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Motorola's internal VC and early money's role

Jim O'Connor, who heads the company's internal venture capital fund, explains how it's helping the cell phone maker gain competitive ground.

The highly competitive communications market stands still for no company, which is why Motorola has created a special internal venture capital fund to commercialize technology it's developed in-house.

The Early Stage Accelerator (ESA) program, started in early 2004, is headed by Jim O'Connor, the former leader of Motorola Ventures, which invests in start-ups outside the company. During his time with Motorola Ventures, O'Connor oversaw the creation of investment operations globally and invested in over 50 ventures.

Now his attention has turned inside Motorola where he taps the creativity of the company's 20,000-some engineers to take early stage research into commercial products.

The second largest cell phone maker in the world, Motorola has been struggling recently to regain its footing in a market that is getting increasingly more competitive. The company hasn't had a hit product since the Razr, and it has reported net losses amid sharp price cuts on its products.

But CEO Ed Zander has promised that the handset division will show a profit for the year. The company's biggest challenge moving forward is finding new products to excite the market that will help it compete against rivals Nokia and Samsung Electronics, which have made gains in recent quarters. While the ESA program won't likely fuel all of this development, it could help.

CNET News.com chatted with O'Connor recently and got the scoop on how this internal VC fund operates and how it can help drive growth for Motorola. Below is an edited version of the conversation.

Q: What is the Early Stage Accelerator program?
O'Connor: It's an internal venture fund that is used to create different businesses using technology developed by Motorola. The group was started at the beginning of 2004 within the office of our chief technology officer, Padmasree Warrior.

How did the program form?
We had a lot of great technology, but we weren't commercializing it. And we needed to find a way to take new innovations and make the business case for it and be able to start pilot programs with customers.

We're taking research out of the lab and ideas out of PowerPoint and putting them into prototypes that can be tested in pilot programs.

I came to Motorola as part of the venture funding group in 1999. And basically we were funding companies that were developing new technologies outside the company, much like Intel Capital has done. We still do that.

But we also looked at the more than 20,000 Motorola engineers around the world and realized we could fund them like start-ups, giving them small chunks of money or seed capital to create a prototype that we could use to expose to product groups and customers.

Can you give some examples of technologies that came to market as a result of the ESA program?
The best example is a project we called Canopy that was incubated in the labs in 1999 until 2003. It eventually became the seedlings of our wireless WiMax technology. In 2004, when ESA first started the project they had about 10 people working on it. So we put the commercialization wrapper around it to go to market so it could be a self-contained business. And then we migrated it into the traditional network business. If we hadn't had the ESA group, the technology could have stayed in the lab environment or maybe it would have been killed. But we were able to bring scalable marketing and get in front of customers.

Are products from this group being deployed today?
Yes, the Canopy project moved out of the ESA program in 2004, and now Sprint Nextel is using some of these products in its 4G WiMax network, which it's currently building.

Are there other examples that you can talk about that are more recent? Yes, there is a trial we are doing right now in Namibia with a cellular operator using wind- and solar-powered bay stations. Cellular bay stations need to connect to the electrical grid to get power, and as you know in rural communities in places like Africa, India or China, power is constrained, so we aren't able to provide as much coverage as we'd like. We developed technology in Swindon, England, and Southern Africa that is the first of its kind to help solve this problem.

The interesting thing is that this went from an idea to a trial in less than nine months. That is warp speed in terms of start-up incubation.

How much do you invest in these in-house start-ups?
Usually the investment is similar to what a venture capital fund would put into a Series A or seed round of funding; about a few million dollars. The wind- and solar-powered project was a low cost investment because it involved a lot of existing technology. Solar- and wind-powered technology has been around for a while and what we had to do was integrate the technology. The trials are going really well so far.

How is what you do through ESA different from what a regular research and development group does?
The difference from our perspective is that we're taking research out of the lab and ideas out of PowerPoint and putting them into prototypes that can be tested in pilot programs.

Does Motorola still do pure research?
Yes, I'd say about half the R&D budget is spent in the labs on pure "blue sky" research on innovations, things that can change the world. Motorola is one of the larger research organizations in terms of companies. The other half is spent looking at technologies that are closer to being developed into products. But the idea is that eventually all research should lead to a feature or product that can be commercialized.

