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Startups – The ” Inside” Stories

You don’t need to quit your day job to launch a startup. Instead, follow the lead of a team from Nortel Networks whose members jump-started a big idea, declared themselves intrapreneurs, and never looked back.

Admit it: At least once in the past few years, over lunch with friends, you’ve kicked around an idea for a startup. Before you were halfway through your sandwich, you had already quit your job, found a venture capitalist, planned the IPO, and spent your newfound wealth. But then you finished eating — and daydreaming — and you returned to the real world.

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Gord Larose and his friend David Allan had that very experience in early 1996, but their story had a different ending. At the time, they both worked in Ottawa at Nortel Networks, a giant telecommunications-equipment maker. One Friday afternoon, over a few beers in Larose’s kitchen, they dreamed up a scheme for renting software over the Internet. The service would allow people to sample programs in a few different ways: They could use a free trial offer, pay for a few hours of use, buy the software outright, or rent to own.

But the two friends didn’t forget about the plan. Nor did they follow the standard-issue fantasy of quitting their jobs and signing up with Kleiner Perkins or some other blue-chip venture-capital firm. Instead, they reported to work on Monday, explained their plan to their boss, and launched into a proof-of-concept skunk-works project. Four years later, their idea has evolved into a full-blown company called Channelware, which Nortel spun off last summer. Today, Channelware has 60 employees and offices in Ottawa, New York City, San Francisco, and Los Angeles. Some of its bigger customers include Barnes & Noble, Sega Enterprises, and Sprint Communications.

Were Larose and Allan nuts not to launch the company on their own and keep all the equity for themselves, instead of ceding much of it to a giant like Nortel? Maybe not. For lots of good reasons, plenty of people with great product and service ideas don’t risk everything they have on a startup.

“We all deal with trade-offs,” says Robert Horne, 60, who recently retired from his post as Channelware’s vice chairman but still remains a company adviser. “If you are a true entrepreneur, you probably shouldn’t be at a big company in the first place. But if you want to test the entrepreneurial waters, doing it from within a company is a good move. And most of us are in the big-company camp, despite what the newspapers tell us.”

That said, big companies have rarely been known for their ability to nurture grassroots ideas. For every person who comes up with an idea like 3M’s Post-it Notes, there are scores of disgruntled up-and-comers who can’t get anyone at their giant corporation to listen to their ideas. When you think about recent big innovations, it’s startups such as Dell Computer, Netscape, and Yahoo! that come to mind.

The people running the behemoths are fully aware of that situation, and they are doing all sorts of things to catch up. Companies like McDonald’s and Microsoft are acquiring stakes in startups or buying them out altogether. Others, such as Intel and General Electric, are setting up in-house venture-capital firms to fund the ideas of those who are outside the company.

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Nortel is taking yet a third path. In addition to scanning the globe for the Next Big Thing, Nortel’s senior leaders are also partnering with the people they know best — their own employees. Three years ago, the company set up an in-house incubator called the Business Ventures Group, which shepherds the best grassroots ideas from skunk works to startup — come what may.

Many more big companies have done nothing of the sort, and it’s entirely possible that your company lacks such a formal program. That doesn’t mean, however, that your company wouldn’t make a similar investment if an insider presented a compelling case for it. If you want to build such a case, you can learn a lot by studying the tactics of the self-styled intrapreneurs who have launched startups within their own organizations.

“Between concept and delivery, there are an incredible number of places where you can miss a step and break both of your legs,” says Jeff Dodge, 39, a former Nortel senior business manager who is now the president and CEO of Channelware. After having jump-started Channelware without a major stumble, Dodge, Larose, and their Nortel cohorts have formed a good model for launching an in-house IPO. Here are five questions, based on their experiences, that every intrapreneur must reckon with.

Do You Stay or Do You Go?

Once, when Larose and Allan were talking about the scheme that would later become Channelware, Larose’s wife interrupted their conversation. “Mary-Anne said that if our idea took off, she hoped we’d get rich,” recalls Larose. “And for a second, I wondered if we ought to leave Nortel and do it all ourselves.”

Allan decided to keep his day job. Larose, 44, who, at the time, was working on Nortel’s residential-broadband applications, knew that he lacked the experience to go solo. “Managing every part of a project this size wouldn’t have fit in with the things that I’m good at,” he says. He also realized that launching a startup at a big company like Nortel had many advantages.

First, there’s the infrastructure. “You can concentrate on the business instead of focusing on where to get the best fax machine,” says Dodge. “Most people think that every startup’s worst nightmare is dealing with staffing and funding. Wrong. It’s the limited number of hours in a day that can kill you. So you don’t want to waste time at office-supply stores.” Nortel also helped out with legal concerns, office-space leases, and public-relations issues. The result: Channelware was spared the Silicon Valley ritual of giving away thousands of stock options just to get the best real-estate agent to return phone calls.

