Lucent Ventures Into the Future

When mathematician Rajiv Laroia joined Bell Labs in the summer of 1992, he thought he had found his ideal niche-if not for life, then at least for a comfortably long time. Armed with his new doctorate and a passion to make his mark, he reported to the Mathematical Sciences Research Department, where he found a sweet opportunity to work with world-class mathematicians, engineers and statisticians. “There was no specific charter,” Laroia relates. “We were given sort of free rein to do anything we wanted to do.” Bent on first broadening his horizons, he dived into the basics of communications-wireless, optics, theory and more. Laroia envisioned writing papers and contributing to state-of-the-art systems. But he didn’t foresee leaving AT&T’s (now Lucent’s) illustrious research division-especially not to start a company. He wasn’t an entrepreneur.

What a difference a few years and the age of Internet fever can make. Early this year, Laroia did the once inconceivable by helping found Flarion Technologies, which is out to make ubiquitous, wireless data access so affordable that a vacationing California family of four could tool along a Maine highway and simultaneously be surfing the Web, listening to the Oakland A’s over the radio, watching The Simpsons and sending e-mail-all without denting the budget. It turned out Laroia’s horizon-broadening pursuits had engendered a novel idea about how to achieve such wonders, an idea so far outside the conventional wireless paradigm that it couldn’t find a ready home at Lucent. So Laroia convinced his whole five-person team to come with him to start Flarion. Job security went out the window. In exchange for equity, people took pay and benefit cuts. Bye-bye Bell Labs.

Only not quite. Laroia and friends may have left their jobs to pursue technology that could, if it pans out, usurp a piece of their former employer’s business-but it’s all been done with Lucent’s blessing and support. In fact, Flarion’s launch was spearheaded by Lucent’s three-year-old New Ventures Group (NVG), a division chartered to scout out Bell Labs technology that doesn’t mesh well with current business lines, help researchers develop financial plans, attract venture capital and get the innovations out the door. The expectation is that these emigrant technologies will either go it alone or acquire enough critical mass to thrive inside Lucent, if repurchased by the mother ship. In this way, the company hopes to strengthen an Achilles’ heel of any big firm: the effort to capitalize on “disruptive” or “white space” advances that buck the status quo-even if those new technologies spring from in-house research. Explains Bell Labs President Arun Netravali, “If you try to nurture that new thing in the same organization, with that same set of people who are today managing fairly substantial businesses using older technology, it becomes very difficult for this new thing to get much attention.”

So far, Lucent’s New Ventures folks have kicked off at least 24 other efforts designed to complement or compete with established business lines-raising $150 million in outside venture capital, not to mention the company’s own contributions of roughly $225 million, to nurture these enterprises in a more focused and friendly environment. Three have now been brought back to the parent corporation, and one (the Internet multicasting concern Talarian) has gone public, with several additional IPOs planned for 2001-and the endeavor’s success is setting the tone for similar efforts around the globe. But that’s only the half of it. As Technology Review inaugurates its first Corporate Research & Development Scorecard, tracking spending trends in 150 leading technology-oriented corporations, NVG’s very existence underscores a critical point: There’s far more to research and development spending than meets the eye. Indeed, while the Scorecard nicely reflects the current robust state of corporate health-especially among U.S. firms-it’s only by looking beyond the numbers to programs like New Ventures that it’s possible to get at the important changes that have reshaped the industrial research landscape in recent years.

Going for Growth

In the late 1980s and early 1990s, when many firms were mired in heavy losses, managers at AT&T (Lucent’s progenitor), IBM, General Motors and other technology-intensive firms slashed R&D funding as they struggled to manage resources more efficiently. Now, as indicated in TR’s Scorecard and government statistics that show U.S. R&D funding rising steadily since 1994, budgets are steaming to new highs. But that hardly means it’s business as usual inside the labs. Indeed, rapidly fusing fields such as computers and communications are bringing ever more competitors to the fore, putting an even greater premium on streamlining the R&D pipeline. To spur collaboration, reward game-changing ideas and, above all, get things to market more quickly and in better shape, a host of new programs, initiatives and interindustry collaborations have emerged.