Are the organizations tied or related in some way?
They are separate groups, but they're a related part of the CTO's office. That is part of the beauty of how it works. We're not beholden to the research organization to turn any technology into a commercial product. This is an internal fund that looks across the portfolio of Motorola's research. The reality is that not all the research will ever get into products. The funnel wouldn't allow it. It wouldn't be sustainable.

So what is the process for selecting technologies or projects that the fund will invest in?
We have an internal intranet that we've developed so that anyone in the company can submit ideas. This means anyone from an inventor or engineer to a marketing person to a finance person can submit an idea. We have a template that asks some questions, such as "what is the problem you're trying to solve?" And "what is the target market for this technology?" Then one of my 30 team members looks at the idea to see if it's something we should develop.

And what do you do from there?
Then we start whittling down the ideas to about 1,000 potential projects. And we continue cutting the number back to about a hundred, and we take ideas to different leadership innovation teams around the world. These teams are made up of our top technology leaders and operational people. In these meetings, they ask a lot of questions about the business model, competitors, etc. And then we get down to the top three ideas and finally just one idea.

The whole process can take between one month and three months. And by the time it becomes a commercial product it's anywhere from 12 months to three years. The average is that we get a commercial product out in about 18 months.

So how many projects actually get funded?
I'd say about 20 to 30 a year get funding. And about 65 percent of those actually make it into commercial deployment.

Would you say that you have a higher success rate than some privately funded start-ups?
If you look at an outside start-up, about one in 10 actually makes it. For inside start-ups the success rate is a bit higher. We already have established customer relationships and the manufacturing and development infrastructure. But one of the big lessons we've learned is that we can't go too big too early. It's best to keep the team to five to seven people in the early stage.

A problem we and many other companies faced back in the 2000 and 2001 time frame is that we de-emphasized innovation. And now we are ramping that up.

What other lessons have you learned?
There are three big lessons. One is that you need the highest level of approval from top executives, like the CEO and CTO. Ed Zander, our CEO, has become more and more involved in terms of reviewing projects. He is very aggressive about pushing new technology into products. If another company comes out with a new technology, the executives often question why we didn't have it first.

The second lesson is that you need money. You can't innovate through persuasion and PowerPoint. We have about $20 million to $50 million available to invest every year on early stage development out of a total R&D budget of $4.1 billion.

The third lesson is that you really need a disciplined process for submitting and evaluating ideas. When Motorola had attempted this kind of investment in early stage technologies before, there was one person doing it. But we realized you need a team and a system in place to filter through thousands of ideas. You also need some mechanism for input that allows people to submit ideas and have them quickly vetted. It's impossible to do innovation through informal networking like e-mails.

Part of the allure of a start-up for people is that there is potential for huge payouts. How do you compete against that mentality when trying to foster this internal start-up system? Do people on these teams have the potential to make a lot of money?
There is no way for a large company like Motorola to compete with the financial payout of a successful start-up. A small start-up will always have a higher capacity for returns. But the risk is greater. Google was one of a thousand search engine start-ups that made it, but there were 999 that didn't.

And I'd say that if you look at people working at outside start-ups in Silicon Valley, they are willing to take more risks. But our group also attracts the best and brightest, and it attracts people who are also risk takers.

The people on these teams see the involvement of the CEO and CTO and they want to be a part of these projects. There is also much greater exposure for people on these teams. I wouldn't say there is a difference in how they get paid, but they have more opportunities for advancement, which leads to higher salaries. They might move up the ladder more quickly if they are on one of these internal start-up teams.

But I'd be remiss to say that there is a big differential between those working on an internal start-up and those who aren't. The idea is that everyone at Motorola should be innovating.

Motorola has been criticized for not innovating in the handset market recently. Apple came out with the iPhone and Research in Motion has introduced several new BlackBerrys. And then you have Motorola, which is just now introducing 3G phones when competitors like Nokia have had them for a while. Do you want to comment on this?
The key thing is in the ESA, we focus on early phase ideation. A lot of things we invest in make it into products months or years down the road. A problem we and many other companies faced back in the 2000 and 2001 time frame is that we de-emphasized innovation. And now we are ramping that up.

The things you are talking about are handled more through product development teams. We work closely with them to get ideas for future features or products. And we'll probably see more ideas with the iPhone coming out, since it is creating a sense of urgency. So I think you'll be seeing some interesting stuff from us in the product portfolio soon. As far as ESA goes, though, we are just one element in all of this.