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It also helps that big companies tend to have more patience than venture capitalists do. “The objective is not to get rid of people, which is what venture capitalists do best,” says Dodge, who visited many VCs last year when he needed to raise additional money to fund the spin-off of Channelware. “VCs aren’t set up for hand-holding.”

But Nortel’s Business Ventures Group is committed to hearing ideas, even if they’re only partially formed. “We let people refine their plans and pitch them to us again,” says Horne, who was a founding member of the group’s advisory board. “You don’t get a second chance with VCs.”

Above all, when you’re just starting out and no one knows you, a large company’s endorsement can mean everything. Being affiliated with a big-brand company can open many doors. “When was the last time you picked up your phone and didn’t hear a dial tone?” asks Dodge, hinting at Nortel’s industrial-strength reputation. “Our largest customer told us that if we weren’t a Nortel Networks venture, it never would have done business with us.”

So Larose and Dodge thought a bit about what it would be like to hoard the equity and to ditch Nortel. But they didn’t consider that idea for very long. “We may not be rich,” Larose says. “But, in hindsight, the whole process of incubating the business within Nortel still gave us a good shot at getting rich.”

Who’s on Your Team?

Joanne Hyland, 39, a Nortel VP, has led the Business Ventures Group since its inception three years ago. The group has received hundreds of proposals. She says that the worst-laid plans all have had one thing in common: “They all lack a compelling team. Too many people fail to ask themselves whether the team they’ve assembled is prepared to pull 200% of its weight.”

As Larose began to develop Channelware within Nortel, he realized that he needed help with the programming. “Nortel is full of smart people, and finding them wasn’t the problem,” he says. “When people wandered the halls, they’d see one person testing a new phone switch and another tuning up a Unix machine. And there I was, playing Quake because I’d figured out how to rent the game over the Internet. People gravitated to the project because it seemed cool.

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“I looked for people who had high energy and total commitment to the project,” Larose continues. “And if you happened to have formed a browser company in a previous life, and it went bankrupt — but boy, did you learn something about starting a business — then you had a lock on a job.”

Larose also had a clear-eyed understanding of his own strengths — and his own limitations. From the beginning, he knew that he wanted only to run the technical side of the project. That meant that he needed a project leader.

“I have trouble behaving myself when I’m around a lot of executives,” says Larose, “which is true of most technical people.” Jeff Dodge, he says, is slightly more presentable. As Dodge himself says: “I’m housebroken. I can go into a room crowded with customers, translate engineering terms into English, and put those customers at ease.”

As Larose spread the word within Nortel about Channelware, Dodge emerged as the go-to guy who could lead and sell the project. “People asked me why I didn’t want to run the project myself,” says Larose. “And my answer was ‘I’m best at heading up the technical stuff. Jeff has strengths that complement mine, which is why we have a stronger team.’ “

Is There a Business in There?

Once Larose had recruited his core group of coconspirators, the next step was to make a case for the business. It’s easy to get starry-eyed about your prospects when a big idea is buzzing around in your head. But unless you are utterly realistic, you won’t impress the people in your company who control the money and the resources that you need.

“Be open to discussing any potentially fatal flaws that could blindside you along the way,” says Hyland. “For example, it’s crucial to recognize that a single product will rarely sustain a business in the long run. To impress potential investors, you must clearly present a business model that has long-term sustainability in the marketplace.” That was certainly one of Channelware’s concerns. But fortunately, it was offering a highly flexible product, one that could be used to deliver all kinds of software in a number of different ways.

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Who would want what Channelware had to offer? Not everyone. Larose and Dodge decided to target software companies whose retail products had a high turnover rate. Instead of focusing on companies that sold graphics programs that people upgraded just once every three years, they searched for software developers that made their money within 90 days — and then started gearing up for the next release.

The two men decided that the computer-gaming industry should be their main target, because a small number of players control most of that market. Dodge figured that if they could sign up two of these companies, then Channelware would be in business.

Meanwhile, Larose was thinking about the executives who ran the technical side of those companies: How would they want to leverage his software? “We decided to make Channelware totally blind to business models and delivery methods,” he explains. “Video-game companies don’t want to build another server to deal with selling their wares online. So we made Channelware compatible with every system used by game developers. That way, they’d be able to deliver product over the Web , by CD-ROM, or however else they wanted to deploy it.”

Does the Damn Thing Work?

By early 1997, the Business Ventures Group had been formalized, and Hyland had seen Channelware’s business plan. But Dodge and Larose knew that they needed more than just an innovative model and encouraging projections. Only a prototype — a piece of working software — would demonstrate that the concept really worked.