New-ventures groups like Lucent’s exemplify the current climate, in the sense that they mark an attempt to go beyond existing product lines into areas where the parent firm may be weak. Indeed, although the vast bulk of corporate R&D resources still go toward protecting existing businesses and product lines, firms are increasingly looking for fresh ideas and sources of growth. Nurturing these efforts from within, however, can be tricky. Corporate annals are replete with stories of ideas that got away from the home company because they proved too revolutionary or too far outside main business lines: Think Xerox’s Palo Alto Research Center (PARC) and the litany of its 1970s personal-computing inventions-from the graphical user interface to WYSIWYG (what-you-see-is-what-you-get) word processing-that proved too much for the copier company to handle.

Xerox PARC may be the most famous, but every major firm has its own horror stories. That fact has led many to form a venture-capital-like entity to spin off promising ideas, in the hopes these upstarts will get a more friendly reception outside the company’s confines. Indeed, a recent study by Harvard Business School Assistant Professor Henry Chesbrough traces these efforts to the 1960s, when one-quarter of the Fortune 500 companies operated venture arms. Almost invariably, however, these endeavors ended in abject failure-for reasons as diverse as the means of compensating employees, cronyism and corporate competition for resources.

But that was then. What seems different about Lucent’s effort is the time spent studying past mistakes and instituting measures to avoid them, while maintaining an unusual willingness to change its approach if a better strategy appears. NVG has been used as a benchmark by some 30 firms considering similar ventures, including IBM, NEC, British Telecom and Motorola. It has also been the subject of a Harvard Business School study and a comprehensive report published by the Corporate Executive Board, a Washington, D.C.-based research organization. This last examination concluded: “After studying 16 companies attempting to do internal venturing…none have addressed all the critical success factors as thoroughly and effectively as Lucent.”

Cruising the VC Champs Elyses

This new new ventures effort dates back to the early 1996 trivestiture that saw the old AT&T split into its current namesake company, NCR and Lucent. In what NVG President Tom Uhlman calls a “desire to break the mold from AT&T,” Lucent challenged employees to move faster and help their company grow. A lot of this nimbleness could be achieved in the business groups. But then-Bell Labs President Dan Stanzione felt his enterprise was underexploited, and that a trove of technology could not get to market speedily enough-if at all-through conventional channels.

Stanzzione’s challenge prompted Uhlman-then Lucent’s senior vice president for strategy, development and public affairs-to propose the separate business entity that became the New Ventures Group. Fundamentally, the enterprise would be different from the programs many companies run to provide venture funding to outside firms that not only promise to fill technological holes but may even add to profits. Instead, NVG would concentrate on internal inventions. The added revenue from spinning off Bell Labs’ technological booty constituted only part of the prize. Equally important was to plant seeds in fertile areas that could one day become major sources of growth. Having an alternative channel for developing technology would also set an entrepreneurial tone that it was hoped would permeate Lucent’s R&D pipeline, motivating recruits and longtime employees alike.

In mid-1996, Uhlman hired former BoozAllen & Hamilton consultant Stephen Socolof to help launch the New Ventures initiative. The pair spent months studying what had worked-and what hadn’t-at similar efforts run by Xerox, Intel and others. One basic tenet they picked up was that their venture arm had to shed conservative corporate structures and act more like true venture capitalists-moving quickly and taking risks. They motored up and down Palo Alto’s Sand Hill Road, the Champs Elyses of venture capitalism, culling VC success secrets. This reconnaissance drove home the imperative of due diligence-evaluating an idea’s market potential, competition and so on-and then providing seed money in discrete stages, adding to the pot only if key technological or market milestones are met. Veteran VCs also advised Lucent to look outside the firm for business and even technical expertise to help consider and launch these ventures-and to provide equity compensation rather than sticking with conventional salary structures. All had proven hard to do in corporate venture arms; all were deemed essential.

