The “Un-Incubator” vs. the Echo Chamber: Five Questions for New Venture Partners’ Robert Rosenberg

8/31/11Follow @arleneweintraub

New Venture Partners is a VC firm with a twist: It invests exclusively in corporate spinouts. The firm—which has U.S. offices in San Mateo, CA, and Murray Hill, NJ—counts among its successes Flarion Technologies (bought by Qualcomm), GeoVideo Networks (acquired by Wire One Technologies), and Silicon Hive, a spinout from Philips Electronics that was acquired by Intel in March.

In a two-part interview with Xconomy last summer, New Venture partner David Tennenhouse explained why in-house research projects at large corporations often get stranded—and why many of those ventures make for great spinouts.

How has corporate incubation held up through the recent economic turmoil? And how do those incubators differ from the plethora of venture-funded incubators that have popped up over the last year? Xconomy posed those questions and more to New Ventures East Coast partner Robert Rosenberg.

Rosenberg helped found New Venture Partners in 1997, after a stint as a manager at the Boston Consulting Group. He is currently a director of Real Time Content, ShopWell and TimeSight Systems.

Xconomy: Are large corporations still investing in internal ventures, and if so, are more VC firms getting interested in spinouts?
Robert Rosenberg: There is still a huge amount of R&D in the corporate setting, and it has remained steady through all kinds of economic cycles. It’s intended to foster products that can be used by the mother ship. But sometimes, innovative ideas crop up and take the company in a different direction.

Traditional VC firms are always open to good spinout opportunities if they materialize. Most established firms can point to one or two they’ve done. But I don’t see a trend to devote a lot of resources into mining spinouts. What we do wouldn’t be recognized by most VCs as a good way to create deal-flow. We tend to be pretty early stage. So when we start a deal, there may only be a draft of a business plan, and the management team may not be complete. The best way to build a business model is often still a matter for discussion.

X: How do you find the best startup opportunities?
RR: Sometimes we find them just by networking inside large companies. Maybe we meet a mad scientist with something that captures the imagination but that isn’t getting traction in the larger organization. Or maybe there’s a large company struggling to capitalize on a pile of patents.

We created IBiquity Digital by merging a spinout from Lucent with an independent company, USA Digital Radio, because they were going after the same goal. They were looking at the old-fashioned analog radio industry and taking it digital. We’ve been selling the technology to broadcasters and receiver companies.

X: A recent example of a deal New Venture was involved in was the 2010 merger of VPISystems, a provider of mobile network analytics, with Telstra spinout Elanti Systems, a maker of routing software. What was the thinking behind that?
RR: In the case of Elanti, it was getting traction inside the parent company. But it was growing into a cost center. [Telstra] wanted to use the technology, but as a preferred supplier in competitive marketplace. So it transformed what was a cost center into an independent startup. The [merged] company began its life with a multiyear contract from a marquis customer. It was born with a silver spoon in its mouth.

X: What technologies are you most interested in incubating going forward?
RR: We’re very interested in the explosion of mobility in IT and communications. And we’re interested in memory—all kinds of memory. We spun [MRAM maker] EverSpin Technologies out of Freescale.

We’re also interested in the intersection between life sciences and computing. But we like to say we do electrons, not proteins. Alverix, which was spun out of Avago in 2007, is increasing the accuracy of low-cost medical diagnostics. ShopWell uses technology to create personalized food-rating engines.

We are also investing a fair amount of time in materials and energy. Novinda was created in 2009 from a joint venture between ADA Technologies and CH2M Hill. It’s making coal cleaner with a product that removes mercury from fly ash. It’s like kitty litter for power plants.

X: How do corporate incubators differ from VC-backed incubators?
RR: The way large companies think about venture-related activities is much more sustainable and highly professional. Corporate VCs invest through downturns, they lead deals, they take board seats. You see them plugged in and acting in a way that’s integrated with the company’s overall strategy. The purpose of a corporate incubator is to isolate the entrepreneurs from the “big company” environment.

Venture incubators are the opposite. It’s all about exposure to other startups so they can learn from each other. And it’s all about volume, and letting a thousand flowers bloom. The Achilles heel of the venture incubator is the echo-chamber effect. Lessons get misapplied to two- or three-dozen companies. Another risk is that the startups are over-shielded from the market and ultimately the customer.

We believe that when we take something out of the big-company environment, we should give that still-plastic venture a lot of exposure to the external world as soon as possible. We’re trying to un-incubate them.

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