Inrix Gets Jump-Start From Microsoft

The Wall Street Journal - 5 October 2005
By Peter Loftus, Dow Jones Newswires
Copyright (c) 2005, Dow Jones & Company, Inc.

Inrix was one of hundreds of U.S. start-ups to receive venture-capital funding this year, and the $6.1 million it raised was a relatively small amount.

But what sets Inrix apart is that its traffic-information software is based on technology licensed from industry giant Microsoft Corp. Inrix was the first start-up to take part in a new Microsoft effort to make money off some of the more obscure fruits of its $6 billion research-and-development program.

The effort is called Microsoft IP Ventures, which makes available to entrepreneurs and venture capitalists various technologies developed by Microsoft researchers, some of which Microsoft has no current plans to use in its own products.

Under its agreement, Inrix pays a revenue-based royalty to Microsoft in exchange for exclusive use of traffic-analysis software that was in development at Microsoft for about three years, according to Inrix Chief Executive Bryan Mistele. Among other technologies Microsoft is seeking to license are software that converts your photo into a cartoon image and biometric identification cards.

Mr. Mistele started Inrix in Microsoft's hometown of Redmond, Wash., last year after a 10-year career at Microsoft, where he was most recently general manager of the mobile-services business unit. He says the Microsoft license program has "accelerated our development plan by several years." What's more, it made it easier for Inrix to raise $6.1 million in venture-capital funding this spring in a round led by August Capital and Venrock Associates, both of Menlo Park, Calif.

"It greatly simplified our fund raising, let's put it that way," Mr. Mistele says. "From a [venture capital] point of view, being able to invest in a firm that has proven technology that's ready to go to market, as opposed to having to wait two years -- it's a huge advantage."

IP Ventures is part of a broader strategy shift at Microsoft, and one that could serve venture capitalists as a source of start-up ideas. In the past, the software maker was relatively stingy with sharing its intellectual property. But in late 2003 it began to widen access to its vast portfolio of patents, partly in response to increasing market demand.

Much of the increased licensing activity has been to midsize to large companies that want to develop products that work with Microsoft software. But Microsoft also decided to design a program aimed at start-ups that might build their core product or service around a technology developed by Microsoft, says David Kaefer, director of business development in Microsoft's licensing group.

In many cases, the technologies were developed by Microsoft Research, its computer-science research-and-development organization with 700 software engineers and researchers in six laboratories world-wide. IP Ventures lists nearly 20 technologies available for license.

One might wonder: if these technologies are so good, why isn't Microsoft keeping them for its own products? Mr. Kaefer says the technologies are promising. But Microsoft isn't interested in commercializing them -- for now -- because they don't have the potential to generate nearly as much revenue as Microsoft's core products, such as Office software or Xbox gaming products.

So instead of letting a patent collect dust, Microsoft wants to "pass that off to a new company [that is] looking to take it the last mile," Mr. Kaefer says. In some deals, Microsoft may retain rights to make its own product based on the licensed technology, he says.

Microsoft plans to strike royalty deals, or possibly acquire equity in the start-ups to which it licenses the technologies, Mr. Kaefer says. Mr. Mistele says Inrix's deal didn't include giving equity to Microsoft. Mr. Kaefer declined to comment on specific terms.

In Inrix's case, Mr. Mistele says he initially set out to build a service that gathered traffic-flow data from global-positioning-system devices mounted in trucks traveling around the country. About four or five months after he left Microsoft last year, he says, he learned the company had been developing software designed to predict traffic conditions in various cities, using data like scheduled events that may worsen traffic congestion. That has been incorporated into the software, which also collects traffic-flow data from road sensors installed by local governments.

Inrix plans to market the traffic software to Web portals, government agencies, trucking-fleet operators and auto makers for use in auto-navigation systems, Mr. Mistele says.

Dan Grossman, a principal with Venrock Associates, says his firm based its decision to invest in Inrix on Microsoft's technology and Mr. Mistele's track record as an executive. "What Microsoft provided was the basis of a very interesting platform," he says. "We think we're going to build significant value with it."

There are potential drawbacks to the license program. Mr. Mistele says Inrix's relationship with Microsoft could make Microsoft's competitors less willing to do business with Inrix. For example, Inrix wants to sell its software to Web portals, but Google Inc. and Yahoo Inc. compete with Microsoft's MSN portal. Still, Inrix continues to explore relationships with those companies.

For venture capitalists, Mr. Grossman says it is important to consider "the royalty deal or any other specific bells or whistles attached. In this case, we thought the deal was acceptable."

So far, Inrix is the only licensing deal to be announced under Microsoft IP Ventures. Mr. Kaefer says venture capitalists and entrepreneurs have shown interest in Microsoft technologies. But he says deals typically will take about nine to 12 months to close, and Microsoft just unveiled IP Ventures in May.

Scott Maxwell, managing director of New York venture-capital firm Insight Venture Partners, says Insight has referred about three or four of the Microsoft technologies to its portfolio companies, but no licensing deals have been struck.

Bill Wiberg, general partner at Advanced Technology Ventures, says it will take time to match entrepreneurs with the appropriate Microsoft technologies. "I think the structure of the program is spot on, in trying to reach out to the venture community and make visible to us what technologies are available and aren't likely to be commercialized within Microsoft," he says.

Microsoft won't make a gold mine off the program in the near future. In fact, the broader IP licensing program -- including licenses to large companies -- is more than 18 months old, and its revenue still hasn't reached the level where it is required to be reported as a separate line item, Mr. Kaefer says.