THE COMPANY

After a stint in a large company research lab where few of the research ideas actually became products, Dr. E. Jennings Taylor was eager to test the waters in a small company environment. He subsequently worked at first one, then another small research company in the Boston area. During this period the entrepreneurial bug bit, and he added an M.S. in technology strategy and policy at Boston University to his Ph.D. in material science from the University of Virginia. Shortly afterwards, he left Boston for Ohio where he launched his own company, Faraday Technology.

Dr. Taylor chose Ohio for two reasons: It was his home state, and, while at Boston University, he had heard about the Ohio Thomas Edison Program, which offered an incubator system for business start-ups. The incubator turned out to be an old school building in Springfield. Basement space was provided at the rate of about $2.00 per ft², plus telephone answering and part-time use of a conference facility. It was modest assistance, but it gave the company inexpensive space to get started. Two years later, the company was able to move into a research park near Dayton, and, two years after this, into a custom-built facility, which has since been expanded. The custom facility provides space for the development of pilot-scale prototypes of electrochemical-based processes.

The staff of approximately 10 full-time and 9 part-time employees includes researchers and experienced manufacturing engineers. Dr. Taylor, who is a registered patent agent, serves not only as CTO, but also as IP Director. The company has developed core business competencies in patent analysis. The staff also includes a full-time marketing director who oversees implementation of the company’s strategic marketing plan for developing new implementation areas and customers.

The company has collaborative arrangements with a number of universities, including Columbia University, Case Western Reserve University, University of South Carolina, University of Dayton Research Institute, University of Cincinnati, Ohio State University, Wright State University, University of Nebraska, University of California-San Diego, United States Naval Academy, University of Virginia, and others. It often employs students, professors, and postdocs in a research capacity. The company also has collaborated with national laboratories, including Los Alamos National Laboratory.

Asked what drives the company, Dr. Taylor responded, “What drives us is we are technologists and we want to see our stuff implemented…. A company like Faraday is an innovation house for a number of companies that are not well positioned to innovate themselves.”

THE TECHNOLOGY AND ITS USE

The company’s mission, which has not changed over time, is to develop and commercialize novel electrochemical technology. Called the Faradayic™ Process, the company’s platform technology is an electrically mediated manufacturing process that offers advantages of robust control, enhanced performance, cost effectiveness, and reduced hazards to the environment and to workers as compared with using chemical controls. Electrical mediation entails the sophisticated manipulation of non-steady-state electric fields as a process control method for inventing and innovating electrochemical processes, which add to or remove material from targeted devices and other media.

The technology’s advantages of cleaner, faster, more precise, and cost-effective results save money for the company’s customers and support value-added manufacturing for them. It will allow, for example, electronics manufacturers to make smaller circuit boards with 20 or more layers stacked on a single board, with each layer connected by tiny holes uniformly plated with copper.

Faraday is applying its technology platform in multiple applications. Developing each new application area entails a new set of technical problems and is research intensive. Over the company’s first decade, it has developed more than six application areas. About 25 percent of the business is currently in the electronics sectors, and about 28 percent is in edge and surface finishing. Environmental applications account for 15 percent of the business and include effluent recycling and monitoring. Industrial coatings account for about 6 percent of the company’s business. Counter measures to corrosion account for another 20 percent. Emerging technologies, including nanocoatings, 3-D MEMs manufacturing, and fuel cell catalysis make up the remaining 6 percent of the business. The company is always looking for the next manufacturing process for which it can solve a problem using its Faradayic™ process, and attract new customers.

THE ROLE OF SBIR IN COMPANY FUNDING

Dr. Taylor became aware of the SBIR program from working in two SBIR-funded companies during the early part of his career. Were it not for this experience, he is doubtful that he would have become aware of the SBIR. With his knowledge of the program, he applied for an SBIR grant early in 1993, soon after the company was incorporated. The first SBIR grant was from DoE to harness electrical mediation for monitoring contaminants in soils and groundwaters. A follow-on Phase II application was not successful. Next the company received an SBIR grant from the Navy for a sensor application, followed by non-SBIR funding of more than $1 million from DARPA for developing process technology to clean up circuit board waste. At that point the company received several EPA SBIR grants to address additional environmental problems. A Phase I SBIR grant from the Air Force followed, and still later the company received SBIR grants from other agencies including NSF. In total, the company has received 47 SBIR grants, 28 of them Phase I, 16 Phase II, and 3 Phase IIB or Phase II enhancements. From NSF, it has received 5 Phase I grants, 4 Phase II grants, and 1 Phase IIB grant. Table App-D-1 summarizes the company’s SBIR/STTR grants in number and amount.

TABLE App-D-1

Faraday Technology, Inc.: SBIR/STTR Grants from NSF and Other Agencies.

SBIR funding has been an essential component of the company’s funding, particularly in the early years when nearly all the funding came from SBIR grants. In fact, according to Dr. Taylor, SBIR grants are involved in all areas of application pursued by the company. There are concentrations of SBIR funding in certain areas. Some things started out under SBIR, but later other sources of funding supported further research. Some things started out under other sources of funding, but later entailed an SBIR funding component for further development.

Taking into account all funding sources, the company obtained financial support from state and federal government grants and contracts, government sales, commercial sales, licensing, retained earnings, and private investment. Historically, SBIR/STTR grants and federal research contracts have comprised approximately 48 percent of total revenue. The next largest share at 28 percent has come from commercial sales. Sales to the government have comprised about 15 percent. Licensing has provided approximately 3 percent. Reinvestment of retained earnings and facilities reinvestment has comprised another 9 percent and 2 percent, respectively.

According to company sources, the SBIR program has enabled the company in a variety of ways to do what it otherwise would not have done. Reportedly, it has allowed the company to undertake research that otherwise would not have been undertaken. It has sped the development of proof of concepts and pilot-scale prototypes, opened new market opportunities for new applications, and led to the formation of new business units in the company. It has enabled the company to increase licensing agreements for intellectual property. It has led to key strategic alliances with other firms. It has also enabled the hiring of key professional and technical staff.

The SBIR conveys more than dollars to the grantee, according to Dr. Taylor. “It is well structured to allow taking on higher risk, and it is highly competitive. The larger government programs tend to have specific deliverables instead of looking at the feasibility of high-risk activities. So to me, it [the SBIR program] is very unique. It is understood that the program is highly competitive, therefore, there is prestige associated with gaining an SBIR grant.”

BUSINESS STRATEGY, COMMERCIALIZATION, AND BENEFITS

Historically the company’s business strategy has been to determine a market need that can potentially be met by an adaptation of its Faradayic™ Process. Then it has pursued an SBIR grant or other sources of research funding to support the necessary research and to develop a pilot-scale prototype of the process. The company actively files patents to protect intellectual property as it develops new technical capabilities. It also investigates who is citing Faraday’s patents in different application areas, obtaining a patent file wrapper to see the documentations that occur in the prosecution of each citing patent. This allows Faraday to see how other companies have claimed around Faraday’s patents, and gives Faraday background knowledge about potential customers in different areas of interest. Patents and the fees they generate are the central focus of Faraday’s business strategy. Thus far, the company has 23 U.S issued patents and three foreign issued patents, which, historically, amounts to 1.4 issued patents per employee.

A major route to commercialization has been to license “fields of use” to interested customers. Company staff members regularly participate in conferences and trade shows to help inform potential customers of Faraday’s existing and newly emerging capabilities. The company’s strategic marketing plan identifies potential customers for further contact. Once engaged, potential customers issue a purchase order to Faraday to adapt its technology for the customers’ needs. In addition to the purchase order, the customer typically pays additional consideration to Faraday contractually to encumber the technology into a “no-shop/stand-still” position, effectively taking the product off the market during the period of adaptation and evaluation. The potential customer has an option to acquire exclusive rights to the technology by paying a negotiated up-front fee and a license fee in the range of 3 percent to 5 percent of the user’s generated revenue for the life of the patent. The company also performs contract research for hire, and engages in product design and vending for equipment manufacturers. In the future, Faraday hopes more frequently to form strategic partnerships at the outset of a research program both for the purpose of securing research funding, but also to have a better defined path to market.

Although the company’s annual revenue of roughly $2 million is relatively modest, Dr. Taylor makes the point that its license fees signal on the order of 20 to 30 times as much revenue generated by customers who are using Faraday’s manufacturing processes. In Dr. Taylor’s words, “Based on calculations we have done using our royalty and licensee revenue and associated multipliers, we believe that we have created on the order of $30 million in market value. Of course, Faraday only reaped a small part of this.” Over its history, Faraday has generated direct commercial sales of approximately $6.6 million. Customers realize value from Faraday’s processes in several main ways: lower cost manufacturing processes, higher quality output, and a combination of the two.

Beyond developing technical capabilities that lead to revenue for Faraday and value-added for its customers, Dr. Taylor pointed to a whole “undercurrent” of effects that the SBIR is having that nobody is really able to capture. “For example, one of our customers likely was going to move off-shore if it could not find a cost-reducing solution to a manufacturing problem it had. Faraday was able to meet the need through innovative research. Of course, I can’t prove it, but I think the technology solution figured importantly in their decision not to move. So what’s the value of having a company remain in the United States? That’s an example of the benefit of innovation funded by SBIR that is not usually factored into the value of the SBIR program. I can’t quantify the value; yet I feel strongly that it is true based on what I know.”

As an example of another difficult-to-capture type of benefit, the technology also offers the potential of environmental effects in several ways. For one thing, by using electricity to achieve results, the Faradayic™ Process reduces the need for polluting chemical catalysts. For another, the process enables the capture of materials from industrial process waste streams. Yet another emerging application is to control the flow of contaminants through soil for more cost-effective capture and cleanup.

