More large corporations create start-up incubators to foster innovation

November 25, 2012

Large corporations are increasingly forming business incubators where they lend office space and provide mentors and other resources to start-up ventures, often without taking an equity stake in the young firms.

The trend is part of a broader effort by big companies to keep pace with the technological changes shaping consumer habits and harness the entrepreneurial fervor that often propels fledgling ventures.

This differs from the longheld practice at many corporations of creating venture capital arms that invest money in early-stage companies whose products fit their strategic mission and may later become acquisition targets.

“These internal incubators serve to signal a very important [message] to both people that are working for the firm and people that are external, and that is that the firm is very open to innovation that may not seem like it is fitting in the current strategic focus of the firm,” said Rajshree Agarwal, professor of entre­pre­neur­ship and strategy at the University of Maryland’s business school.

Herndon-based Volkswagen Group of America said last month that the company’s Electronic Research Lab in Belmont, Calif., has begun accepting applications from start-ups for a spot in its Silicon Valley-based incubator.

The program will house 10 early-stage firms developing technologies that may not seem inherently automotive, but could be used in future Volkswagen cars, said Chuhee Lee, deputy director of the electronic research lab.

“From the automaker perspective, we sometimes can actually apply a number of technologies intended for something else in the car,” Lee said

For example, Lee said the navigation system in one of the company’s new European automobiles can pull the geographic coordinates from a smartphone photo and call up directions to the spot where it was taken.

The company is also interested in such popular consumer technologies as voice recognition, biometrics and game strategies, all of which could be used to make the driving experience safer or more enjoyable, he said.

“The consumers are experiencing these new electronics from the consumer electronics world, and when they get into their car they have new expectations,” Lee said.

Looking for an advantage

Volkswagen doesn’t plan to invest money in any of the start-ups, at least not initially. Agarwal said that’s not uncommon, particularly because the start-up’s ultimate financial success and a potential windfall for investors is not the biggest benefit to a company like Volkswagen.

“The financial gain is coming not from the niche market that the start-up is in, but from the main market that Volkswagen is in by using this technology that will give Volkswagen an advantage against its competitors,” she said.

At the AOL campus in Dulles, executives are playing host to start-up companies working on fresh ideas in such areas as mobile and big data. The initiative, dubbed Fishbowl Labs, got under way earlier this year.

Co-founder Bud Rosenthal said AOL is not preoccupied with whether the start-ups eventually make money or develop a viable product. Instead, he said, AOL benefits if it can successfully foster an entrepreneurial spirit among its staff.

Rosenthal said the company hopes Fishbowl Labs will allow AOL employees to absorb some of the start-ups’ risk-taking nature while, at the same time, convincing entrepreneurs that AOL is still the technological innovator that pioneered home Internet use.

“AOL is a turnaround, and as part of that turnaround, one of the things we need to turn around and reinvigorate is our culture and our sense of urgency and our willingness to take risks,” Rosenthal said. “If we don’t do those things, we will not be successful.”

“There’s no silver bullet to turning around a culture, so this is one of a series of things we’re tyring to do to try to change AOL’s culture,” he added.

Steven Overly covers the business of technology, biotechnology and venture capital in the Washington region for The Washington Post and its weekly Capital Business publication. In that capacity, he has written about start-up struggles, investment trends and major drug discoveries.
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