“All sorts of people pitched the Business Ventures Group using nothing more than PowerPoint slides and some numbers scribbled on a napkin,” Larose says. “We wanted to show the group something real, even if it was pretty rough.”

The demo had to answer some basic questions: How would Channelware deliver its customers’ software to consumers? How would those software developers know when Channelware had delivered the goods to consumers? And how would Channelware protect the software from cyber-pirates?

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“The prototype was really fancy,” Larose recalls, laughing at the application he helped build. “It was an analog alarm clock that appeared on a computer’s desktop. The clock represented the software that we’d rent. When you double-clicked on the clock, you were immediately linked to our Web site. You entered your name and other information, you exited from the site, and then the clock would pop up again and start ticking. That was our proof of concept.”

It wasn’t elegant, but Nortel’s technical people understood immediately that it took some pretty sophisticated programming to make the app work. Still, there was another worry.

Back then, Larose and Dodge were working in Nortel’s residential-broadband group. Nortel had charged them with finding new applications that would drive demand for high-speed Internet service in residential buildings, thereby increasing demand for Nortel equipment. As Larose built the prototype, he confirmed a long-held suspicion: His uncomplicated piece of software wouldn’t need one of Nortel’s fat pipes. The software worked just fine on a 56-KB modem, which was the standard for most home computers at that time. The problem: Channelware was not fully devoted to broadband. So why would Nortel decide to back it?

But Dodge remained optimistic. “Despite the flaws, we just couldn’t shake the idea from our brains,” he remembers. “It was so intuitively good, we knew we’d convince somebody that the business made absolute sense.” Dodge was right. Hyland and the rest of the Business Ventures Group quickly realized that if Channelware survived its incubation period, Nortel could spin it off.

But what if your company lacks a setup for spinning off great projects? “There’s an obvious argument that you can make,” Dodge advises. “You point out that if the plan has real potential, the company should put some resources into it, nurture it, and work to improve the ROI — just as it would with any other investment. It’s that simple.”

Are You Getting Your Fair Share?

All things being equal, the entrepreneur who launches a successful, VC-backed business will almost always come out ahead of the intrapreneur who builds a startup from within a larger company. But that doesn’t mean the intrapreneur won’t make good money. In Nortel’s case, people who lead in-house startups earn their regular salary, plus a bonus every six months — if they nail certain milestones. (Those bonuses can be twice as much as the average Nortel perk.)

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When a company like Channelware is spun off, a second plan kicks in. Nortel did some benchmarking against other corporate venture programs and decided to apportion 15% to 30% of the company to the startup team. Dodge and his group had raised additional venture capital as Channelware was spun off, which diluted their stake: Nortel owns 44% of Channelware, Channelware’s employees own about 20%, and various investors own the rest.

So did Dodge, who got a 3% stake in the company, miss out on a huge payoff? “Jeff did suffer a bit financially, and he regularly reminds us of that,” says Horne, laughing. “But had he and Gord started Channelware in a garage, they wouldn’t have earned a dime until someone agreed to fund their idea. And for the first couple of years, they’d have made only about 75% of what they were earning at Nortel.” Then maybe they’d have had a one-in-a-hundred chance of hitting IPO pay dirt.

When Dodge compares that potential scenario with the situation that he’s in today, he says he can’t complain. “I’d much rather own a small percentage of a big thing,” says Nortel’s most successful intrapreneur, “than a big percentage of a small thing.”

Ron Lieber (rlieber@fastcompany.com) is a Fast Company senior writer.

Action Item: Start Me Up

Transforming a good idea into a real business requires you to zero in on a multitude of operational details, without losing sight of the big picture. And that’s where “The Fast Forward MBA in Project Management” comes in.

Using checklists, worksheets, and other aids, author Eric Verzuh, president of Versatile Co., a project-management consulting firm in Seattle, takes you through each step of the startup process, helping you make sure that your big idea gets on track — and stays there.

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Coordinates: $16.95. “The Fast Forward MBA in Project Management,” John Wiley & Sons, www.wiley.com

Sidebar: The Skunk Works Starts Up

Before the startup, there’s the “skunk works.” The term dates back to the 1940s, when a small group of engineers at Lockheed Martin developed the first jet fighter, according to Jay Miller’s exhaustive book, Lockheed Martin’s Skunk Works. The engineers were fans of the “Li’l Abner” comic strip, which featured a notorious brewery called the “Skonk Works.” Since the jet-fighter project was kept secret, the engineers would often answer their phones by announcing that callers had reached the Skonk Works. The name stuck, and the spelling changed several years later.

