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External
Venture Investments by Nortel |
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Every year, Nortel invested
in10 to 30 external start-ups through it's partner venture capital
firms, acquiring usually from 5 to 20% of each venture
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Value-added activities in the
area of relationship management, screening and selecting strategic
investment opportunities, and the capacity for entrepreneur-friendly
acquisitions allowed Nortel's business model to work effectively and
with speed
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Nortel maintained close ties
with and invested through 7 to 8 carefully selected venture capital (VC)
firms that were at the forefront of creating new telecommunications
service providers. These firms made a network of relationships that made
visible 90-95% of what Nortel needed to know on an ongoing basis. Nortel
used its side-by-side collaboration with
VC firms to gain
access to entrepreneurs and ventures and to learn the skills of venture
screening, valuating, investing and monitoring
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Occasionally, investments
led to acquisitions. However, usually Nortel had no intention of
acquiring the service providers; rather, it's aim was to learn and
understand new business dynamics, to cement relationships, to get
access to new-generation technologies, to cut out its own comparable
research effort, to support OEMs, to share in the value created by
its investments, or to get some preferential rights.
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Major acquisition made by
Nortel in order to integrate critical disruptive technologies
include acquisition of Qtera, the leader in ten-gigabit fiber-optic
technology, for $ 3.25 billion, and acquisition of Bay Networks,
manufacturer of LAN switches and other networking equipment, for $
9.1 billion.
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Sources of
Nortel's Competitive Advantage |
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the ability to search out an
array of competing ventures
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the ability to assess market
and technology potential and strategic relevance of ventures
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the ability to take risks and
financial risk-management skills
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the ability to act with
speed to close deals
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the ability to manage equity
and decisions with uncommon for large firms agility
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Nortel's Core
Competence – Seeking out the Discontinuities
Having declared its independence
from AT&T and Bell Canada in 1976, Nortel* has grown
to become a world
market leader in telecommunications, voice, and data
transmission.
By the turn of the century, Nortel owned up to 90% of the
world market for its selected competence areas such as ten-gigabit systems.
The key to this success is the company's ability to seek out the
discontinuities, whether they crop up in technology or in the market it
serves. Having mastered this ability, the company knows what to do when –
and quite often before – the discontinuity happens.
Unwilling to settle to mediocre
results, Nortel has developed a significantly advanced technology program
and is serious about finding and implementing
disruptive technologies in
such areas as wireless communications and optical networks.
Partnering
with Venture Capital Firms
Having discovered that
most
innovative products and technologies are coming from
venture-capital-funded start-ups, Nortel decided not to create its own venture capital fund, as
they feared that establishing a fund under Nortel's name would just bring
people who wanted to do business with Nortel. And the company wanted to
attract not similar thinking people, but disruptive people who
think differently. Thus, Nortel decided to work side-by-side with a small number
of carefully selected venture capital firms to gain access to
entrepreneurs
and ventures and to learn the skills of
venture screening and
investing.
Nortel assigned several directors
of business development to work with the venture capitalists for one or two
days a week on their premises.
Formalizing
Relationships with VC Firms
Nortel formalized its
relationships with the VC firms. Three- or four-page letters of agreement
clearly articulate the company's expectations and outline the preferential
treatment the company requires, the kind of services the VC firm receives in
return, the information in the venture capitalist's deal flow to which
Nortel will have access, how it will be shared, and other relevant matters
such as quarterly presentations on industry's events by the VC firm at
internal Nortel meetings.
Reciprocal
Preferential Treatment
Relationships between Nortel and
its VC allies are built on fair exchange of valuable ideas and services. VC
firms look constantly for companies that might form strategic relationships
with Nortel. They give Nortel the best opportunities and all-around
preferential treatment. For each relevant deal, Nortel has 30-days'
exclusive consideration.
For their part, VC firms use
Nortel to conduct – on a fee basis –
the due diligence in those areas of technology they don't understand. VC
allies get also 30 days for exclusive consideration of an investment
opportunity whenever Nortel spins out a company from its
internal venture
program. |