Educational benefits also result from the company’s activities. Largely as a result of participating in NSF’s annual conference, the company became active in encouraging young people to pursue careers in science. It has provided internships to three junior high students; it has employed several high-school teachers during the summer; and it annually hosts a high-school science day. Moreover, as a result of the company’s many collaborative relationships with universities, it has employed about 20 undergraduate and graduate students, one of whom did a Ph.D. dissertation and another, a master’s thesis under the Dr. Taylor’s supervision.

The innovation process and the multi-faceted roles played by the SBIR are complex and nonlinear, noted Dr. Taylor. He recalled several Phase I grants that did not go on to Phase II. By one standard, these would be considered “failed grants.” Yet, he explained, after some twists and turns, the concepts explored in these earlier Phase I grants eventually came to fruition and became important application areas. For example, a “failed” Phase I grant provided the seed for later electronics work that now provides 35 percent of the company’s business and accounts for 8 of its patents. “It is not a tidy path; it is a cumulative process.”

VIEWS ON THE SBIR PROGRAM AND PROCESSES

Dr. Taylor made a number of observations about the SBIR program and its processes that may serve to improve the program. These are summarized as follows:

SUMMARY

This case study shows how SBIR grants enabled a start-up company in Ohio, Faraday Technology, Inc., to develop an underlying electrochemical technology platform and, through continuing innovation, to leverage it into multiple lines of business. The company’s main focus is on developing cleaner, faster, more precise, and more cost-effective processes to add to or remove target materials from many different kinds of media, ranging from metal coatings to fabricated parts, to electronic components, to contaminants in soil. By offering innovative processes that reduce costs for customers and support value-added manufacturing, the company serves as an innovation house for a number of manufacturing companies that are not well positioned to innovate themselves.

The case illustrates that a basic technology platform can be leveraged through additional research into many novel applications to solve specific problems. Because the application areas are so different, they each have required advances in scientific and technical knowledge for success. The challenges of devising a process to uniformly coat tiny holes through 20 or more layers of circuits stacked on a printed wiring board, for example, are quite different from the challenges of developing a process to produce super smooth surface finishing for titanium jet engine components.

The case illustrates a business model that relies primarily on an aggressive patenting strategy and licensing in multiple fields of use to generate business revenue. Essential to leveraging the technology platform is the alignment of intellectual property and marketing strategies. The company continually assesses market drivers to identify needs that may be addressed by Faraday’s platform technology. The company works closely with patent firms, has a patent professional on staff and has its engineers and scientists trained in patent drafting. Furthermore, the company has long employed a full-time marketing director.

The case also demonstrates how relatively modest licensing fees rest on a much larger revenue stream realized by the innovating firm’s customers. Further, by leveraging advances from one application area into the next, customers in different industry sectors benefit from the company’s past advances in other industry sectors. Economists studying the rationale for government support of scientific and technical research have identified the licensing of technology as one of the factors conducive to generating higher than average spillover benefits.

Finally, this case compares and contrasts aspects of different agency SBIR programs. It suggests ways for improving the SIBR program.

THE COMPANY

As a Stanford graduate student in mechanical engineering, Louis Rosenberg, investigated computer-based and physical simulations of remote space environments to provide a bridge across the sensory time gap created when an action is performed remotely and the resulting effect is known only after a time delay. For example, a satellite robot tightens a screw and scientists on the ground find out with a delay if the screw was stripped. As earlier described by Dr. Rosenberg, “I was trying to understand conceptually how people decompose tactile feeling. How do they sense a hard surface? Crispness? Sponginess? …Vision and sound alone do not convey all the information a person needs to understand his environment. Feel is an important information channel.”³

From aerospace researcher, Dr. Rosenberg turned entrepreneur with a focus on the less-studied sensory problem of feel, which was also closely attuned to his specialization in mechanical engineering. He took as his first business challenge to convert a $100,000, dishwasher-sized NASA test flight simulator into a $99 gaming joystick. To take advantage of his breakthroughs, he founded Immersion Corporation in 1993 in San Jose, initially drawing heavily on other Stanford graduates to staff the company. Reflecting the early NASA-inspired challenge, Immersion’s first products were computer games with joysticks and steering wheels that move in synch with video displays. Other application areas followed.

The company has now grown to 141 employees. Growth over the first seven years reflected internal gains mainly in the entertainment area. Then, in 2000, Immersion grew mainly by acquiring two companies: Haptic Technologies, located in Montreal, Canada, and Virtual Technologies, Inc.⁴, located in Palo Alto, California, both acquisitions now an integral part of Immersion Corporation. And, in 2001, Immersion acquired HT Medical Systems, located in Gaithersburg, Maryland, renamed it Immersion Medical, and made it a subsidiary of Immersion Corporation. In the case of Haptic Technology and HT Medical Systems, the acquisitions brought into the company competitors’ technologies in application areas new for Immersion. In the case of Virtual Technologies, the acquisition brought in a complementary technology.

THE TECHNOLOGY AND ITS USE

Of our five senses, the sense of touch differs from the others in that “it requires action to trigger perception.” Development of a technology to sense touch draws on the disciplines of mechanical and electrical engineering, computer science, modeling of anatomy and physiology, and haptic content design. The technology uses extensive computer power to bring the sense of touch to many kinds of computer-based applications, making them more compelling or more informative processes. As a company publication puts it, “At last, the world inside your computer can take on the physical characteristics of the world around you…. Tactile feedback makes software programs more intuitive.”

The technology was brought to life for the interviewer by a series of demonstrations. The first demonstration was of a medical training simulator that teaches and reinforces the skills doctors need to perform a colonoscopy. Low grunts from “the patient” informed the performer that a small correction in technique was needed for patient comfort. “Stop, you are really hurting me!” informed the performer in no uncertain terms that her technique was in need of substantial improvement.

Immersion has developed five main AccuTouch^® platforms for helping to teach medical professionals. The five platforms teach skills needed for endoscopy, endovascular, hysteroscopy, laparoscopy, and vascular access—all minimally invasive procedures.

The next demonstration was of a gaming application. The weight of a ball on the end of a string was “felt” to swing in different directions in response to manipulating a joystick. The technology is used also to enhance the computer feedback experience when using a mouse or other peripheral computer controllers for PC gaming systems, arcade games, and theme park attractions, as well as for other PC uses.

A third demonstration was of a “haptic interface control knob” to provide human-machine touch interface on an automobile dash to help manage the growing number of feedbacks from navigational, safety, convenience, and other systems. The purpose is to lessen the risk of overloading the driver.

A fourth demonstration was of Immersion’s “Vibe-Tonz” system for mobile phones. The system expands the touch sensations for wireless communications by providing vibrotactile accompaniment to ringtones, silent caller ID, mobile gaming haptics and many other tactile features.

THE ROLE OF SBIR IN COMPANY FUNDING

Though the initial funding of Immersion Corporation was through private equity, the company applied for and received its first SBIR grant in its second year, 1994. In addition, the acquired companies, HT Medical and Virtual Technologies, had received SBIR grants prior to their acquisition by Immersion, and HT Medical had also received a grant from the Advanced Technology Program (ATP) that was nearing completion at the time Immersion acquired the company. All totaled, Immersion and its acquired companies have received 24 Phase I SBIR grants and 19 Phase II (including 3 Phase IIB) grants, summing to approximately $10.6 million. SBIR funding agencies include NIH, DoE, DoD, Navy, Army, and NSF. Table App-D-2 summarizes the company’s SBIR and STTR grants in number and amount.

TABLE App-D-2

Immersion Corporation: SBIR/STTR Grants from NSF and Other Agencies.

According to Mr. Ullrich, SBIR grants gave the company the ability to fur ther develop its intellectual property and to help to grow its intellectual property portfolio, which is the very core of the company’s commercial success. The company has leveraged its government funding by investment funding from private sources in the amount of $12.7 million. The company attributes approximately $33 million in revenue to products directly derived from Phase II SBIR research projects, including licensing, direct sales of product, and product sales due to licensees. However, due to the company’s licensing model, third-party revenues and tertiary economic activity, which are very significant, are not tracked directly by Immersion.

The company now receives only a small fraction of its annual revenue from SBIR/STTR funding, with the percentage ranging variously between 4 percent and 9 percent from 2001 to 2004. Its objectives for rapid commercialization growth are expected to reduce this percentage to an even lower level in the near future.

BUSINESS STRATEGY, COMMERCIALIZATION, AND BENEFITS

From its beginning, Immersion’s prime business strategy has been to develop intellectual property in the field of touch sense and to license it. In addition, the company performs limited manufacturing operations in its 47,000 sq. foot facility in San Jose and in Gaithersburg, and arranges for some contract manufacturing. But far and away, the company’s wealth generation depends on its ever-growing portfolio of patents which it licenses to others. At the time of this interview, the company had more than 270 patents issued in the United States and another 280 pending in the United States and abroad.

Important to identifying and developing relationships with new licensing partners is the company’s participation in trade shows and conferences, and its ongoing interactions with industry associations and teaching universities. The company employs a business development specialist in each of its core business areas to cultivate these contacts.

Because direct sales for Immersion’s technologies are derived from the much larger markets into which its licensees typically sell, estimating ultimate market size is considered “complicated” for Immersion, and it takes a more narrow view. For example, Immersion markets its cell phone vibration technology to a limited number of cell phone OEMs, and those OEMs in turn market to millions of customers. Estimating the larger consumer markets is not Immersion’s focus.

Potential benefits of the technology include boosting the productivity of software use; enhanced online shopping experiences; enhanced entertainment from computer-based games; improved skills of medical professionals resulting, in turn, in improved outcomes for patients; increased automotive safety due to reduced visual distractions to drivers; and savings to industry through the ability to experience prototypes “first hand,” but virtually, before building costly physical prototypes, and the ability to capture 3-D measurements from physical objects. In addition, visually impaired computer users may benefit from the tactile feedback of the mouse, keyboard, or touch-screen.

