Networking giant is moving into the fledgling smart grid space. Cisco (Nasdaq: CSCO) will foster the new group in an internalized, big company version of startup and venture funding model.

Cisco’s Emerging Technologies Group is something of an experiment. Since launching two years ago, the division has opened eight new business lines for Cisco, one of which — the real-time conferencing product Telepresence — has turned out to be very successful. Cisco gives the group nearly free rein and around $10 million per business idea, and in return, its employees act more like aggressive entrepreneurs than cubicle-bound bureaucrats.

Initial successes like Telepresence spurred this latest idea, a business plan competition called the iPrize, which was open to all comers. While the Emerging Tech group was strictly internal when it began, iPrize was started last October to allow outsiders to submit their ideas. Over two months, some 1,200 ideas for “billion dollar” business were submitted, in hopes of winning the $250,000 prize. (The winning team is from Russia and germany, according to Cisco.)

The winning idea that Cisco selected was for the smart grid, the general name given to companies that try to add intelligence to the electricity networks spread between utilities and users. A number of startups have won massive amounts of funding in that area recently, like Gridpoint, Silver Spring Networks and Trilliant.

("The winning team was led by Anna Gossen, a computer science student at the Karlsruhe University in Germany," Cisco said in a statement. "With the help of Niels Gossen, a computer science student at the University of Applied Sciences in Germany, and Sergey Bessonnitsyn, a systems engineer from Russia, the team is eligible to receive US$250,000 in cash to be equally shared among the team members. The team may also be considered for opportunities to join Cisco.")

Guido Jouret, Cisco’s chief technology officer at the Emerging Tech Group, wouldn’t give many details on the new company. Instead, he only argued that Cisco is actually better-positioned than a startup to explode in the smart grid, since it’s sizable enough to approach the entire market, rather than just catering to customers or utilities.

“It’s a lot like VoIP,” he told me. “If you look at who’s cleaning up now, it’s not the startups, it’s more the traditional telcos.”

Should independent startups be afraid? Cisco’s hardly the first big company to try to foster new businesses. Google, most famously, gives all employees 20 percent of their time to work on new ideas, although it has had only a few shining successes, like Gmail. Microsoft was also famous for its internal innovation units in the late 1990s, but many of its most lauded projects were quietly shut down.

Jouret thinks that Cisco’s onto something unique, though, and also touts the security that the company can offer to experienced entrepreneurs.

“Everyone dreams of making it to an IPO, but the reality is that very few will get a dime,” he says. “The people we attract have kids, education, a mortgage, and they’ve been through several busts.”

Those are the people already working in Jouret’s unit, but oddly enough, few of the contest entries came from traditional Silicon Valley entrepreneurs. The winning team, for example, consisted of three people from Germany and Russia, two of whom decided to let Cisco handle developing the business, in favor of finishing advanced degrees.

That’s where the people Cisco already employs, some of whom do have local startup and venture capital experience, come in. They’ll work on the business, and try to launch it within 18 months. The more successes Cisco can rack up, the more attention it’s likely to focus on Emerging Tech. Other big companies could also follow its lead and emulate the program.

The iPrize competition may also be re-opened on a rolling basis, and advertised more heavily — the first round relied almost entirely on word of mouth. And if Cisco keeps putting its money where its mouth is, venture capital could have a serious competitor.