Looking for a few good ventures

In terms of launching a telecom incubator, the timing couldn't have been much worse than April of last year, when the industry — and the economy overall — started its relent-less downward spiral. That ideaEDGE, a small San Diego-based incubator, is still around to talk about it may speak volumes about its business plan.

“It took us two to three months to realign our strategy and to basically make sure we knew what we were doing,” says Rick LeFaivre, managing partner of technology at ideaEDGE.

Unlike some well-known incubators such as CMGI, ideaEDGE focuses its attention on a handful of ventures a year; the company has launched only four ventures to date. “We saw this coming,” LeFaivre says. “We knew the Internet bubble was going to burst.”

And burst it did, though not necessarily to the detriment of the newly formed company. “Our feeling was: That means there is going to be more money for good, solid ventures,” says Jim Collas, managing partner of strategy for ideaEDGE. “We have to be careful how we manage our capital, but there are a lot fewer companies coming up, so there's a lot less competition.”

What distinguishes ideaEDGE's business strategy from those of other Internet incubators is its focus on the mobile Internet. “It's not just about re-purposing the Web for smaller devices. It's new services that will be tailored for devices — things that you don't do on your PC,” Collas says.

Though there's no such thing as a sure bet in today's soft economy, Tom Kucharvy, president of Summit Strategies, believes that the mobile Internet is a good one. “The wireless area tends to be more sustainable than many of the segments of the Internet — particularly if you're focusing on business apps that demonstrate those benefits for the consumer,” he says.

Not unlike the leaders of some competitive service providers, execs at ideaEDGE think of their company as a smaller, more nimble player than some larger incubators that spread their resources over a much wider area. And like many start-up telecom companies, ideaEDGE boasts a roster of seasoned telecom and datacom executives — for example, Collas spent time at Gateway and General Dynamics; LeFaivre did stints at Tektronix, Sun Microsystems and Apple Computer.

One possible disadvantage of being a small incubator with a narrow focus is that it can be damaged more significantly should one of its ventures fail. But focus is where some of the larger incubators first got into trouble, according to Kucharvy. “The initial incubators were just very broad,” he says. “A focused strategy is certainly good as long as you pick the right areas in which to focus.”

So how does ideaEDGE ensure that it has picked the right area? In a word: research. The ideaEDGE team has what LeFaivre calls “a very active ideation process.” During this ongoing brainstorming process the company maps out venture opportunities. “We get very involved from an executive standpoint,” Collas says.

For example, some start-up companies hire executives too early in the incubation process, thereby populating the executive ranks with the wrong caliber people, Collas says. “Our process eliminates that challenge in that we assign execs that have expertise in that area,” he says.

Though ideaEDGE welcomes venture proposals from the outside — interested parties must fill out a form on the company's Web site (www.ideaedge.com) — the company relies heavily on its internal staff of general managers and four managing partners to generate start-up opportunities. “We're not the kind of people who sit back and twiddle our thumbs and see what happens to come into the door,” LeFaivre says.

Part of the company's secret is that it doesn't go it alone. The company is buttressed by a number of strategic partners such as Qualcomm (which is also an ideaEDGE investor), Ericsson, Sun Microsystems and Motorola. “We kind of seek out who we think of as the market or technology leaders in different spaces,” LeFaivre says.

And no two partnerships are alike; partner companies can decide how much they want to be involved in the incubation process.

For example, M7 Networks was forged through alliances with Exodus Communications, Nuance and Qualcomm. The company takes carrier-class mobile Internet infrastructure from Ericsson and realigns it for use in Exodus' data centers.

Wireless is becoming an important part of Exodus' technology strategy, says Exodus Chairman and CEO Ellen Hancock. “What we're saying is that we're not going to overly engage in any particular networking technology, but we want to be involved in all of them so that we understand the impact it has on our customers and their services. So wireless is clearly part of our strategy,” she says.

Plus, LeFaivre worked with Hancock while at Apple, so the partnership made sense. “He is a very good architect; he really does understand technology very well,” Hancock says.

Part of ideaEDGE's alliance strategy is to create ventures that can serve a global marketplace. “We had VCs that basically said they won't do a deal out of Silicon Valley,” Collas said. “You think about that contrast to us, where we're spending half our time on the road.”

Risk will always be a part of the incubator model, though, and it's something that ideaEDGE has come to terms with. “It is one aspect of the overall venture game — the fact that there's no guarantees,” LeFaivre says. “There will be times when, for one reason or another, a company doesn't make it. We think we're going to have a higher hit rate than the average VC because… of our hands-on approach.”

Recipe

Company name: ideaEDGE

Headquarters: San Diego

Key Execs: Jim Collas, managing partner of strategy; Hans Davidsson, managing partner of telecommunications; Rick LeFaivre, managing partner of technology; Dan Pittard, managing partner and chairman

Founded: April 2000

Financial backers: Enterprise Partners, Qualcomm, Investor AB, Sienna Holdings

Incubator focus: Mobile Internet

Number of incubated companies: Four

Number of IPO spin-offs: 0

Biggest success story: M7 Networks

Guiding philosophy: “Instead of just being opportunistic and waiting for things to come in the door, we are very proactively going out and analyzing and trying to deciding where we think there's a venture opportunity.” — Rick LeFaivre

What you look for in a company: Market size, value proposition, distribution of sales channels, barriers to entry. Company must be profitable within six quarters