VIEWS ON THE SBIR PROGRAM AND PROCESSES

Mr. Ullrich made several observations about the SBIR program and its processes that may serve to improve the program. These are summarized as follows:

SUMMARY

This case study describes how SBIR grants helped a young company develop a large intellectual property portfolio centered on adding the sense of touch to diverse computer applications, and how the company grew the business over its first decade to approximately 141 employees and $24 million in annual revenue. It illustrates how government funding can be used by a university spin-off to leverage funding from private sources to achieve faster growth, eventually essentially eliminating the need for government R&D support. The case also illustrates how a basic idea—adding the sense of touch to computer applications—can be used to enhance entertainment experiences, increase productivity of computer use, train doctors, and more. Immersion’s technology was inspired by a NASA system, but its growth centers on its embodiment in consumer products. The case provides a number of suggestions for improving the SBIR program.

THE COMPANY

ISCA was founded in 1996 by Dr. Agenor Mafra-Neto, an entomologist performing basic research at the University of California-Riverside on pheromones, chemical substances produced by, in this case, insects that stimulate behavioral responses in other insects of the same species. From his background in basic research, Dr. Mafra-Neto took on the challenge of applying this knowledge to real-world applications. He contacted growers back in his native Brazil who were very supportive of putting his ideas for pest control into practice. His contacts wired up-front financing to cover a contract for pest control traps, and ISCA was born.

For the next two years, the company’s principal business was export of pest control traps to Brazil. Then in January 1999, the company was caught up in a financial crisis that was a result both of the devaluation of the Real, the Brazilian currency, and the default by a customer on a large order of ISCA product. During the months that followed, the company was in severe financial distress, and Dr. Mafra-Neto was unsure of his company’s ability to survive. It was with the help of an SBIR grant that he was able to restructure and reshape the company to provide more advanced product lines targeted at new domestic and foreign markets.

From its new start, the company has grown to 12 employees and annual revenue of $2 million. The company’s offices and facilities are located in an industrial park in Riverside, CA, and occupy a combined area of approximately 8,500 square feet. The staff is a multidisciplinary team of specialized researchers, including synthetic organic chemists, engineers, entomologists, and information technologists.

THE TECHNOLOGIES AND THEIR USES

ISCA synthesizes and analyses sex pheromones for a variety of insects. These pheromones are species specific, occur in nature, are environmentally friendly, and do not result in the development of insecticide resistance by the pest. These properties make them an ideal alternative to insecticides for pest management.

The insect’s response to pheromones and other attractants is often quantified through the use of electroantennograms (EAG), which measure the neural activity originating from the insect’s antenna. In addition to EAGs, biological assays are also used to determine a variety of performance metrics, such as the optimal pheromone release method and the optimal pheromone trap design and placement. ISCA then develops pheromone delivery and dispensing systems and monitoring traps, and integrates the traps with data collection systems, including automated sensors to give pest counts and GPS/GIS analytical tools that are internet accessible to give pest locations.⁶

The results of monitoring provide timely information about the type, num ber, and location of pests captured in time to predict pest population densities, identify alarm situations, and deliver limited targeted treatments of pheromones to disrupt mating patterns. The advent of ISCA’s pest information management system, equipped with smart traps and wireless communication puts an end to hand counting and the all-too-familiar-to-counters tangled balls of deteriorating insects. The resulting information enables a timely response that avoids insect proliferation throughout a field or larger area and reduces the need for blanket applications of insecticides. Although these technologies individually are not new to the world, their application in the area of integrated pest management has broken new ground.

The company has lines of pheromones, attractants, and repellents to address agricultural pests, including the boll weevil, carob moth, European corn borer, corn earworm, Mediterranean fruit fly, tomato fruit borer, olive fruit fly, peachtree borer, pecan nut casebearer, potato tuber moth, tobacco budworm, and many others. Additionally, ISCA has a product line designed for urban pests, such as the cockroach, housefly, yellow jacket wasp, and mosquito. One of ISCA’s most recent lure technologies is the development of “SPLAT™” (Specialized Pheromone & Lure Application Technology), a sprayable matrix that dispenses attractants over an extended time interval substantially greater than that provided by traditional dispensing technologies.

Information technology comprises a critical component of ISCA’s approach to pest management. The information technology features modular scalability and GPS/GIS capability. At its core is Moritor, an integrated and automated Internet accessible monitoring system.

In support of its R&D, ISCA operates insect rearing chambers, testing rooms, wind tunnels, and olfactometers. It uses an artificial blood membrane system to maintain its mosquito colonies. The company tests its tools and solutions through rigorous field tests as well as by feedback from user groups.

THE ROLE OF SBIR IN COMPANY FUNDING

According to the company founder and president, Dr. Mafra-Neto, the SBIR program was essential to survival of the company after it hit a major financial setback in its third year of operation. He learned about the SBIR program by reviewing U.S. Department of Agriculture’s SBIR proposals during his days in the university. He reasoned that if the company were to get an SBIR grant, it could use the research funding to improve its approach to pest control in terms of the chemicals produced, the lure and trap design and placement, and, eventually, data collection and analysis.

NSF put out a call for sensors. The company responded with a proposal to develop an Internet accessible pest monitoring system with automated traps that would count insects. It was subsequently granted SBIR Phase I and Phase II grants, including a Phase IIB supplement. At NSF, there was interest in bringing innovation to a field not known for its use of technology. “The NSF SBIR gave us lots of prestige; it gave us credibility,” said Dr. Mafra-Neto.

ISCA has received a total of 7 Phase I SBIR grants, 4 Phase II grants, and 1 Phase IIB supplemental grant. It has received SBIR grants from NSF, USDA, DoD, and NIH. The amount the company has received in SBIR grants since 1999 totals a little more than $3 million. Table App-D-3 summarizes the company’s SBIR/STTR grants in number and amount.

TABLE App-D-3

ISCA Technology, Inc.: SBIR/STTR Grants from NSF and Other Agencies.

According to Dr. Mafra-Neto, the receipt of additional SBIR grants in the future is expected to be important to the company as a means of continuing the innovations necessary to maintain its technical base.

In addition to its SBIR grants, the company received a grant from the Advanced Technology Program, for the period 2002 to 2005. The grant supports the integration of sensor technologies and information technology in a highly automated pest management system.

BUSINESS STRATEGY, COMMERCIALIZATION, AND BENEFITS

The company’s competitive advantage lies in its innovations to make smarter traps, which are then linked wirelessly to a centralized database located on the Internet. Automated data collection and subsequent analysis and reporting enables targeted pest control strategies. In addition, the company derives strength from its internally developed “SPLAT” technology that extends the time interval needed for effective seasonal control of pests. Sales of SPLAT products are expected to increase dramatically in the near future.

Between 60–70 percent of the company’s sales now are in the domestic U.S. market. Remaining sales comprise exports to Brazil, Argentina, Chile, India, and other countries.

The company’s approach to pest monitoring and control offers environmental benefits in terms of reductions in the need for and use of insecticides. These benefits result from early alerts of pest activity, targeted treatments, and use of strategies that do not involve the use of insecticides to disrupt mating patterns. Humans may benefit from reduced insecticides on products they consume, as well as from higher quality products due to less damage to fruit and vegetables from pest outbreaks.

This pest management approach benefits growers who can avoid multiple blanket spraying of fields with insecticides that may cost as much as 10 times more for pest control than ISCA’s method. Avoidance of pest outbreaks may also increase growers’ yield and quality of produce.

The recent development of smart traps that automatically count mosquitoes, together with the company’s pest management information system, may also offer important health benefits by providing an early alert of threats of possible outbreaks of mosquito-borne disease. The widespread use of the system could enable a near instantaneous warning of threatening trends and activities.

VIEWS ON THE SBIR PROGRAM AND PROCESSES

“The SBIR program has allowed us to get where we are today,” said Dr. Mafra-Neto, emphasizing the importance he places on the program. He went on to make the following several observations about the program and its processes, some of which focused on the NSF program.

SUMMARY

This case study illustrates how SBIR grants helped a young company survive following the collapse of export sales several years after start-up. It further shows how SBIR-funded research brought needed innovation to the important but largely static field of pest monitoring and control. The development of better lures and smarter traps integrated with advanced communication tools is effectively cutting the grower’s use of insecticides, and thus reducing the unwanted effects on insects (i.e., increasing their resistance to insecticides and impacting nontargeted organisms), lowering pollution, improving the quality of fruits and vegetables, and providing potential health benefits. The case also provides valuable company observations and opinions about the SBIR program and how to improve it.

THE COMPANY

Like a newly born gazelle, Language Weaver found its legs early. In two years it has developed a fully functional commercial software product from a novel, statistics-based translation technology brought to a research prototype by the company founders, professors and researchers in the University of Southern California’s Information Sciences Institute. Of course, it should not be overlooked that approximately 20 person-years of university research, heavily funded by government agencies, were critical to establishing the scientific and technical underpinnings of Language Weaver’s technology. Language Weaver gained exclusive licenses to past and future patents filed by the university in the field.

With a conception date of November 27, 2001, the company’s annual revenue reached several million dollars in 2004, in a market whose potential is estimated in the billions. Having a technology that rather unexpectedly turned out to be much needed at just the right time is paying off.

The company founders are still professors at the university. The company now has about 35 employees, many of them attracted from the university’s Information Sciences Institute. The company is headquartered in an office building with a grand view overlooking a marina just west of downtown Los Angeles.

The company’s first funding came from NSF grants. “When we were trying to start the company,” related Mr. Wong, “it was a little before 9/11, and no one cared about languages. There were no Senate hearings about languages. Then 9/11 happened, and at the time we had already submitted a proposal to NSF. But we didn’t hear back until November, and by then the NSF was able to bootstrap us to get us working quickly, moving code from the university to the company. … It was after the SBIR grant that everything happened. We started getting government interest as it became apparent that we had something interesting. But we would not have been positioned to move quickly to respond to the need if it hadn’t been for that first small amount of NSF funding and the confirmation of the technology.” Subsequently the company was able to obtain venture capital funding.

