Lucent's Startup Garage Sale
The company is selling 80 percent of its stake in Lucent New Ventures Group, the five-year-old division of Lucent that's been responsible for incubating a portfolio of 27 companies that evolved from technology coming out of Bell Labs (see Lucent Dumps New Ventures). The buyer is Coller Capital, a U.K. firm that specializes in buying up the private equity interests of investors that want out for various reasons. Sources close to the deal say it will bring in "just under $100 million." Reportedly, Coller was one of several firms that bid on Lucent's portfolio.
Lucent will retain a 20 percent interest as a limited partner in a new firm called New Venture Partners II LP (NVP II), which is being established by Coller. The group will start life at the present New Jersey location of Lucent New Ventures Group. It will be headed up by Tom Uhlman, who formerly managed the group. He'll be joined by the dozen or so Lucent staffers who made up that division.
"We won't be adding any personnel," says a Coller spokesman. "We have absolute confidence in the management team Lucent already has in place."
Of the 27 companies in the sold portfolio, only a handful pertain directly to optical networking. Those include AraLight Inc., which makes "ultradense" optoelectronic modules; Siros Technologies Inc., which makes VCSEL lasers and other photonic components; and Sychip, specializing in optoelectronic chips.
According to information from Dun and Bradstreet, these companies are slim pickings at present. The reports show that Aralight makes roughly $3,900,000 in annual revenues; Siros, $2,700,000; and Sychip about $10,000,000.
Spokespeople at Coller acknowledge the firm wasn't focused on optical networking in making the purchase and that it remains to be seen how much the firm will invest in any of the startup companies, including optical ones.
"I don't think Coller viewed the optical networking companies in Lucent's portfolio as having very high values," says an industry source, who asked that name and affiliation be withheld.
Interestingly, Lucent's holding onto Lucent Venture Partners, the Palo Alto-based division that backs startups that began life outside the company. That group has backed roughly twice as many startups in its portfolio as the Lucent New Ventures Group did. The portfolio's optical networking startups include Bandwidth9 Inc., BTI Photonics Inc., Caspian Networks, ChiLight Technologies Ltd., Cirrex Corp., Cognigine Corp., Lambda Crossing Ltd., OptiMight Communications Inc., and WaveSplitter Technologies Inc., among others.
"There are no plans to sell Lucent Venture Partners," a spokesperson said.
Experts say the Coller deal is a smart but unusual one, because it's the first time a major telecom firm has successfully divested itself of an in-house venture portfolio, management team and all. "It's quite unique, and there isn't that much information yet on the role of corporate funds in secondary equity deals," says Delaney Brown, a research analyst at Almeida Capital, a research firm that specializes in private equity.
Experts say the management team was no doubt a key factor in Lucent's ability to make this sale. Firms like Coller make money by getting sizeable discounts on shares of companies they don't have to worry about managing.
"We need to know that fund managers are good at what they do," says Tom Bradley, partner at Pomona Capital, another firm that specializes in buying private equity stakes secondhand. He says the lack of good management has kept firms like Pomona from buying corporate portfolios, even though they've been on offer for quite awhile.
"We look for asset diversity, expertise of management, and the right price. Usually we buy an interest in companies that are already well managed," says Bradley. Firms like Pomona don't have to worry about stakes in startups managed by the likes of Sevin Rosen Funds or Kleiner Perkins Caufield & Byers. It's a different matter entirely when a portfolio comes with a management team that's unknown or untrusted by the buyer.
It doesn't look as though this week's news will start a run on in-house VC sales among Lucent competitors anytime soon. Alcatel SA (NYSE: ALA; Paris: CGEP:PA) says it's already achieved what Lucent has by becoming an "arm's length" limited partner with an undisclosed stake in independent VC firm Alcatel Venture Partners, headed by Steve Kim. Cisco Systems Inc. (Nasdaq: CSCO) says it chooses to invest in startups without formalizing its venture arm; Siemens Venture Capital (SVC), which consolidated its several in-house venture divisions in September 2001, relies on Siemens Venture Capital (SVC) for technology innovations and strategic partnerships.
Nortel Networks Corp. (NYSE/Toronto: NT) appears to have a similar approach to Cisco's in terms of investing in private companies. But the firm wasn't answering any questions at press time. Recent filings with the U.S. Securities and Exchange Commission, however, indicate the firm is interested in divesting itself of any and all properties not related to its immediate goals.
— Mary Jander, Senior Editor, Light Reading