Do any of these sound familiar?
In a “spin-along” system, the parent company spins out an R&D project as a separate company, with the right of first refusal to spin it back in. The authors claim that Cisco does this, and Deutsche Telekom began such a program.
Contrary to the authors’ claims, Cisco did very few spin-ins, as I verified with a contact who was formerly an exec with them.
The authors note the problems with such a scheme. There is jealousy in the employees still in the parent company, and disappointment among the spun-back-in employees (who were important executives with some autonomy in the spun-out unit, but now they’re just mid-level executives again).
If the spun-out company fails, presumably the employees are allowed to rejoin the parent, chastened but wiser. If it does well, though, the parent company benefits from that success, much greater than the parent could have achieved on its own.
What PARC Actually Did Later
Finally, if we’re trying to figure out how PARC’s inventions should have been commercialized, we shouldn’t neglect how they actually did it after the early days. We’ll look at a couple of examples, where PARC launched a startup to commercialize its technology. In “Graceful exits and missed opportunities: Xerox's management of its technology spin-off organizations." (Henry Chesbrough, Business History Review 76.4 (2002)) the author reviews many of the companies that PARC allowed to leave Xerox.
Chesbrough notes that there was substantial resistance within Xerox to most of these startups. Bill Spencer, who took over PARC in 1983, had a rule of “no additional capital” which helped overcome the resistance. In most cases, a researcher could leave Xerox and receive a license to the technology that he or she had helped develop at PARC and perhaps some of their equipment, in return for which Xerox got an equity stake in the company, but contributed no additional funds. On the plus side, the founders had to attract outside investors; on the minus side, it limited the potential gain to Xerox.
Spectra Diode Labs
Spectra Diode Labs (SDL) was established as a joint venture of Spectra-Physics and Xerox, in April 1983. SDL was a result of laser diode research by PARC researchers including Donald Scifres, Robert Burnham, and William Striefer. Xerox and Spectra-Physics each had 40% of the company, with 20% for employees. Xerox put up no additional capital.
This was launched fairly close in time to the Xerox Star, so it’s interesting to ask “what was unique about it?” For one thing, Xerox’s need for laser diodes could be met by just buying them from a supplier, and those needs alone were not enough to support the very large scale production that would bring prices down. There was no question about whether owning laser diodes was “strategic” to Xerox.
To quote Chesbrough :
In 1992, Xerox realized a return of $15 million when the SDL management, led by Scifres, performed a cash buyout of both Spectra-Physics (itself now owned by Ciba-Geigy) and Xerox’s shares for $30.3 million. Three years later, in 1995, SDL went public at a market capitalization of $50 million. Recently, SDL experienced a tremendous surge in its growth, as its technology was applied beyond printers to high-speed optical communication switches. This proved to be a fortuitous new application for its technology, and the company was acquired by JDS Uniphase. The transaction was announced at an astounding $41.3 billion in June of 2000, though this value declined to $13 billion by the time the transaction closed in February of 2001. This amount again exceeded the total market value of Xerox in February of 2001. [emphasis added]
In other words, it was a big win for Xerox. It could have been much bigger.
Synoptcs was founded in 1985 by a couple of PARC managers, Andy Ludwick and Ron Schmidt, intending to use a technology called AstraNet for Ethernet over optical fibers. As Chesbrough relates it:
SynOptics was another PARC spin-off incorporated by two Xerox managers, Andy Ludwick and Ron Schmidt, in October 1985. Ludwick had come to Xerox from SDS in 1969 and had served in a variety of mid level management and sales positions. At PARC, Schmidt had developed an Ethernet system, then called AstraNet, that could operate on an optical cabling system. This would allow much faster transmission of network data than that offered by the coaxial cabling, which was the standard cabling at the time. For nearly two years the pair tried to sell the technology for adoption within an existing Xerox division. They encountered three key impediments, as Ludwick explained:
[First] none of Xerox’s operating divisions was interested in AstraNet because they did not have the right sales force to sell this system…. [Second], the divisions did not believe that it was possible to commercialize AstraNet within the limited window of opportunity that existed. They viewed everything in terms of copier machines, and it usually took four years to roll-out a new copier. Finally, since I thought that the market for AstraNet was at most $100 million, no one at Xerox wanted to invest any time in the technology.
Once on their own, Ludwick and Schmidt realized that the real market opportunity was not optical fiber but unshielded twisted-pair (UTP) wiring. UTP wiring was what was commonly found in offices, and customers loved not needing to run coaxial cable. Twisted pair wiring is almost universal now and “Ethernet” is the only game in town. You can buy one of their switches on eBay: