As VMware Prepares for IPO, EMC Looking More Toward Internal Innovation

This summer’s hottest IPO might well be the forthcoming sale of 10 percent of VMware, the virtualization company owned by storage giant EMC (NYSE:EMC). The offering showcases the highly successful acquisition strategy of Hopkinton, MA-based EMC, which over the last roughly four years has laid out more than $7 billion to acquire upwards of 30 companies. These purchases, which besides VMware include RSA Security and Documentum, have opened major new markets for EMC and, as of 2006, were bringing in more than $1.5 billion a year in new revenues.

It’s a great strategy. But it’s not enough, says Executive Vice President and Chief Development Officer Mark Lewis. Over the past year, the company has quietly launched an aggressive effort to create robust new business opportunities and revenue streams from within EMC’s ranks, rather than via acquisition. “Clearly, we had not as of yet looked at what I would call major new market or disruptive market innovations coming from inside,” Lewis says, explaining the strategy. “And that is a shift for us now.”

Much of this activity is taking place in the Technology Ventures Group, a rapidly growing enterprise on the fourth floor of 11 Cambridge Center, in the heart of Kendall Square. Adorned in bright colors, with lots of open space for brainstorming and collaboration, and office walls that double as whiteboards (all greatly inspired by the Googleplex), the TVG feels wildly different from most other parts of EMC. Group staffers explore and develop ideas for creating major new businesses. If these ideas are approved, EMC will fund them—to the tune of millions of dollars apiece, if necessary. The specifics are all very hush-hush. Whiteboards were actually wiped clean before my arrival. But EMC did confirm that the group is currently roughly 20-strong and set to double over the next few months as the company prepares to announce its first ventures later in the year.

Lewis is quick to point out that the creation of TVG, which also has operations at EMC’s Hopkinton headquarters, does not mean the company is abandoning traditional research and development work. EMC spent $385 million (12.3 percent of revenues) on R&D in the just-announced second quarter of 2007. The vast majority of these funds are devoted to incremental innovations, such as improvements to existing products or the creation of smaller-scale new products for existing businesses. But when it comes to getting into major new markets, Lewis says: “We have never sought out significant new billion-dollar kinds of businesses other than through acquisition.”

Nearly 18 months ago, says Lewis, EMC executives began exploring how to beef up internal innovation. A basic concept was that by finding new efficiencies in core R&D practices—for instance, by creating one security platform that could be installed across product lines instead of fashioning different solutions for different products—it could free up funds for new ventures without affecting the overall R&D budget.

With that philosophy at work, the Technology Ventures Group was formed a little less than a year ago. Reflecting the fact that it is often extremely difficult to launch disruptive ventures inside existing businesses, officials gave the new unit its own space—and provided TVG members a longer-than-usual leash to explore ideas. “These are really areas where we needed to start very clean,” says Lewis. A new venture, he adds, “could be in technology, business, or process innovation.”

I asked Lewis if he could share what ventures TVG was forming, or at least what areas it was exploring. “No and No” was his polite response. But he did say announcements would be forthcoming, probably around November. For now, he added, “you can consider them in stealth mode.”

He also pointed out that the TVG was just one aspect of the company’s new focus on internal innovation. Another, launched only a few months ago, is an early-stage companion to TVG called the EMC Innovation Network. This is, in essence, a consortium where the company is expanding its collaborative research with universities, outside development partners, and its own researchers to do proof-of-concept explorations of ideas at much earlier stages than what TVG works on: “pre-Series A” work, as Lewis describes it.

Corporate venturing efforts—either to nurture ideas from the outside, or, as in EMC’s case to grow innovation from within—are nothing new, says Henry Chesbrough, executive director of the Center for Open Innovation at U.C. Berkeley’s Haas School of Business. He can cite a long list of business-school case studies of such activities going back to at least 1971. What’s important isn’t that groups like TVG are tried, he says, but whether companies sustain them over time, including through changes in leadership. “One thing to say about these corporate venturing activities, there’s a herd mentality, where it seems like everybody gets in, the market turns south, everybody gets out,” he says. Only time will tell, he says, whether EMC really has the fortitude and commitment to make the Technology Ventures Group and efforts like its Innovation Network work.

For their part, EMC officials say they are not only committed to the concept, but that the existence of both the Innovation Network and the TVG are signs that the company will be far less aggressive in the acquisitions arena in the near-term future. For proof, they point to the remarks of CEO Joe Tucci in last week’s earnings call, where he indicated that EMC would apparently content itself with “buying additional small…tuck-in technology companies this year.”

As Lewis sums up, “We’re really changing the face and flavor of how we spend our R&D dollar.”

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