“What we are trying to do,” explained Mr. Wong, “is to create the best machine translation in the world, with the highest quality and readability. Our best selling system right now is Arabic to English —to the government. We have customers and we have partners.”

THE TECHNOLOGY AND ITS USE

The state of the practice in commercial machine translation is rule-based, e.g., noun before verb. But 30 years of working with rules has reportedly shown that the approach does not do well in handling special cases. In contrast, Language Weaver’s statistical learning approach to machine translation is designed to learn the appropriate linguistic context for distinguishing and handling words with multiple meanings. This is the kind of problem that confounds rule-based systems because it is impossible to capture all the necessary cases in rules. For example, the English word, “bank” may need to be translated differently in each of the following: “put the money in the bank;” “you can bank on it;” and “paddle the canoe near the bank.”

The machine-based software uses computational algorithms and probability statistics to learn from existing translated parallel texts, analyze words and word groupings, and build translation parameters that will provide the highest statistical probability of providing a correct translation. The development of translation software for a given language entails performance of two analyses: First, a bilingual text analysis is performed using a corpus of text and statistical analysis to learn associations. For example, a bilingual corpus for Spanish/English may be found at Microsoft’s Web site which gives the same material in both Spanish and in English. From such existing one-to-one translations, the system learns. A translation model is built from the resulting analysis. Second, a great deal of monolingual text is fed into it to increase translation fluency. The process is akin to a computer chess game, whereby the computer is playing chess with itself trying to find the best move, or, in this case, the best translation. The approach requires a lot of computing, but fortunately substantial computing power is available at a reasonable cost.

“Basically, we consume this text corpus. We learn from it and develop the parameters which will be used by the runtime module we call the ‘decoder.’ What we license to the customer is the parameters and the decoder,” related Mr. Wong, describing Language Weaver’s approach.

What about languages for which there is not much of an existing corpus of digital translations available? Language Weaver’s first two contracts involved Somali and Hindi—both of them “electronically low density languages.” In this case, the company had to employ human translators to generate a body of digital text that they could put into the learning system to create the parameters. “We don’t get as high a quality taking this approach,” said Mr. Wong, “but it’s still readable.”

“We have also developed a Chinese translator—for which a lot of existing data exists—but which is difficult because it uses characters instead of letters. And in the case of Arabic, there is a similar difficulty because we are dealing with script. Chinese and Arabic each presented special challenges that we met,” noted Mr. Wong.

“In summary,” explained Mr. Wong, “instead of rule based, our approach is code breaking. We just need a few weeks to create a new language set. We are getting to the point that we can deal with any language, translating it into another language by pressing buttons.”

Mr. Wong brought the technology to life for the interviewer with some graphic depictions of how it can be used for defense applications: “Everyday many hours of potentially important information to U.S. efforts against terrorism are broadcast in Arabic. Our technology is used to provide near simultaneous translation. Similarly, hours of taped interviews with people from different cultures, speaking in a variety of languages, may contain insights and information important for the military effort. Our technology can perform the translations and allow specific questions to be searched.”

Language Weaver’s translation system, for example, has been incorporated into media monitoring systems by BBN, Virage, and Z-Micro Systems. These systems can capture an Arabic satellite news broadcast. The audio track containing speech is extracted in 5-second chunks. A speech recognition system does the transcription of the chunks into Arabic text. From there, the media monitoring system sends the Arabic text to the Language Weaver translation system, which translates it into English. “An exciting part of the media monitoring systems is the way they allow an analyst or viewer to track each translated text segment in synch with the broadcast video and audio. As the speaker speaks, the English text chunk is highlighted that corresponds to what the announcer is saying.”

Continuing, Mr. Wong said, “Or imagine that you are searching a house where terrorists have been and you uncover a trove of dirty or degraded documents written in Arabic, or Farsi, or some other language. These documents may contain valuable information. They can be cleaned, scanned, and transcribed using optical character recognition software, and our system can be used quickly to generate translations. These translations can be stored and searches can be performed on key words as needed.”

THE ROLE OF SBIR IN COMPANY FUNDING

The company founders, Dr. Kevin Knight and Dr. Daniel Marcu, were professors at the University of Southern California’s Information Sciences Institute, when they saw business potential in a new approach to machine language translation they had brought to a research prototype stage.⁸ This awareness came right at the time the Internet bubble was about to burst, but at a time everyone was still excited about technology, allowing the professors to get their foot in the door with venture capitalists. But they couldn’t get funding—perhaps because the venture capitalists were just then realizing that conditions were about to take an unfavorable turn.

Next the professors went to see the Tech Coast Angels, a group of investors who provide seed and early stage capital in Southern California. They were able to present to the group, but they didn’t get money. However, they did get a mentor who worked with the would-be company for about nine months.

Still, during this time, the professors were getting no traction from the commercial sector in terms of investment funding. It was at that point that Daniel Marcu, following something of a whim, decided to see if he could get STTR funding and start the company on that. At the university, he had worked on DARPA and NSF-funded research projects, and he knew from this experience about the NSF STTR grant. He submitted a proposal to NSF and got the STTR grant.

In the words of Mr. Wong, “Getting the STTR grant was a real boon to us, because we were on the verge of saying, ‘This technology is not ready. No one is interested in talking to us. Let’s just shelve it for a while.’ But then came the grant from the National Science Foundation and with it the confirmation and redemption of the technology—an indication that it was useful, or interesting at least.”

“What did that do for us?” Mr. Wong continued. “It wasn’t enough to support more than one person, but it forced us to actually incorporate—that’s one of the rules. The other thing was that it forced us to find a CEO—someone who could drive the formation of a whole company as you see today. And it forced us to spend some time working out the details, including those of us who were volunteering our time. It reinforced that we had something interesting. So basically November 27, 2002 was our conception date, because that is when we got our first STTR. Then we were given a chance to convert the STTR into an SBIR, and we did because the SBIR offered more advantages.⁹ So the STTR/SBIR from NSF created Language Weaver and what we are today. Without that we would have shelved the technology.”

Language Weaver has received a total of $150,000 in Phase I SBIR grants and $1,500,000 in Phase II grants. It has received SBIR grants from NSF and the U.S. Army. The amount the company has received in SBIR grants since its founding in 2002 totals $1,150,000. Table App-D-4 summarizes the company’s SBIR/STTR grants in number and amount. In addition to its SBIR grants, the company received a multiyear grant from the Advanced Technology Program, for a large scale syntax-based system, expected to bear fruit several years out.

TABLE App-D-4

Language Weaver: SBIR/STTR Grants from NSF and Other Agencies.

BUSINESS STRATEGY, COMMERCIALIZATION, AND BENEFITS

The company is “a core technology house based on licensing its software.” It licenses its product, statistical machine translation software (SMTS) directly to customers, and through partners, such as solution vendors who add multilingual capability to their applications with Language Weaver. Underpinning its ability to license are more than 50 patents pending worldwide on SMTS. These partners are important marketing vehicles. “We have a symbiotic relationship with our partners,” Mr. Wong explained. “We promote our products and our partners’ product lines that contain our technology; our partners do the same thing.”

In its first two years, the company focused on heavy government funding. Grants and development contracts comprising 80–90 percent of company revenue were the company’s “life’s blood.” In 2004, the company received more revenue from licensing, allowing it to get the government share down to 60–70 percent of revenues. According to Mr. Wong, the goal in 2005 is to cut the share of government grants to less than half of company revenue, with the majority coming from licensing.

The company is “not hanging onto research,” explained Mr. Wong. “Yes, we will continue to have researchers internally, but the growth vehicle is the market now. We are sticking with the company’s core technology and then building supporting technologies around it to make the core more useful.” An additional avenue for research support, reminded Mr. Wong, is the fact that the company will continue to benefit from research advances made at the University of Southern California through Language Weaver’s rights to future discoveries.

Mr. Wong elaborated on the ongoing relationship between Language Weaver and the University. “Whatever they are working on that improves the quality of automated language translation, Language Weaver will gain the rights to. This arrangement used to be unusual, especially unusual for research university institutions because they are not focused on commercial prospects. We were probably the poster child—actually the second one—to break this path where we not only receive current rights but also future rights (for five years) from the university. Because the university shares in the company’s equity, and we are a healthy company, the university benefits from our success. In addition, Language Weaver hires a steady stream of graduates coming out of the university program.”

Mr. Wong also provided perspective about the company’s view of and use of venture capital and external business management, explaining, “Early on we made the decision that we wouldn’t be control freaks, and that we couldn’t handle all of the management aspects. We found our CEO—Bryce Benjamin—through the Tech Coast Angels. From then on we just wanted reasonable ownership of the company for the amount of money they were giving us. We decided not to worry about the fact that we are giving up shares. Rather we would worry about how much value is being added. We did not have to give up majority ownership in order to attract funding. We stayed away from people who didn’t see the future of the technology, and just seemed out to get majority ownership. To develop a beneficial relationship with venture capitalists, you need to be in that phase when you are moving towards having customers, but need to grow more; in this phase venture capital can help and investors can see potential.”

Language Weaver’s technology offers societal benefits in several ways: First, it reportedly provides a significantly higher rate of accuracy in translation than counterpart rule-based machine translations, providing customers more value. Second, it is able to provide translation systems for languages for which there is a shortage of available translators and for which there is considerable demand for translations, particularly for defense purposes. Third, it can be a more cost-effective solution for translation of large volumes of information than human translators. Fourth, the technology may offer a faster means to obtain needed translations by its ability to process large volumes of data quickly. For example, it reportedly can process in one minute what a human translator would take several days to produce.

VIEWS ABOUT THE SBIR PROGRAM AND ITS PROCESSES

Because NSF SBIR grants make up most of Language Weaver’s funding received through the SBIR program, Mr. Wong’s views on the SBIR program, which follow, mainly reflect NSF’s program.