A trailblazing team within Lockheed was responsible for rapidly assembling aircraft prototypes from scratch, and department founder Clarence L. “Kelly” Johnson developed a remarkably forward-looking set of guidelines for getting work done. Here are three of Kelly’s original rules for moving skunk-works projects ahead:

Multitask Like Hell. Each engineer on this project shall be designer, shop contact, parts chaser, and mechanic, as the occasion demands.

Make the Process Transparent. Individual managers must have access to all plans and schedules, and must understand how their part contributes to the whole program.

Blow Up the Bureaucracy. A purchasing setup, working directly for this project and no other, shall be made. It will operate without the usual red tape and policy encumbrances. Keynote: Get the stuff.

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Coordinates: $29.95. “Lockheed Martin’s Skunk Works: The Official History …,” Midland Publishing

Sidebar: Talk Like a VC

Venture capitalists remain the most experienced evaluators of big, new ideas. What must you do to win over the VC types at your company?

We asked Dan Beldy, 34, a partner at Hummer Winblad Venture Partners, which invests in companies like AdForce, Liquid Audio, the Knot, and Pets.com.

Don’t Do This: “People write up their business plan with a top-down mentality. They invariably talk about a particular vertical market that has X billions of dollars in sales each year. They’ll tell us that they can get 10% of that market. But when we ask them for the average sale or the cost of customer acquisition, the answer almost always is ‘I’ll get back to you.’ “

Do This: “Entrepreneurs have got to display a clearly articulated vision for what they want to do. And they must tell their story from the bottom up. A bottom-up approach means that they know with absolute certainty whom they’ll sell to, how much it will cost, and what the sales per week will be next March. Sure, a lot of assumptions are involved, but entrepreneurs need to break their business down to the molecular level. That information leads logically to the next step, which is saying to an investor, ‘I am going to take this money and do X, Y, and Z with it, and here’s what will happen in the end.’ Your survival depends on knowing that stuff cold.”

Coordinates: Dan Beldy, dbeldy@humwin.com

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Sidebar: Start Up, Set Back

Sometimes, large organizations are less than ideal for launching a startup. Just consider two of the speed bumps that Nortel’s Gord Larose and Jeff Dodge had to negotiate as they beat back the bureaucracy while building Channelware.

Lost in the Database. “I was told that I couldn’t use Nortel’s humongous jobs database to hire staff for Channelware. Why? Because I wasn’t a hiring manager,” recalls Larose. “Why wasn’t I a hiring manager? Nobody reported to me. But how could I hire people to report to me unless I was allowed to use the database to hire them? There was no one who was so perverse as to defend this contradiction. It was just one of the side effects of being part of the big machine.”

The Ultimate Shell Game. No exceptions were made for us when Nortel declared a hiring freeze,” says Dodge. “So I formed Channelware, incorporated it under my own name as a shell company, made my hires, and ran their salaries through Nortel as a consulting expense. You do what you have to do to keep the enterprise moving forward.”

Sidebar: Start Up, Shot Down

What if your company backs your big idea, and your big idea bombs? Does that mean that your career is doomed? Plenty of people at Nortel Networks have wondered about that very thing. Anshu Prasad, 28, and Jim Carew, 33, along with other Nortel employees, spent a year developing a software package, called Guru, that helps programmers debug their work. After the Business Ventures Group took a careful look at Guru, it decided that the product’s market was too small. But despite devoting a year to a project that never made it to market, Prasad and Carew were able to reboot their careers at Nortel. Here are some of the reasons why.

They stepped into the spotlight. Carew got a huge charge out of appearing before the Business Ventures Group to defend Guru. “There was no other place in the company where I could have gotten the same experience,” he says.

They picked up new skills. “The process of pitching Guru to the Business Ventures Group really forced us to focus on the business side and to wrestle with specific problems — for example, where we’d sell the program and how much we’d charge for it,” says Carew. “I had no formal training in business, but I suspected — and later confirmed — that my skills extended beyond software programming.”

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They took a risk — and got a second chance. Even though the Business Ventures Group decided to drop Guru, the project helped Carew and Prasad achieve recognition throughout Nortel. Carew was offered three different promotions within the company. (He elected to make a lateral move first, so that he could pick up some new technology skills before attempting to vault the career ladder.) Prasad got job inquiries from Nortel and from other companies as well. He decided to stay put and help Nortel’s biggest customers — phone companies — to assess new technologies.

“I understand why people might assume that there are inherent penalties for failure and that they shouldn’t try anything unless success is guaranteed,” says Prasad. “But our experience suggests that failure does have its own rewards.”

Coordinates: Jim Carew, jcarew@nortelnetworks.com; Anshu Prasad, anshup@nortelnetworks.com

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