Silicon Valley's entrepreneurial magic has enticed dozens of large
corporations to open R&D labs and throw millions in venture funding at
promising young companies. Often, however, the bureaucracy inherent in major
corporations squelches the innovative spirit that the giants had hoped to
enjoy. So when Matsushita Electric Corp.'s Panasonic division decided to put
its ear to the Silicon Valley ground, it did so with a twist. Instead of
stamping its mark on the innovators, Panasonic opted to let them remain
independent while it pulls them under its wing. It's inviting a dozen or so
E-commerce startups to set up shop on the cheap -- they just pay low-rent
fees -- in a luxurious new 20,000-square-foot "digital concepts center" in
Cupertino that it opened earlier this year. The idea isn't to absorb these
little companies into the $70 billion Japanese behemoth but rather to set up
a microcosm of Silicon Valley's entrepreneurial culture where Panasonic's
engineers can get a glimpse of tomorrow while its managers figure out how
Panasonic might best fit into that future. Panasonic's approach is novel in
other ways. Unlike Idealab!, an innovative Pasadena (Calif.) Internet
incubator that takes a majority equity position in each of the companies it
spawns, Panasonic doesn't require the startups in its center to sell it any
equity at all. "We aren't doing it for charity, of course," says Charles Wu,
managing director of the Panasonic Digital Concepts Center. Instead,
Matsushita expects to reap valuable long-term business relationships from
the companies that pass through its center. And it's likely that many of
those companies will seek backing from the $50 million venture fund that the
center manages for Matsushita. For startups, incubators can have a definite
appeal. Traditionally created by government or nonprofit agencies to
encourage local economic growth, incubators rent office space to budding
companies for below-market rates and give them cheap access to a shared
switchboard, receptionist, kitchen area, conference rooms, office
equipment -- the works.
HAPPY GRADUATION.
Incubators also offer a team of mentors, experienced business people with
the knowhow to warm corporate "eggs" until they're ready to hatch into the
marketplace. Not only that, but the newborn chicks get to learn from one
another during conversations over the shared office coffee maker. In Silicon
Valley, an advisory team can help the fledgling companies get a foot in the
door with the top venture capitalists, too. It's the kind of
shoulder-rubbing, learn-by-example interaction that can make the difference
between success and failure. Businesses that "graduate" from an incubator --
a process that generally takes anywhere from 6 to 18 months -- are much more
likely to flourish. While fewer than 20% of startups survive their first
three years of life, the National Business Incubator Assn. claims that 87%
of U.S. incubator graduates are still in business today. So, Matsushita
could be onto something promising. "We think this will wake up other
companies. It's going to be very carefully watched by their competition,"
predicts Richard Doherty, director of research at the Envisioneering Group,
a New York-based consultancy. As traditional consumer electronics companies
like Matsushita push forward into the networked world, they need to puzzle
out new technologies that are entirely foreign to them. Watching what nimble
little companies are up to can be a valuable learning experience. "Panasonic
is doing it to make sure they don't miss out on anything good," says Bill
Ablondi, founder of technology consulting firm MarketMaps LLC. "This sounds
like a relatively inexpensive way for them to keep their ear to the ground."
The first Panasonic center tenant moved in early this month. Founded in late
1997 by a Stanford scientist who had developed algorithms for predicting the
intensity of solar flares, Dynaptics Corp. already is testing software that
can analyze consumers' behavior as they're shopping on a Web site. CEO Bruce
Lichorowic says the company's six employees were crammed into two small
rooms in a Palo Alto (Calif.) office building before moving to the Panasonic
center. "If I took my people anywhere else, I'd have to cough up capital
expenses for a network, for phones and fax and printers, for desks and
computers, all that stuff," he says. "Here I can take that capital and put
it toward building a business." Besides, he says, Dynaptics now has an in
with what he hopes will become his first big customer: Panasonic.
NO SECRETS.
Exactly what Panasonic executives had in mind. "This is spinning-in rather
than spinning-out [technology]," says Paul Liao, chief technology officer of
Matsushita Electric Corp. of North America and president of Panasonic
Technologies Inc. His company can offer its incubator tenants everything
from a recognized brand name to the kind of distribution and marketing
expertise that takes decades to create. "We knew we could bring a lot more
than money to a startup company," he says. "We want to help these companies
be successful, and by doing that they can help us be successful." Are the
startups worried about revealing their plans to an industry giant with the
money and muscle to preempt their move into the market? Evidently not. The
center already is sifting through scores of business plans that are arriving
faster each week as word of the incubator's existence spreads through
Silicon Valley. "We feel incredibly lucky to be here," says Lichorowic, who
likes the fact that E-commerce is not Panasonic's core expertise. "It
doesn't make sense for them to run out and get into our area themselves. It
makes more sense for them to work with startups like us." Only in the
Internet realm would Goliath be asking David for directions.
Rae-Dupree, who writes about emerging technologies, is based in Business
Week's Silicon Valley bureau.She cn be reached at
[email protected]
Tushar J. Mehta
email: [email protected]
voicemail: (206) 405-2335