SUMMARY

This case study illustrates how an NSF SBIR grant was critical to bootstrapping a technology with national security and economic potential out of a univer sity into use on a fast-track basis. The credibility afforded the technology by the SBIR grant enabled the company to get the management, additional funding, and strategic partners it needed to make a business. Without the NSF SBIR grant, a technology that turned out to be extremely timely would not have been developed in the same time frame. The technology is statistical machine translation that Language Weaver has applied to translating Arabic, Farsi, Chinese, and other languages. At this time, it is being used mainly for military-related purposes such as to create translations of Arabic broadcasts. From its founding in 2002, Language Weaver has moved from being almost entirely dependent on government grants to receiving the majority of its revenue from licensing fees. The case illustrates the speed capabilities of a software company as well as the speed imperatives that often characterize this field. The interview provided many observations that may help improve the SBIR program.

THE COMPANY

MER (Materials and Electrochemical Research) Corporation was created 20 years ago by two former employees of Arco Chemical Company in an R&D spinoff from Arco. The founders continue to own and operate the firm. Incorporated in Arizona and located in Tucson, MER now has about 75 employees. It operates as an engineering services company.

The firm seeks a leadership position in developing advanced and exotic materials. It has received a number of prestigious grants in recognition of its technical capabilities, including multiple R&D 100 grants—for its work in SiC fibers, VLS SiC whiskers, metal powders, and titanium extraction. It also has received grants from the Arizona Innovation Network in recognition of its prowess as an innovator. Moreover, it has received from the Small Business Administration (SBA) several “Tibbetts Grants,” named for Roland Tibbetts, a former National Science Foundation (NSF) employee who is acknowledged as “the father of the SBIR program.” The stated focus of the SBA in selecting firms to receive the Tibbetts Grant is on the economic impact of the technological innovation, business achievement and effective collaborations, and demonstrated state and regional impact.

THE TECHNOLOGY AND ITS USE

According to its website, “Researching and developing new materials is the backbone of MER.” Its specialty research areas include ceramic composites, diamond and other specialty coatings, solid free-form fabrication, and custom development and evaluation of batteries. Using SBIR grants, MER has developed technologies in advanced composites, powders, coatings, reinforcements, fullerenes and nanotubes, near net shape metals and alloys, and energy conversion systems.

One current focus of the company is on commercialization through military channels of prototypes of its rapid manufacturing near net shape processing technology. This was the technology featured by MER at the Navy Opportunity Forum, the occasion of the interview in support of this case study. By depositing successive layers of molten metal based on CAD-file designs, a variety of metal shapes—including very complex shapes—can be produced without tooling, without waste of materials, with desirable joining features, and at a cost advantage to machining techniques.

THE ROLE OF SBIR AND OTHER GOVERNMENT R&D FUNDING

Beginning early in its history and continuing to the present, the MER Corporation has relied heavily on SBIR grants and government engineering contracts for funding. The firm has also received funding from DARPA and, as part of a joint venture, from the ATP. Today, roughly 60 percent of the company’s funding comes from government sources—mainly from SBIR grants. The remaining approximately 40 percent comes from engineering services and product sales.

The SBIR program has been important to the owners as a means for not losing control of the company. It has allowed the company steadily to improve and advance its R&D capabilities.

BUSINESS STRATEGY, COMMERCIALIZATION, AND BENEFITS

In parallel with its R&D activities, MER seeks new opportunities to commercialize these technologies through strategic alliances, joint ventures, licensing, and by production and sale of product. The firm has developed extensive cooperative arrangements with major universities and international corporations as part of its R&D efforts. Among its affiliate companies are Fullerene International Corporation, LiTech LLC, Tailored Materials Corporation Inc. (TMC), and Frontier Materials Corporation (FMC). Among its research partners are Mitsubishi Corporation and RC Technologies.

Focusing on the firm’s rapid manufacturing prototyping technology, Dr. Storm, MER’s Program Manager interviewed for this case, described the company’s competitive advantage as consisting of the following elements: a) a minimum of waste, b) no need for tooling, c) very specific capability in joining and producing composite structures, and d) a cost advantage primarily in terms of low capital and operating costs. Currently at the prototype stage, the firm faces the challenges of scaling-up and moving into commercial applications. In the process, it looks for value-added opportunities in military and commercial markets.

VIEWS ON THE SBIR PROGRAM AND PROCESSES

Dr. Storm characterized the SBIR program overall as “a good program.” He called out several agency program features as particularly noteworthy. He spoke positively about the Navy’s approach to fostering SBIR Phase III activities. He noted the benefit that certain parts of DoD provide by eliminating the problem of a funding gap between Phase I and Phase II through an option to keep projects going if satisfactory progress is being made.

SUMMARY

This case study illustrates the continuing role played by SBIR grants in the research of a grant winning company started 20 years ago. The SBIR program was said to be particularly important to the owners as a means for not losing control of the company. It has allowed the company steadily to improve and advance its R&D capabilities in advanced composites, powders, coatings, reinforcements, nanotubes, manufacturing processes to produce near net shape metals and alloys, and energy conversion systems. In parallel with its R&D activities, MER is commercializing its technologies, primarily through military channels. One current focus of the company is on commercializing its rapid manufacturing near net shape processing technology. The process technology allows a variety of very complex shapes to be produced without tooling, without waste of materials, with desirable joining features, and at a cost advantage to machining techniques. Today, roughly 60 percent of the company’s funding comes from government sources, and the remaining from engineering services and product sales. The case draws on the experience of the company to identify potential problems with the SBIR program

THE COMPANY

While pursuing a graduate degree in mechanical engineering at the University of Vermont, Steve Arms witnessed an incident that led him to his future business. During a horse vaulting gymnastics competition, a friend flipping off the back of a horse injured the anterior cruciate ligaments in both knees when she landed. That set Steve, an avid sportsman himself, wondering about the amount of strain a human knee can take and how to measure that strain. Soon he was making tiny devices called “sensors” in his dorm room to measure biomechanical strain, and soon afterwards he was making money for graduate school by selling sensors around the world—the first a tiny sensor designed for arthroscopic implantation on human knee ligaments.

In 1985, Steve Arms left graduate school to start his company, MicroStrain, Inc. Its business: sensors. “In many ways,” he said, “an excellent time to start a business is when you first leave school and it is easier to take the risk, the opportunity cost is small, and one is used to living on a budget.” He operated the business out of his home at first.

The company is not a university spin-off, but the company has a number of academic collaborators. Among them are the University of Vermont, Carnegie Mellon, the University of Arizona, Penn State, and Dartmouth University.

He located the company in Vermont to be close to family and friends, and to continue to enjoy the excellent quality of life offered by that location. In the longer run, the location has proven positive for high employee retention.

From its initial focus on micro sensors with biomechanical applications, MicroStrain moved into producing micro sensors for a variety of applications. Its sensor networks are in defense applications, security systems, assembly line testing, condition-based maintenance, and in applications that increase the smartness of machines, structures, and materials.

The company has grown to approximately 22 employees, including mechanical and electrical engineers. It occupies 4,200 square feet of industrial space near Burlington, Vermont. Its annual sales revenue was recently reported as $3.0 mil lion in 2004, with revenues growing at about 30 percent per year. Revenues are expected to reach $4.0 million in 2005.

THE TECHNOLOGY AND ITS USES

A “sensor” is a device that detects a change in a physical stimulus, such as sound, electric charge, magnetic flux, optical wave velocity, thermal flux, or mechanical force, and turns it into a signal that can be measured and recorded. Often, a given stimulus may be measured by using different physical phenomena, and, hence, detected by different kinds of sensors. The best sensor depends on the application and consideration of a host of other variables.

MicroStrain focuses on producing smarter and smaller sensors, capable of operating in scaleable networks. Its technology goal is to provide networks of smart wireless sensing nodes that can be used to perform testing and evaluation automatically and autonomously in the field and to report resulting data to decision makers in a timely and convenient manner. The data can be used to monitor structural health and maintenance requirements of such things as bridges, roads, trains, dams, buildings, ground vehicles, aircraft, and watercraft. The resulting reports can alert those responsible to problems before they become serious or even turn into disasters. They can eliminate unnecessary maintenance and improve the safety and reliability of transportation and military system infrastructure, while reducing overall costs.

Among the features that determine how useful sensors will be for the type of system monitoring function described above are the degree to which the sensors are integrated into the structures, machinery, and environments they are to monitor; the degree to which the systems are autonomous, i.e., operate on their own with little need for frequent servicing; and the degree to which they provide efficient and effective delivery of sensed information back to users. MicroStrain’s research has focused on improving its technology with respect to each of these performance features.

Another way to look at it is that MicroStrain has addressed barriers that were impeding the wider use of networks of sensors. For example, MicroStrain was one of the first sensor companies to add wireless capability. Wireless technology overcomes the barrier imposed by the long wire bundles that are costly to install, tend to break, have connector failures, and are costly to maintain. A recently passed international standard for wireless sensors (IEEE 802.15-4) is expected to facilitate wider acceptance of wireless networks.

A barrier to the use of wireless sensor networks is the time and cost of changing batteries. MicroStrain is an innovator in making its networks autonomous, without need of battery changes, by pursuing two strategies: First, it has adopted various passive energy harvesting systems to supply power, such as by using piezoelectric materials to convert strain energy from a structure into electrical energy for powering a wireless sensing node, or by harvesting energy from vibrating machinery and rotating structures, or by using solar cells. Second, the company has reduced the need for power consumption by such strategies as using sleep modes for the networks in between data samples.

