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Lucent Sprouts In-house Ventures

Lucent lets employees scratch that entrepreneurial itch by giving them their own companies to run.

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Two years ago, Stephen Eick figured he'd spend several years in the bowels of Bell Labs, researching "something no one cared about." But now he's CTO of his own company, Visual Insights, which launched seven months ago with a few million dollars in seed funding from a venture capital firm.

The strange thing is, he's still on the Bell Labs payroll.

The VC behind Visual Insights is Lucent Technologies (LU)' New Ventures Group, based in Murray Hill, N.J. The group walks and talks like a traditional VC but pulls all its business ideas and founding staffers from one source: Bell Labs, which has been a part of Lucent since the company was spun off from ATT (T).

Lucent has launched nine companies since forming the New Ventures Group a year ago. In addition to Visual Insights, a start-up that solves Year 2000 compliance problems, the ventures include Elemedia, an Internet telephony company; GlobalCast, a multicasting technology firm; and Lucent Digital Radio, which converts AM and FM signals to near-CD-quality sound. The group expects to create one new venture each quarter.

Though many technology companies have VC groups that invest in ventures outside the company - Intel (INTC)'s is legendary, and Lucent has an outside venture group in Silicon Valley - it's rare to find a tech company that incubates in-house ventures. But as the tech talent shortage creeps into telecommunications, it's the people with skills in cutting-edge areas that the telecom companies desperately want to keep.

The venture group "is an important - albeit still at this point start-up - way of keeping technology and people in the company, because it gives people an alternative that otherwise might not have existed," says Tom Uhlman, who spun the group off from his corporate development department and now serves as its president.

"The problem technology companies face is, people who have ideas leave. So why not incubate them?" says Gregg Grossman, senior partner at Pathway Executive Search, a New York-based recruiter.

Eick knows that without the New Ventures Group, he'd no longer be a Bell Labs employee. When he and other researchers came up with an idea for software to help Year 2000 consultants analyze the way networked databases communicate, he saw three courses of action: Let the product coast along as an internal tool, quit and build the software outside Lucent, or appeal to Lucent for funding.

Eick, Jim Wikal and other Bell Labs employees presented their idea to Lucent's corporate development group in summer 1996, before the company's venture group was officially formed. By December of last year, the Naperville, Ill.-based company was launched.

"Someone else would have done it," Eick says. Now, Visual Insights is an independent entity with 50 employees.

Though the money Lucent's venture group doles out isn't as much as it typically devotes to R&D (Lucent officials won't reveal the fund's total dollar size), the funding is essential to retaining budding entrepreneurs. Telecom companies - such as AT&T - have seen a stream of talent exit for newer ventures. "Lucent and others, in order to capitalize on entrepreneurial [ambitions], have to give [employees] independence," says Doug Hickey, a veteran of data networking company MFS Communications and president of Frontier GlobalCenter, an asynchronous transfer mode backbone company. Though he left MFS after WorldCom acquired that company last year, Hickey credits MFS for supporting the launch of DataNet, a San Jose, Calif.-based MFS unit.

The impetus for the formation of Lucent's New Ventures Group came from the 1996 breakup of AT&T. The company's telecom equipment business, including Bell Labs, was spun off into a new company dubbed Lucent. Lucent has been developing plans to commercialize Bell Labs research ever since. The ventures group is one outcome.

The group evaluates ideas the same way a VC would, looking first at a technology then at its market opportunities. It considers ideas pitched by in-house researchers but also investigates products it has heard about within Bell Labs.

After a business is up and running, Lucent lays out four exit strategies. The first three - initial public offering, sale and liquidation - are common to other VC-backed firms. But Lucent also has the option of folding the start-up back into Bell Labs.

For start-ups, Lucent's backing offers benefits a typical VC firm may not be able to provide. Top-notch talent percolates up through the ranks of Bell Labs, for instance; the companies can tap into Lucent's human resources and accounting systems, as well. Although Visual Insights went outside Lucent to hire its president and CEO, start-up veteran Doug Cogswell, the job could just as easily have been filled from the inside. Cogswell sees another upside to the Lucent affiliation. "If I want to get in to see a client, [the] press or an analyst, I have access that a typical VC company wouldn't have," he says. Robert Lee, who launched Zing Networks and was its VP of marketing, joined Lucent last month as a partner in the New Ventures Group. He was assigned to be CEO of Cineblitz, which specializes in high-bandwidth video server technology. He says that working for a Lucent start-up feels just like working for a VC-backed company.

"For me, it was an opportunity to be a CEO again and run a business," he says, adding that he expects to take Cineblitz public in about a year.

For potential employees, Lucent-incubated companies have all the risk-reward elements of a start-up. Staffers receive a percentage of company ownership, which could prove quite profitable if the company goes public.

When Bell Labs employees sign up with a New Ventures Group firm, they can choose a lower number of stock options in return for a clause in their contract that lets them return to Bell Labs at any point.

As for Lucent, it diversifies its options, as any good VC would. While the wide-eyed enthusiasm of a start-up environment runs strong through Visual Insights and Cineblitz, Venture Group head Uhlman sounds more like a seasoned investor.

"I have to manage [profit and loss] on behalf of the group," he explains. "Not all [ventures] will be winners. It's a portfolio approach."

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