The first spinoff was launched in late 1996: a firm called Veridicom, which makes a fingerprint analyzer on a silicon chip for identification and security. About a year later, with a handful of ventures under way, Uhlman’s initiative became a full business group. Despite all their precautions for quick and thorough evaluation, however, Socolof admits the initial group members were overwhelmed by scores of ideas covering everything from semiconductors to optics to the Internet. It also turned out that Lucent harbored fewer true entrepreneurs with the experience to lead spinoffs than planners had imagined.

Both factors led to NVG’s bolstering its capabilities with a cadre of “entrepreneurs-in-residence.” Working mainly out of cubicles in the swank, carpeted New Ventures wing-a stark contrast to the adjacent linoleum-lined Bell Labs-these tended to be young business-school types who also had experience in selected technical areas. Not only could they help evaluate ideas and develop them into workable business plans, they were also prepared to join any new venture-perhaps as chief executive or chief operating officer-to get it off the ground.

Another lesson Lucent learned was that it shouldn’t try to fund its ventures alone. The original idea had been to keep total ownership of proprietary ideas. But the group soon realized that outside VCs brought added benefits that more than made up for Lucent’s taking a smaller share. For one thing, they had experience in launching startups; Lucent didn’t. They also carried golden Rolodexes of contacts essential to developing businesses-and in many cases enjoyed such standout reputations that just putting their name on the investor list increased the odds of success. Socolof says it initially proved tough for Lucent to grasp “this whole notion of being willing to take a smaller piece of the pie to create a bigger success.” But grasp it the company did. NVG today counts some 40 VC firms as investors in its endeavors.

Doing More With Wireless

It was this new, faster-acting NVG that Rajiv Laroia encountered with his idea for what would become Flarion. The mathematician’s studies in communications had led him to a radical concept for handling wireless data-and in October 1997, he started the Digital Communications Research Department to pursue it. Laroia’s efforts went beyond e-mail and music applications, then coming into vogue, to include more sophisticated services such as videoconferencing and interactive gaming that he believed mobile people would soon want in wireless form. Planned improvements to conventional wireless systems-the so-called third-generation technology still under development-could conceivably accommodate such applications (see “Internet Everywhere,” TR September/October 2000). But traditional systems had originated to handle voice calls, which have different technical requirements from digital data transmissions. Voice systems can tolerate typical losses of up to 1 percent of a given conversation with no noticeable problems, largely because of the redundancy of speech. Data transmission is a lot more sensitive: The same small losses-even losses a hundred times smaller-can ruin a deal or end a game. And besides, Laroia reasoned, configuring voice-optimized systems to carry high data volumes was an expensive proposition affordable for businesses but not for the mainstream users he wanted to serve.

The way around this problem was to start from scratch with a system designed for data. (Adding voice to this would be relatively simple, since voice could be treated as just another form of data.) The key lay in improving on a well-known technology popular in wireless and digital TV and audio called “orthogonal frequency division multiplexing,” which tries to get around the “multipath” interference that happens when signals bounce off trees, buildings and the like. Lucent’s big innovation was to add the “flash,” a term that refers to the ability to hop rapidly between frequencies. Essentially, the new system deploys multiple high-speed wireless signals virtually simultaneously over several frequencies. This spread-spectrum technique both optimizes bandwidth and minimizes interference.

Initially, Laroia’s department consisted of himself and one colleague. But by mid-1998, he had hired several additional members-and things began to move. Within a year, the group was far enough along for Laroia to envision a commercial system consisting of a base station transmitter paired with a unified modem-chip set that could be integrated into cell phones, personal digital assistants and other wireless devices. He spoke with business groups about his concept, but they were squarely focused on third-generation technology and did not have the extra resources to develop such a radical alternative. Laroia felt it was far too important to let go, since if left to others it could ultimately usurp a core part of Lucent’s wireless business. Still, he believed the idea had a significantly greater chance of success if it could be pursued in a more entrepreneurial environment.

That led him to New Ventures, where his proposal fell into the hands of J.C. Huang and Lars Johnnson. Huang, with a doctorate in applied physics, an MBA and consulting experience, heads up one of three core groups inside NVG. He had helped launch WatchMark, a firm specializing in network-management software. The German-born Johnnson was an entrepreneur-in-residence who had worked as a chemical engineer before joining NVG with a master’s degree in technology management.