A recent newsworthy application of MicroStrain’s sensors was to assist the National Park Service move the Liberty Bell into a new museum. The bell has a hairline fracture that extends from its famous larger crack, making the bell quite frail. MicroStrain applied its wireless sensors developed as part of an NSF SBIR grant to detect motion in the crack and fracture as small as 1/100th the width of a human hair. During a lifting operation at the end of the move, the sensors detected shearing motions of about 15 microns (roughly half the width of a human hair) at the visible crack with simultaneous strain activity at the hairline crack’s tip. MicroStrain’s engineers stopped the riggers during this activity, and the sensor readings returned to baseline. Further lifting proceeded very slowly, and no further readings of concern were observed. The bell was protected by this early warning detection system, which saved it by literally splitting hairs.

Another newsworthy application by the company of a sensor network was to the Ben Franklin Bridge which links Philadelphia and Camden, NJ, across the Delaware River. The bridge carries automobile, train, and pedestrian traffic. At issue was the possible need for major and costly structural upgrades to accommodate strains on the bridge from high-speed commuter trains crossing the bridge. MicroStrain placed a wireless network of strain sensors on the tracks of the commuter train to generate the data needed to assess the added strain to the bridge. “For a cost of only about $20,000 for installing the wireless sensor network, millions were saved in unnecessary retrofit costs,” explained Mr. Arms.

In the future, military systems will benefit from the cost-saving information from MicroStrain’s sensor networks. Current development projects include power-harvesting wireless sensors for use aboard Navy ships, and damage-tracking wireless sensors for use on Navy aircraft. Mr. Arms explained that the data collected in this application is expected to result in recognition that the lives of the aircraft can be safely extended, avoiding billions of dollars of replacement costs.

THE ROLE OF SBIR IN COMPANY FUNDING

Early on, SBIR funding played an important role in supporting company research. While in graduate school at the University of Vermont, Mr. Arms was involved in proposal writing. He also had learned of the SBIR program. “Were it not for this,” he said, “the application process may have seemed intimidating.” He tapped Vermont’s EPSCoR¹² Phase O grants to leverage his ability to gain Federal SBIR grants. EPSCoR Phase O grants provide about $10,000 per grant. According to Mr. Arms, these Phase O grants helped the company get preliminary data for convincing results and helped it write competitive proposals. The company has leveraged a total of $40,500 in EPSCoR grants to obtain $3.6 million in SBIR funds.

According to Mr. Arms, he found the NSF SBIR program with its “more open topics” particularly helpful in the early stages when the company was building capacity. “The open topics allowed the company to pursue the technical development that best fit its know-how,” he explained. “Now the company is better able to respond to the solicitations of the Navy and the other agencies that issue very specific topics.”

The company regards receipt of an SBIR grant as “a strong positive factor that is helpful in seeking other funding,” said Mr. Arms. “It is used not only to fund the development of new products, but as a marketing tool,” he continued, pointing out that the company issues a press release whenever it receives an SBIR grant.

MicroStrain has received a total of 9 Phase I SBIR grants, 5 Phase II grants, 3 Phase IIB supplemental grants, and 1 Phase III grant. It has received SBIR grants from National Science Foundation (NSF), Navy, Army, and the Department of Health and Human Services. The amount the company has received in SBIR grants since its founding in 1985 totals about $3.6 million. Table App-D-5 summarizes the company’s SBIR/STTR grants in number and amount.

TABLE App-D-5

MicroStrain, Inc.: SBIR/STTR Grants from NSF and Other Agencies.

According to Mr. Arms, the receipt of additional SBIR grants in the future is hoped for as a means to enable it to continue to innovate and stay at the forefront of its field. The company is targeting about 25 percent of its total funding to come from SBIR grants in coming years.

BUSINESS STRATEGY, COMMERCIALIZATION, AND BENEFITS

The company operates at an applied R&D level, and, unlike most R&D-based companies, has had sales from its beginning. Mr. Arms, the company founder and president, emphasized his belief in the need to produce product “to make it real as soon as possible.” Continuing, Mr. Arms said, “Having products lets people know you know how to commercialize and that you intend to do it.”

Mr. Arms sees the company’s main competitive advantage as its role as an integrator of networked sensors. “Our goal is to produce the ideal wireless sensor networks,” he explained, “smart, tiny in size, networked and scaleable in number, able to run on very little power, software programmable from a remote site, capable of fast, accurate data delivery over the long run, capable of automated data analysis and reporting, low in cost to purchase and install, and with essentially no maintenance costs.” These features are important because they help to overcome the multiple barriers that were impeding the wider acceptance of sensors.

While the company sells its sensors mainly in domestic markets, it has from the beginning shipped sensors to customers around the world. Now the company sees market potential particularly in Japan and China. Patenting is reportedly very important to the company’s commercialization strategy.

MicroStrain has received a number of grants in recognition of outstanding new product development in the sensors industry. It has received seven new product grants in the “Best of Sensors Expo” competition. Products that have been recognized by grants include the company’s V-Link/G-Link/SG-Link micro-datalogging transceivers for high speed sensor datalogging and bidirectional wireless communications; its WWSN wireless Web sensor networks for remote, Internet enabled, ad hoc sensor node monitoring; its FAS-G gyro enhanced MEMS based inclinometer; its MG-DVRT microgauging linear displacement sensor; its 3DM-G gyro enhanced MEMS based orientation sensor; its EMBEDSENSE embeddable sensing RFID tag; AGILE-Link frequency agile wireless sensor networks; and INERTIA-LINK wireless inertial sensor.

Society stands to benefit in a variety of ways from improved sensors and networks of sensors. Structures, such as buildings, bridges, and dams, as well as transportation and industrial equipment should have fewer catastrophic failures, because managers will be alerted to emerging problems in time to take preventative action. Homeland security should be enhanced by smarter networks of sensor-based warning systems. Manufacturing productivity may be increased by better planning of required maintenance and avoidance of costly, unplanned downtime. In general, integration of smart sensor networks into civilian and military structures and infrastructure, transportation equipment, machinery, and even the human body can conserve resources, improve performance, and increase safety.

VIEWS ON THE SBIR PROGRAM AND ITS PROCESSES

Mr. Arms made the following several observations about the SBIR program and its processes, some of which focused on the NSF program, some on the Navy program.

SUMMARY

This case shows a still-small company that has emphasized product sales since its inception in 1985. It has leveraged $40,500 of Vermont’s EPSCoR “Phase O” grants to obtain $3.6 million in Federal SBIR grants. With SBIR support it developed an innovative line of microminiature, digital wireless sensors, which it is manufacturing. These sensors can autonomously and automatically collect and report data in a variety of applications. Unlike most research companies, MicroStrain, started by a graduate student, has emphasized product sales since its inception in 1985. Its sensors have been used to protect the Liberty Bell during a move and to determine the need for major retrofit of a bridge linking Philadelphia and Camden. Current development projects include power-harvesting wireless sensors for use aboard Navy ships, and damage-tracking wireless sensors for use on Navy aircraft. Although annual revenues are relatively small ($3 million in 2004), the company can document many millions of dollars of savings achieved by users of its wireless sensor networks. A little more than a quarter of the company’s revenue come from government sources.

THE COMPANY

At the time National Recovery Technologies (NRT) was founded, the growth potential for municipal solid waste recycling looked promising. To develop municipal recycling technology, Dr. Ed Sommer applied for an SBIR grant from the U.S. Department of Energy (DoE) soon after starting NRT in 1981. NRT applied first to DoE’s SBIR program for funding, because of the energy implications of municipal waste recycling. After being granted a Phase II DoE SBIR grant, Dr. Sommer said he was advised by a DoE program manager that further research to develop the plastics sorting technology would better fit the mission of EPA because of the environmental benefits of reducing PVC plastic waste in incineration. According to Dr. Sommer, having a close fit with EPA’s mission made it more likely to receive SBIR grants.

Dr. Sommer described his company’s location in Tennessee as very positive from a business standpoint. However, he noted that a drawback is the lack of technology infrastructure in the state. In developing proposals to the SBIR, “you are on your own,” he said. There are not the incubators and other institutional assistance provided by some of the states that have a stronger technology infrastructure. He noted that NRT is the first- or second-largest recipient of SBIR grants in Tennessee.

NRT developed and commercialized several innovative processes for high-speed, accurate analyzing and sorting of municipal solid waste streams. The initial customer base had its origins in state recycling laws. Demand for the company’s initial product was politically driven, not economically driven. In 1991, with venture capital funding, the company installed process lines in large sorting plants located in states with recycling requirements.

An EPA-granted SBIR project was to remove chlorine-bearing PVC from municipal waste streams prior to incineration for the purpose of emissions control. The company was successful in bridging to the new application, and quickly became a world leader in the recycling equipment industry, providing equipment and automated systems for analyzing and sorting plastics and curbside collected materials. It continues to have worldwide equipment sales, mainly in North America, Europe, Japan, and Australia. As a result of this technology development, NRT received EPA’s National Small Business of the Year grant in 1992.

In 1994, the U.S. Supreme Court ruled on a case brought by waste haulers that found that a city violated their rights by requiring them to take collected waste to recycling plants. Because it was cheaper to take it to landfills, many haulers stopped taking it to the sorting plants—taking it to landfills instead— causing large numbers of sorting plants to shut down. Plants that employed their own haulers were more likely to survive. At the same time, there was a move for presorting of curbside waste pick-up, requiring less sorting by secondary processors, further reducing demand for the company’s equipment.

As a result of these developments, the company was in trouble. It needed to move into others areas or go out of business. As it looked for new ways to leverage its existing intellectual capital and technology capabilities, it identified new areas in which to apply its technical capabilities: metals recycling and airport security. It continued to pursue automated process technology for high throughput sorting of plastics.

Today the company maintains sales of plastics analysis and sorting equipment with annual sales running about $4 million. At the same time, it is developing new lines of business that were not yet generating sales at the time of the interview. The company employs a staff of 14, 5 of whom are in R&D.

THE TECHNOLOGIES AND THEIR USES

For plastics recycling, NRT used such technologies as IR spectroscopy for polymer identification, machine vision for color sorting, concurrent parallel processing for rapid identification, quick real-time sorting, and precision air jet selection of materials.

