said, and the outcome from Azure is awaiting the final sale of shares after its merger with listed Subex.
Instead, NVP is understood to have used the knowledge of BT’s technical needs and relationship with its researchers to understand the market more widely and help drive its estimated three-times return on capital from its first fund.