By Vadim Kotelnikov. Main source of information: "Venture Catalyst", Donald L. Laurie. 

External Venture Investments by Nortel

  • Every year, Nortel invested in10 to 30 external start-ups through it's partner venture capital firms, acquiring usually from 5 to 20% of each venture

  • Value-added activities in the area of relationship management, screening and selecting strategic investment opportunities, and the capacity for entrepreneur-friendly acquisitions allowed Nortel's business model to work effectively and with speed

  • Nortel maintained close ties with and invested through 7 to 8 carefully selected venture capital (VC) firms that were at the forefront of creating new telecommunications service providers. These firms made a network of relationships that made visible 90-95% of what Nortel needed to know on an ongoing basis. Nortel used its side-by-side collaboration with VC firms to gain access to entrepreneurs and ventures and to learn the skills of venture screening, valuating, investing and monitoring

  • Occasionally, investments led to acquisitions. However, usually Nortel had no intention of acquiring the service providers; rather, it's aim was to learn and understand new business dynamics, to cement relationships, to get access to new-generation technologies, to cut out its own comparable research effort, to support OEMs, to share in the value created by its investments, or to get some preferential rights.

  • Major acquisition made by Nortel in order to integrate critical disruptive technologies include acquisition of Qtera, the leader in ten-gigabit fiber-optic technology, for $ 3.25 billion, and acquisition of Bay Networks, manufacturer of LAN switches and other networking equipment, for $ 9.1 billion.



Sources of Nortel's Competitive Advantage

  • the ability to search out an array of competing ventures

  • the ability to assess market and technology potential and strategic relevance of ventures

  • the ability to take risks and financial risk-management skills

  • the ability to act with speed to close deals

  • the ability to manage equity and decisions with uncommon for large firms agility

Nortel's Core Competence Seeking out the Discontinuities

Having declared its independence from AT&T and Bell Canada in 1976, Nortel* has grown to become a world market leader in telecommunications, voice, and data transmission.

By the turn of the century, Nortel owned up to 90% of the world market for its selected competence areas such as ten-gigabit systems. The key to this success is the company's ability to seek out the discontinuities, whether they crop up in technology or in the market it serves. Having mastered this ability, the company knows what to do when and quite often before the discontinuity happens.

Unwilling to settle to mediocre results, Nortel has developed a significantly advanced technology program and is serious about finding and implementing disruptive technologies in such areas as wireless communications and optical networks.

Partnering with Venture Capital Firms

Having discovered that most innovative products and technologies are coming from venture-capital-funded start-ups, Nortel decided not to create its own venture capital fund, as they feared that establishing a fund under Nortel's name would just bring people who wanted to do business with Nortel. And the company wanted to attract not similar thinking people, but disruptive people who think differently. Thus, Nortel decided to work side-by-side with a small number of carefully selected venture capital firms to gain access to entrepreneurs and ventures and to learn the skills of venture screening and investing.

Nortel assigned several directors of business development to work with the venture capitalists for one or two days a week on their premises.

Formalizing Relationships with VC Firms

Nortel formalized its relationships with the VC firms. Three- or four-page letters of agreement clearly articulate the company's expectations and outline the preferential treatment the company requires, the kind of services the VC firm receives in return, the information in the venture capitalist's deal flow to which Nortel will have access, how it will be shared, and other relevant matters such as quarterly presentations on industry's events by the VC firm at internal Nortel meetings.

Reciprocal Preferential Treatment

Relationships between Nortel and its VC allies are built on fair exchange of valuable ideas and services. VC firms look constantly for companies that might form strategic relationships with Nortel. They give Nortel the best opportunities and all-around preferential treatment. For each relevant deal, Nortel has 30-days' exclusive consideration.

For their part, VC firms use Nortel to conduct on a fee basis the due diligence in those areas of technology they don't understand. VC allies get also 30 days for exclusive consideration of an investment opportunity whenever Nortel spins out a company from its internal venture program.


* Hit hard by the global economic and financial crisis, on January 14, 2009, Nortel filed for protection from creditors in the United States, Canada, and the United Kingdom, in order to restructure its debt and financial obligations. In June, the company announced it no longer planned to continue operations and that it would sell off all of its business units. Nortel's CDMA wireless business and LTE access technology was sold to Ericsson; the Enterprise business unit was purchased by Avaya; the Metro Ethernet Networks unit was sold to Ciena Corporation; and the GSM business was sold to Ericsson and Kapsch