An idea that emerged from discussions with potential customers was metals sorting, smelting, and refining. NRT undertook a research effort now in its seventh year to develop metals processing technologies. It is collaborating with another company, wTe Corporation of Bedford, MA, which has an automobile shredder division, to develop a novel optoelectronic process for sorting metals at ultra-high speeds into pure metals and alloys. It also joined with wTe to form a new company, Spectramet LLC, to serve as the operator of metals reprocessing plants.

An idea for a new technology/business platform that emerged just in the past several years is in the security area. The stream of objects moving along a conveyer belt at an airport security system resembles in many ways a mixed waste stream in the recycling business. NRT’s approach combines fast-throughput materials detection technology with data compilation, retrieval, analysis, storage, and reporting to provide an improvement over the current non-automated, manual inspection system. The Transportation Security Administration (TSA) is evaluating NRT’s system, a necessary step in qualifying it for use in airport security. According to Dr. Sommer, NRT anticipates product sales in 2005.

THE ROLE OF SBIR IN COMPANY FUNDING

According to Dr. Sommer, “Without the SBIR program, NRT wouldn’t have a business. We couldn’t have done the necessary technical development and achieved the internal intellectual growth.” The SBIR program was critical, he explained, both in developing NRT’s initial technology, and in responding to market forces to develop new technologies after a Supreme Court decision caused many municipal solid waste sorting plants to close and the growth potential of the initial waste recycling technology to decline. “SBIR saved our bacon,” said Dr. Sommer. As a result of the intellectual capabilities built within the company through SBIR-funded research, “we continue to be able to contribute.”

In 1985, the company had received a Phase II grant from DoE to pursue development of an automated process for sorting municipal solid waste. Subsequently the company received a series of SBIR grants from EPA, including eight completed Phase II grants between 1989 and 1996, aimed at developing and refining plastics recycling technologies. In 1996, NRT received SBIR grants again from DoE for plastics recycling and mixed radioactive waste recycling. Since 1996, the company has received SBIR grants from both EPA and NSF. Its first Phase II grant from NSF was received in 1999, when the company was in its second decade of operation. The funded project was aimed at developing new technologies in scrap metals processing. Later NSF SBIR funding was aimed at developing new technologies in the security area.

From the NSF, the company has received a total of three Phase I grants, totaling $0.3 million, three Phase II grants, totaling $1.4 million, and, reportedly two Phase IIB grants. Altogether, the company has received more than $5 million in SBIR funding combined from DoE, EPA, and NSF over the past 20 years.

As time passed and the growth potential of the plastics recycling business flattened, Dr. Sommer said that he turned to NSF’s SBIR program to develop new lines of technology. He said that NSF’s SBIR program was particularly appealing because its solicitation is the broadest among the agency programs. NSF’s solicitations allowed the company more leeway to propose new technology development projects that it believed would lead to business opportunities with higher growth potential. At the same time, he characterized NSF’s SBIR program as “very competitive” and its grants “the hardest to get.” With NSF funding, NRT was able to develop metals recycling technology and, more recently, the detection system for airport security.

The “openness” of NSF, Dr. Sommer said, was critical to his business model, which entails first finding a need for a new product, performing market analysis, and then looking for funding to perform research needed to bring a product to the prototype stage. Contrasting NSF’s openness with the “narrow” solicitations of the Department of Defense (DoD), Dr. Sommer explained that he did not apply to the DoD SBIR program because “for us it is not conducive to developing products aimed at a general market.”

Dr. Sommer related how his company (in a subcontractor position to the wTe Corporation, Bedford, MA) had subsequently looked to the ATP for larger amounts of funding to help further develop the metals reprocessing technology. In describing the sequence, he said there was a “spring off from SBIR to ATP.”

BUSINESS STRATEGY, COMMERCIALIZATION, AND BENEFITS

While it develops the metals reprocessing and security product lines, NRT has maintained a steady revenue stream on the order of $2–4 million/year, primarily from sales of plastics analysis and sorting equipment. Dr. Sommer sees a larger market potential in metals reprocessing—which includes partnerships to operate as well as provide equipment—with projected annual sales revenue in the range of $10–30 million. He sees a larger potential in the security market, with projected sales revenue in the range of $100 million/year. Dr. Sommer expressed his intention to take the company into a faster growth mode with the development of these new lines of business.

Annual sales revenue is currently running approximately $4 million. Revenues reportedly generated as a result of SBIR grants, referred to as “Phase III revenues,” totaled approximately $44 million from the start of the company up to November 2003.

At least eight products are on the market derived from DoE and EPA SBIR-funded research, including, for example, the following:

• NRT VinylCycle^® system—a grant winning sorting system for separating PVC from a mixed stream of plastic bottles introduced in 1991
• NRT MultiSort^®IR System—an advanced plastic bottle sorting system for separating specific polymers from a mixed stream of materials
• NRT Preburn^TM Mixed Waste Recycling System—a facility with integrated technologies to provide a system for achieving maximum material recovery from waste streams otherwise slated for landfill

Products funded by the NSF SBIR program are still in the development stage. The metal alloy sorting technology under development with NRT’s commercialization partner wTe Corporation is planned to be used by the Spectramet LLC spin-off, jointly owned by NRT and wTe Corp, for processing of metals as opposed to the technology being made available as a commercial equipment product. The advanced third generation of this sorting technology is installed and in initial commercial operation processing selected loads of scrap metals from various suppliers.

Two patents resulting from the NSF funded research have been issued. Four additional patents are pending.

Dr. Sommer identified four types of social benefits that have resulted, or may result, from the SBIR-funded technologies. (1) Knowledge creation and dissemination result from patents the company filed on the intellectual capital coming out of its NSF research, and from presentations. Patents signal the creation of new knowledge and provide a path of dissemination. Company researchers have also presented at conferences in the fields of metallurgy and plastics recycling. (2) Safety effects arise from the automation of sorting machines in recycling plants which appear to have reduced injuries as compared with conveyer belts using labor-intensive hand-picking techniques that bring the worker in close interface with potentially unhealthy waste streams and possibly injurious equipment. (3) Environmental effects result because NRT’s sensing and sorting technologies are based in electronics, not chemicals. Using “dry processes” rather than “wet processes” avoids the runoff of chemicals into waste streams and the associated pollution. Additionally, environmental benefits result directly from recycling plastics and metals into reuse instead of dumping them into landfills. The availability of automated systems that increase the efficiency of the process helps to enable cost-effective recycling of diverse materials around the world. (4) National security benefits may result if NRT is successful in leveraging its automated materials sensing technology into the security arena, improving the efficiency—and more important—the effectiveness of security at airports and other security check points. NRT’s technology is currently under evaluation for airport security applications, and not yet in use.

VIEWS ON THE SBIR PROGRAM AND PROCESSES

SUMMARY

This case study shows how SBIR is used not only by a start-up company to help it establish a technology platform from which it can launch a business, but also by a mature company that needs to rejuvenate its technology platform in order to meet changing markets. The case study company, NRT, used SBIR grants initially to support R&D underlying its first line of business. In its second decade, it used SBIR grants to leverage its existing technological base in a directional change that offers potential for future robust growth.

The NSF SBIR grant solicitation with its broad topic areas and emphasis on commercialization fits particularly well the company’s business strategy of first identifying a potential market opportunity, developing a research plan to bring a product/process to the prototype stage, and then looking for early stage research funding to make it happen.

This case also illustrates a business trajectory that, although up to this time, is not dramatic in terms of its growth, is significant when considered as one of many such companies enabled by the SBIR program. The company has survived for over 20 years, remaining small but steadily employing approximately 10 to 15 people, generating on the order of $4 million per year, meeting niche market needs that have energy and environmental implications, and poised to make further, potentially substantial technological contributions and to achieve growth. It may be argued that this company represents a component of the R&D landscape, which in its aggregate is an extremely important part of the nation’s capacity to innovate.

THE COMPANY

This small company traces its origins to a very large company, Honeywell, Inc. The company founder, Dr. James Daughton, co-invented “Magnetoresistive” Random Assess Memory (MRAM) while at Honeywell. On retiring from Honeywell, he licensed the technology for pursuit of civilian development and applications, and, in 1989, founded Nonvolatile Electronics, Inc. (NVE).¹⁵ Other former Honeywell employees joined NVE following a downsizing at Honeywell and continue with NVE today.

Initially the company operated out of the founder’s home in a Minneapolis suburb, but in the early 1990s after receiving research funding from the SBIR program and from the Advanced Technology Program (ATP), it found space in a nearby Eden Prairie, MN, industrial park. Today it leases a facility of approximately 21,000 square feet, which includes offices and a clean-room for research and fabrication of semiconductor devices. It employs a staff of 70, including 24 in R&D—12 at the Ph.D. level, and the rest in product development, manufacturing, and administration.

The company has licensing arrangements with other companies, among them Honeywell, Motorola, Cypress Semiconductor, and Agilent Technologies. It also has affiliations with a number of universities, including the University of Minnesota, Iowa State University, and the University of Alabama, and it has sponsored a university student through an NSF program.

THE TECHNOLOGY AND ITS USE

Since its founding, the company has continued development of MRAM, a revolutionary technology that fabricates memory with nanotechnology and uses electron spin to store data. MRAM computer chips could prevent accidental losses of information when the power is interrupted, extend battery life, and replace essentially all RAM technology in use today. A website devoted to MRAM news (< http://mram-info.com >) calls the technology the “holy-grail” of memory, and states that it “promises to provide non-volatile, low-power, high-speed and low- cost memory.” MRAM is based on effects named “Giant MagnetoResistance” (GMR) and “spin-dependent tunneling,” whereby a sandwich of metals shows a substantially greater change in resistance than a single metal of the same size when exposed to a magnetic field. These effects enabled researchers to increase signal strength while increasing density and decreasing size.

