Company seeks to re-create entrepreneurial spirit of years gone by

XEROX LOOKS TO VENTURE CAPITAL TO UNLEASH PROMISING NEW IDEAS

September 02, 1991|By Mike Langberg | Mike Langberg,Knight-Ridder News Service

SAN JOSE, Calif. -- Xerox Corp. is still trying to live down its reputation as the company that invented the personal computer and then didn't know what to do with it.

The company's Palo Alto Research Center, known as PARC, invented a complete personal computer system in the late 1970s that was years ahead of anything then available from IBM or Apple.

But Xerox, which showed enough entrepreneurial spirit in the 1960s to single-handedly build a global market for office copiers, blew it. The company's stifling bureaucracy couldn't accommodate a product as new and different as PARC's creation, so Xerox missed an opportunity so huge that it was chronicled in a 1988 book derisively titled "Fumbling the Future."

PARC technology instead leaked to Silicon Valley competitors -- including Apple Computer Inc., Adobe Systems Inc. and Sun Microsystems Inc. -- creating billions of dollars in sales for every one except Xerox.

Xerox is determined that won't happen again. In a pioneering experiment, the company has focused on venture capital as at least part of the answer. Other large corporations are now looking at Xerox's strategy: using the entrepreneurial spirit of venture capital partnerships to unleash promising ideas that are languishing in research labs.

In early 1989, Xerox created a subsidiary called Xerox Technology Ventures, or XTV, and gave it $30 million to invest in start-up companies built on Xerox technology that didn't immediately fit any of the company's business plans.

"I have as my goal looking to re-create the energy that existed in the parent company when it was smaller," says Robert V. Adams, a 26-year Xerox veteran who is XTV's president. "I think the XTV model can teach something to all large companies that are perplexed at why they can't be as successful in new businesses as they are in their main business."

Xerox spends $500 million a year on research and development. Most of the money is targeted at the company's core markets in document processing and office automation. But, inevitably, some of the R&D effort goes down blind alleys in projects that ultimately don't have enough sales potential or involve entry into markets that just don't interest the company.

XTV's mission is to explore those blind alleys.

"There is a growing realization that intellectual property is too important to lie fallow simply because it doesn't fit into the corporate profile," says Richard A. Marciano, head of technology commercialization for SRI International, the Menlo Park, Calif., think tank.

"It's awfully difficult to build something new within an existing structure," Mr. Marciano adds. "It's one thing to plant a seed in an open field. It's quite another thing to plant a seed in a field full of flowers and weeds."

One example of this "open field" approach is Advanced Encryption Systems, an XTV-backed company taking shape in Santa Clara, Calif.

Clifford A. Reeser, the driving force behind Advanced Encryption, spent nine years with Xerox developing security systems for government computers. Xerox had designed a similar system for commercial users but wasn't interested in bringing the new idea to market.

"It's not a billion-dollar product," Mr. Reeser explains. In other words, it was too small for a corporation with annual sales of $18 billion.

But at the suggestion of his boss, Mr. Reeser pitched the idea to XTV and got almost $1 million in seed money last year.

Mr. Reeser got other benefits as well, including free office space in a Xerox building. Most important, perhaps, Advanced Encryption calls itself "a Xerox company," giving the fledgling business an aura of credibility that is crucial to overcoming customer skepticism.

XTV, based in El Segundo, is playing the role of a traditional venture capital firm, owning a majority of Advanced Encryption stock and keeping a watchful eye on Mr. Reeser's progress. Mr. Adams is even recruiting the company's first chief executive officer, because Mr. Reeser by his own admission lacks the necessary experience for the top job.

If Advanced Encryption's product is a success when it hits the market next year, Mr. Reeser and XTV ultimately could make a significant profit -- giving them an incentive most large companies can't match with internal development programs.

XTV has invested about $20 million in 11 start-up companies, according to Mr. Adams, a relatively modest amount in the world of venture capital. Venture capital funds typically take 10 to 12 years to reach maturity, so it's still too early for a full assessment of XTV's performance.

But Mr. Adams already has racked up one clear success and one clear failure.

One of XTV's start-ups, Advanced Workstation Products Inc. of El Segundo, a maker of circuit boards for workstations, was acquired by Xerox last year. Because Xerox holds XTV at arm's length, XTV was able to record a large profit -- which Mr. Adams refuses to specify -- when Xerox paid for XTV's stake in the company.

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