Corporate conception
- Article 6 of 25
- Infoconomist, August 2001
The Internet-incubator model was deeply flawed, but corporate incubators could yet deliver substantial returns.
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Incubators, perhaps more than any other type of company, symbolise everything that was wrong with the dot-com boom. These start-up companies based their businesses on taking stakes in other start-up companies in return for management advice, office space and a network of contacts. A simple enough model, perhaps: but is an entrepreneur who can't take find an office or doesn't know who to call for legal advice really going to create a company worth billions of dollars?
It was little surprise, then, that hot-housing turned out to be hot air. Aberdeen Group analyst Dave Wright estimates that the number of incubators, which rose from just 37 in January 1998 to 412 by July 2000, will have dwindled to 155 by January 2003.
But incubation isn't all bad. While the business case for most independent incubators was always difficult to fathom, the case for corporate incubation, particularly for companies with large amounts of intellectual property, is credible if not compelling. A report by IDC, Going Beyond R&D: How corporations are speeding innovation, says that many large companies are sitting on a gold mine of intellectual property that they have been unable to commercialise.
BT, the British telecommunications giant, is one example. It boasts more than 14,000 patents and set up its corporate incubator, Brightstar, at the end of 1999 with the aim of launching 12 to 15 companies a year. The company, hampered by the technology slowdown, has failed to achieve that goal (see box, Brightstar incubees and launches), but BT's stake in Brightstar-generated companies could still generate up to ?������5 billion in terms of exit value in the next five years, say analysts.
Other large corporations, including Ericsson, Siemens, Nokia and DaimlerChrysler, eager to capitalise on their intellectual-property portfolios, have launched similar projects since the start of 2000. And Wright of the Aberdeen Group is generally bullish about the prospects of such initiatives. The incubators that survive, he says, will either pursue a niche technical focus, or ally with universities or corporations to help develop in-house research and development.
Brightstar was the idea of Stuart Collins, head of BT's technology division, BTExact, and Harry Berry, a 30-year company veteran. "We knew we had massive assets and the brightest people you could wish to meet," says Berry. "I liken it to North Sea Oil 20 years ago. We knew it was big, knew it was valuable. But we couldn't get at it. Brightstar was all about getting at it."
To get the project started, the two men went to the then-chairman, Peter Bonfield, with the request, "Give us cash, the responsibility to do it and your confidence – then get out of the way." Bonfield responded by stumping up ?������2.4 million.
But good ideas and bright people don't necessarily equate to success. The PARC reseach facility of photocopying giant Xerox invented a number of key technologies, but spectacularly failed to turn those inventions into commercial success. Brightstar, however, believes that, by focusing on investment return from the outset, it can be more successful in terms of delivering value to the parent company.
The Brightstar methodology dictates that it only incubates ideas that it thinks will have a market capitalisation of more than ?������100 million three years after launch. Seed funding is between ?������400,000 and ?������800,000, which is mostly provided in the form of resources and intellectual property – very rarely in cash.
Berry has arranged for various service providers, such as IBM and the HSBC banking group, to provide 80% to 90% of the services incubees need. These services are free – the providers are prepared to gamble that the grateful incubees will remain loyal and provide further business down the line. Berry believes that the less resources come from BT, the more mobile and faster the incubee.
Once it becomes clear that an incubee is likely to be able to survive, Brightstar looks for second round funding from its VC partners. "It's dead easy to get VCs, but I'm looking for VCs who want to be members of a club, who have a deal plan that is sustainable and of high quality. I don't want a hit-and-run merchant who will do one deal and then you'll never see him again. So I like to attract the sort of VCs who can see the scope here."
Berry will invite two or three VCs to meet with a company ready for the second round of investment. He selects them, he says, not so much on the basis of how much money they are willing to invest, but more on their knowledge of the company's potential market. They are offered a stake of around 35% to 40%, BT generally takes 35% to 40% itself, and the management takes the remaining share.
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