Xerox Pushes GroupFire Out of the Start-Up Incubator

Sometimes you have to hand your baby to the wolves.

Maybe it's because you know the white-gloved world of Xerox (XRX - Cramer's Take - Stockpickr) is no place to raise a free-spirited Internet infrastructure start-up such as GroupFire. Maybe it's because your institutionalized ways and extended afternoon tea times just don't lend themselves to moving and shaking, no matter how darling a business chance you may be passing up. Maybe it's because you take one look at the baby and scream in terror.

This couldn't possibly belong to you.

Whatever the reason, last week Xerox PARC (that's Palo Alto Research Center for the uninitiated) spun out its third start-up effort in two years, spawned from the $1 billion research and development gene pool of the technology world's genius central.

In the past, famous Xerox innovations such as the graphical user interface and mouse grew up to benefit the bottom lines of other corporations, but not Xerox. Now the mother of personal computing has devised a three-pronged plan to encourage offspring that don't fit neatly into the document product family tree: enforce its intellectual property rights to avoid creative borrowing in the computer industry; develop technologies as wholly owned subsidiaries; and most recently, spin out great ideas and court venture capital to create a true start-up environment.

PARC first spun out language and text-navigation tools in the form Inxight in 1998 as a wholly owned, privately held subsidiary. In April, Xerox patted ContentGuard on its Pampers and sent it out into the cold, cruel world holding the hand of partner Microsoft (MSFT - Cramer's Take - Stockpickr) to protect intellectual property rights in the digital realm.

Last week, GroupFire crawled into a circle of snapping jaws and fell asleep to the confused howls of the venture capital community. CEO Casey Roche likens his Internet infrastructure baby to content management prodigy Akamai (AKAM - Cramer's Take - Stockpickr). The company is bashful about its technology, but will say that it will add context to Web surfers, and will be sold, Akamai-style, as a service. And Xerox is willing to give 75% of that up, in the hopes it'll develop into a boffo initial public offering? Details, details.

"Right now, say you have somebody from China sitting in Beijing, or in Germany, or an Eskimo in Alaska," Roche describes. "It doesn't matter where they are. If they type in, for example, a search with the same keywords, they will get the same thing back. With GroupFire, the Web knows you, and presents results that reflect who you are."

A few more days in the woods -- and its late 2000 departure from current stealth status -- will toughen up that story.

As you can see, while the Xerox technology that went into GroupFire probably has something to do with text, that's about as tight as the maternal bond gets with Xerox. Hence, as Xerox worldwide PR manager Jeff Simek puts it, Xerox decided to let GroupFire pursue one of "many roads to the promised land" of market valuation success. While he says Xerox is committed to getting the most out of its intellectual property, he says it doesn't make sense to always fully develop technologies in-house. "Look at the track record of companies with only an ancillary interest in developing something themselves."

Be free, GroupFire. Be free!

Relinquishing control of its darling, Xerox retains a minority stake of less than 25%. Venture capital firms Ridgewood Capital and Wit SoundView were brave enough to join Xerox on a second round of funding for the start-up, and venture capitalists are allowed to own a majority stake. Earlier, as a first-round goodbye gift, Xerox handed GroupFire a 69-part patent to own and licenses to play with on six more nonexclusive patents.

Founders and PARC alums Jim Pitkow, Todd Cass and Hinriche Schuetze fill out the management ranks as president, VP of engineering and VP of advanced development, respectively. A $1.5 million bridge loan helped GroupFire along until it could get up on its feet with 40 employees and stretch out with a civilized $7 million funding start. The start-up brings the technology development leaders from Xerox, who are fencing off patents in GroupFire's competitive wilderness at the rate of one every three weeks, according to Roche.

Now, it's time to go from soft and civilized to wildly successful -- so Xerox can get some benefit from its prodigious procreation.