Tech Companies Seek Start-Up Relationships

Companies need new models for innovation when forced to grow revenues and profitability while also streamlining operations and focusing on core competencies. Vertically integrated companies like IBM, AT&T and GE used to have the cost structures to support basic research, developing much of their corporate innovation internally.

That's no longer the case. Today, corporations prefer investments, partnerships or acquisitions of emerging technology companies.

"A key element of corporate R&D labs is the external start-up community," said Tom O'Donnell '85, Manager, Business Development within Cisco Systems' Technology Center organization.

"It's all about innovation," he said. Companies need to refresh themselves by doing new things and creating new growth opportunities. More and more often, they buy into that growth through acquisitions or strategic alliances.

"Within Cisco, the corporate innovation model can be summed up in three words: build, partner or buy," O'Donnell continued. "Internal development, the preferred option, accounts for roughly 60 to 70 percent of Cisco's overall innovation," he said. Cisco also partners with "best of breed" external organizations to jointly develop new technologies. But the option that "gets most of the attention" he said, "is external investments and acquisitions." In many cases, a specific innovation initiative may have elements of all three strategies. "This blended, portfolio approach to innovation has been a key contributor to Cisco's success over the years."

While building a new area internally offers better control and tighter integration, buying into a market opportunity through investment or acquisition usually decreases overall technology and market risk while increasing chances for success. Venture firms fund the higher risk opportunities, allowing a start-up's idea to incubate externally and achieve certain milestones. At that point, the risks are reduced to manageable levels, and a larger company may consider an acquisition.

As an example of this trend, IBM recently announced the creation of an advisory panel of venture capitalists to help the company tap start-up companies as potential suppliers, customers, or acquisitions.

O'Donnell's area, the "Technology Center," is an internal advanced technology incubator. Acting like advance scouts, people in O'Donnell's department constantly search for emerging technology and business opportunities for Cisco. The team identifies and develops emerging trends and future markets in the three- to five-year horizon. Partnering with early-stage, emerging technology companies in those areas of interest can take many forms, including joint development and seed investments. As these companies mature and reach "critical mass," they also may become acquisition targets, eventually ending up as Cisco business units.

"Working externally to bring innovation back into the company is difficult," O'Donnell said. But he noted that Cisco's third-largest development center is in Boxborough, Massachusetts, where more than 1,800 people work. The core of the Boxborough team formed through the aggregation of Cisco's 13 New England acquisitions over the last 10 years.

He welcomes discussions with entrepreneurs that understand what Cisco does, how it operates and in which markets and want to explore partnering with Cisco. While he acknowledges that many hurdles exist in developing relationships, O'Donnell encourages start-up companies to contact him if they see value in working with Cisco and possibly developing a longer-term partnership.

"We're extremely interested in expanded relationships with local start-ups and the broader Boston/Worcester-area emerging technology community," he said. Tom can be reached at todonnel@cisco.com.