Sustaining venture creation from industrial laboratories: the evolution of Lucent's New Ventures Group into a partnership with private equity capital suppliers offers a new route to corporate innovation.

In an earlier article, we described an innovative model for creating corporate ventures out of industrial research laboratories at Lucent Technologies (1). Since that article, tremendous changes have occurred in the telecommunications market, within Lucent, and within the venture capital sector overall. These changes have forced this model of creating ventures out of industrial labs to evolve in a somewhat new and different direction. In this article, we briefly review these different forces, detail how they compelled Lucent to spin out its New Ventures Group, and describe the evolution of the model into New Venture Partners.

We believe that this evolution carries with it important implications for industrial innovation, and for the concept of Open Innovation (2). Open Innovation advances the claim that, in a world of widely distributed knowledge, a company must access external technologies for use in its business and allow its technologies to be accessed by other firms' businesses. Lucent's New Ventures Group was an example of the latter process, of allowing other firms to access Bell Labs technologies.

Notwithstanding this hypothesis, there appear to be limits in the ability of a publicly-traded company to support the creation of internal ventures over the business cycle. While one can conceive of possible financial instruments to address these limits, they have not been tested by companies, and may not soon be attempted in the current post-Enron accounting and governance climate. Teaming with private equity capital suppliers to sustain the creation of these ventures in challenging times, as well as in good times, may serve as an alternative mechanism to deal with these problems.

The Spinout of Lucent's NVG

Lucent's New Ventures Group (NVG) had achieved considerable success following its formation within Lucent back in 1996. In the subsequent six years, 35 ventures had been created out of Bell Labs research projects. As noted in our previous article, each project was initially reviewed by internal Lucent businesses, which had the right of first refusal for a technology nominated to go into a new venture (1). While this might suggest that NVG would be consigned to the "leftovers" that were rejected by the business units, NVG found that many of these technologies held significant commercial potential. In fact, NVG commercialized opportunities that were both in non-strategic "white spaces" for Lucent, as well as opportunities that represented alternative strategic hedging bets.

Lucent's NVG was a financial success. Out of the 35 ventures that NVG launched, there were eight exit events in its portfolio. This rather high success rate translated into a gross internal rate of return for NVG of 46 percent from 1996 through the end of 2001 (based on exits over the …