The pair liked the idea immediately and spent a couple months helping Laroia hone the concept into a workable business plan. Then it was time to meet the venture capitalists. Laroia had never been much of a pitch artist, but with Johnnson handling the business end and the mathematician touting the technology, together they wowed venture capitalists on both coasts. Backed by $12.5 million from Lucent and three leading VC outfits-Charles River Ventures, Bessemer Venture Partners and Pequot Capital-Flarion was launched this February. Johnnson signed on as director of business development, and Laroia became chief technology officer, taking his entire department with him. By summer, they had hired former NextWave and Bell Atlantic Mobile executive Ray Dolan as CEO and set up shop in a roomy 2,500-square-meter space in a modern office park in Bedminster, N.J. Even as workmen were converting an old mailroom into a systems laboratory, Flarion was up to 40 employees, and is heading toward 100 by year’s end.

The initial focus is on perfecting the technology. Plans call for a prototype system to be ready late this year, with a commercial offering set for the second half of 2001. Flarion officials say they can’t estimate the cost savings of their technology because it depends on network size, traffic volumes and other factors. But they stress that the savings will be significant-enough for that California family to do its Web surfing affordably. With conventional systems, quips Dolan, “I don’t think anybody can afford both the automobile and the connectivity.”

Even presuming it can bring wireless data into mainstream use, Flarion doesn’t expect to get the bulk of the wireless pie. First come the big carriers on conventional networks-the Nortels, Ericssons and Lucents. Flarion must also contend with startups such as San Jose-based ArrayComm, which has its own dedicated data scheme. Still, Dolan foresees winning a major, and increasingly important, portion of the wireless-data business. He envisions a future for data traffic that mirrors the evolution of air freight shipping. Commercial airlines began carrying freight because they saw the chance for extra revenue. But as air freight usage grew, a separate industry sprang up to serve it; freight takeoffs and landings now rival commercial airline traffic. So it will be with data, contends Dolan. Data may have started out on conventional wireless networks. However, he asserts, “The tidal wave of demand that’s about to hit carriers of wireless data will require a Flarion solution.”

Back in the carpeted confines of NVG, everyone hopes Dolan is right. But it’s only one of many seeds being planted, a fact attested to by dozens of paperweight-like deal icons-each commemorating successful financing rounds-covering a long birch cabinet in Tom Uhlman’s expansive office. So far, Uhlman’s people say they’ve examined nearly 250 projects in detail and launched about 25 ventures, though not all have been announced. Not every one has been a winner. Two didn’t make it even to the spinoff stage. One particularly high-profile disappointment was Inferno, an attempt to develop a new operating system partially conceived by legendary Unix and C-programming-language pioneer Dennis Ritchie. The effort failed to live up to its buzz and was ultimately closed-though it has recently been reborn under a different business strategy and may yet find a way to survive.

No doubt there will be others that, as Uhlman puts it, “I wouldn’t call failures, but didn’t meet expectations.” But the New Ventures head isn’t much troubled by that right now. Indeed, he’s on a roll, helping Lucent do what few companies have been able to accomplish: find ways for people like Rajiv Laroia to challenge the status quo and bolster the establishment at the same time. That task may not make for the stay-in-one-job stability of yesteryear, but for big companies and their employees, it can provide a different type of security.

Company Year foundedSelected areas of focusIdeas screened annuallyAnnounced launchesRecent launchesIntel New Business Development Group1998Data services,Internet hosting, networking, digital cameras and toys1002Vivonic: fitness-planning software for handheld market
PassEdge: digital-rights management for Internet streaming videoLucent New Ventures Group1997Wireless, multimedia, e-commerce, networking, semiconductors7525Flarion: wireless data
SyChip: chips for wireless Internet appliances
CyberIQ: Internet traffic and content managementNortel Business Ventures Group1996Internet and networking technologies150NAEntrust: encryption and digital security
Elastic Networks: next-generation DSL
Netgear: network computing
NetActive: digital-rights managementXerox Technology Enterprises1998Internet technologies5012 (est.)Inxight: Web navigation and viewing software