The technology has proven a challenging pursuit indeed. A decade later MRAM remains largely a promise still falling short of the realization of its huge commercial potential. However, NVE has developed significant intellectual property in MRAM that it has licensed to both Motorola and USTC for initial license fees and future royalty payments when it is put into commercial use. Other companies, including IBM Corporation, Hewlett-Packard Company, Infineon Technologies AG, NEC Corporation, Fujitsu Limited, Sony Corporation, and Samsung Electronics are also seeking to develop MRAM chips.

It should be noted that there are currently available nonvolatile memories, such as “flash” memories and ferroelectric random access memories (FRAMs), and there are also emerging technologies that are expected to compete with MRAM, such as polymeric ferroelectric random access memory (PFRAM), ovonic unified memory (OUM), and carbon nanotubes. However, according to its developers, MRAM offers advantages over the existing nonvolatile memories in terms of speed, lower power use, longer life expectancy, and freedom from other limitations, and also advantages over the emerging technologies, including being closer to market.

As NVE pursued MRAM development, it saw other potential commercial applications in the GMR effect. By the mid-1990s, NVE was making and selling GMR-based sensing products for such diverse applications as automotive braking systems, medical devices, and portable traffic monitoring instruments.

NVE now describes its technical focus as “spintronics,” a nanotechnology based on MRAM research, which, like MRAM, takes advantage of the property of electron spin. The technology combines quantum mechanical tunneling with magnetic scattering from the spin of electrons, resulting in a new phenomenon called “spin-dependent tunneling (SDT)” or “magnetic tunnel junctions (MTJ).”(SENSORS, March 2004). The targeted application area is magnetic field sensing for which very small, inexpensive sensors with high sensitivity to small changes in the magnetic field are required. Standard silicon microprocessing methods can be used to fabricate SDT devices. The company expects to enter the market within several years with SDT sensors in complex magnetometer systems, in small simple event detectors, in arrays for perimeter security, vehicle detection, and other security systems, and also for detection of deep cracks, corrosion, and other deeply buried flaws. Further in the future, applications are anticipated for physiological monitoring, advanced magnetic imaging, and other areas not yet identified.

THE ROLE OF SBIR AND OTHER GOVERNMENT R&D FUNDING

Federal grants for R&D—both from SBIR and ATP—have played an essential role in the company’s start-up, survival, and growth. During its early days, the company’s founder credited government R&D funding with preventing the company from failing and improving its ability to attract capital from other sources.

More recently, NVE’s vice president called the SBIR program “the mother of invention.” The company currently derives approximately half of its funding from government funding, including SBIRs and BAAs (Broad Area Announcements that federal agencies may use to solicit contract work), and the remaining half from commercial sales, up-front license fees and royalties, stockholder investment, and retained earnings. It views SBIR and other government R&D funding programs as essential to being able to perform the advanced R&D that has allowed the company subsequently to produce products for sale and to license intellectual property.

Table App-D-6 summarizes the company’s SBIR/STTR grants from the National Science Foundation (NSF) and other agencies. The 121 SBIR and STTR grants received have totaled $34.3 million in R&D funding. Approximately a fourth of the 121 grants have come from NSF.

TABLE App-D-6

NVE Corporation: SBIR/STTR Grants from NSF and Other Agencies.

BUSINESS STRATEGY, COMMERCIALIZATION, AND BENEFITS

NVE President and CEO, Daniel Baker, has been recently quoted as saying, “We believe that NVE is well positioned with critical intellectual property covering a broad range of near-term and long-term MRAM designs. Our MRAM strategy, therefore, will be to focus on an intellectual property business model, providing technology to enable revolutionary memory designs rather than both providing technology and selling devices.” (NVE Press Release, April 19, 2005) Regarding NVE’s strategy regarding sensors and signal couplers, it appears that NVE will continue to build its intellectual property base in SDT and GMR sensors, as well as continue to design, fabricate, and sell a variety of sensor and signal coupler devices for both commercial and defense applications.

Product revenue from sales of spintronic sensors and couplers has steadily increased, reaching $5.4 million in FY 2004, and the company projects its commercial product revenues to continue to grow. R&D revenue for FY 2004 rose to $6.6 million, as government contract revenue increased. Total revenue for FY 2004 totaled $12 million. As of the end of FY 2004, NVE had been profitable for two years, and the firm was projecting continued profitability into FY 2005.

The spintronic sensors and couplers sold by NVE offer value-added benefits to users in terms of accuracy and data rates. The firm’s unique components provide up to three-to-four times the accuracy and twice the data rate of conventional electronics, allowing users to make better products at lower costs.

NVE has stated recently that the commercial viability of MRAM technology is now more assured. It expects FY 2005 to be pivotal for MRAM commercialization. In additional to nonvolatility, MRAM’s potential benefits to users are high speed, small size, increased life expectancy, lower power use, and scalability. Nevertheless, as indicated earlier, the competition among firms and among technologies is intense.

VIEWS ON THE SBIR PROGRAM

The interviewees strongly supported the SBIR program in general. They noted that it has fostered the development of a large number of small R&D companies like itself that “collectively comprise the modern-day equivalents of the Bell Labs of the past.” They emphasized the advantages of performing R&D in a small-company environment where “there is much more freedom to innovate” and “R&D is not viewed as an unwelcome tax on what is considered the productive part of the corporation.” They expressed the hope that program officials and policy makers will not underrate the importance of this collective group of small firms by assuming that only if they individually grow into large companies are they worthwhile from the standpoint of the economy and its innovative capacity.

At the interviewer’s request, the three NVE officials shifted their focus to NSF’s SBIR program, beginning with a positive comment and then turning to areas for potential improvement:

THE COMPANY

Maria Thompson, with an M.B.A. degree and industry experience in product development and marketing, and her husband, Levi Thompson, with a Ph.D. in chemical engineering, combined their expertise to start T/J Technologies in 1991. They started the company by taking over a Department of Defense SBIR Phase I grant from a company that was divesting contractual obligations. The Thompsons rented a lab bench in a friend’s small laboratory space, hired an employee, and put their savings into the enterprise. The SBIR grant was to develop ultrahard coatings for armor. Because the funding was quite limited, Ms. Thompson, “kept her day job” as an IBM marketing representative, and Dr. Thompson, who is an officer in the company, continued at the University of Michigan where he is now a tenured professor in the College of Engineering, and Associate Dean for Undergraduate Education. They ran T/J Technologies as a part-time business for the next three years, working evenings and weekends. Then, in 1994, Ms. Thompson left IBM and focused on being president of T/J Technologies.

From its initial work in ultrahard coatings, the company moved into developing ultracapacitors, and that led them into a specialty in advanced materials and devices for electrochemical energy storage and conversion. Particularly notable are its advances in rechargeable batteries, ultracapacitors, and fuel cells. The company holds seven patents and has a number of others pending in the area of nanomaterials for alternative energy technologies.

The technical and business achievements of T/J Technologies have been recognized in grants at the national and state level. In 2005, the company was designated one of the “50 Companies to Watch in Michigan.” In 2000, the company received the DoD Nunn Perry Grant for its ultra-capacitor development with Lockheed Martin, and it also received the “Product of the year Grant” from the Michigan Small Business Association. In 2000, Ms. Thompson was named one of Metro Detroit’s Innovators by Crain’s Detroit Business. Among other grants, T/J Technologies and Ms. Thompson received Black Enterprise Magazine’s “Innovator of the Year” grant in 1998. The company has been featured in Fortune Small Business, Black Enterprise, the Detroit News, and other business journals and newspapers.

The company has grown to approximately 25 employees, most of whom are scientific researchers and many of whom have doctorate degrees. Employee disciplines include chemical engineering, polymer science, chemistry, and electrochemistry. The company occupies 12,500 square feet of industrial space in Ann Arbor, Michigan, the home state of Ms. Thompson and where both Dr. and Ms. Thompson attended the University of Michigan.

THE TECHNOLOGY AND ITS USES

T/J Technologies designs advanced materials for energy storage and energy conversion devices. It has a nanocomposite cathode composite material for lithium-ion (Li-ion) batteries. It has developed a series of electrocatalysts for fuel cells that have implications for portable power applications.

The characteristics of the materials developed by T/J Technologies are expected to enable a new class of proprietary, high power Li-ion batteries that are suited for a wide variety of high rate commercial and military applications.

The company also provides expertise in materials synthesis and processing and materials testing services. The company offers consulting services in nanomaterials, energy storage materials, and fuel cell battery research, development, and commercialization.

THE ROLE OF SBIR IN COMPANY FUNDING

Despite the fact that Ms. Thompson did not know of the SBIR program in advance of starting the company, it was a Phase I SBIR grant that got the company started. When her husband identified an opportunity to start their company by picking up research from another company, she regarded it as an opportunity. During the course of arranging the transfer, she learned about the SBIR. Her teacher was MERRA, a Michigan-based organization aimed at boosting the State’s technology businesses. “MERRA explained the concept of SBIR and how the various phases worked.” Afterwards, T/J Technologies went on to propose and win new SBIR grants.

“The SBIR grants served as building blocks for us,” explained Ms. Thompson. With the technical capacity developed in a series of SBIR, the company applied for an award from the Advanced Technology Program (ATP). “When we went to apply for an ATP award, even though MERRA was disbanded, the people were still around and they helped us with our ATP proposal by giving us feedback. When we reached the finalist stage, they volunteered to do a dry-run with us in preparation for the oral review. As a result, we were very well prepared. So now we try to give back to the community the kind of support we received when we needed it. At this time, most of this kind of assistance in Michigan is on an Ad Hoc basis.”

Continuing with the building block model, Ms. Thompson explained that the ATP and SBIR grants in turn served as building blocks for pursuing research contracts with the Army under competitive-issued Broad Agency Announcements (BAA) for contract research, the company’s current major source of funding. And the BAA work in turn is serving as a building block allowing the company to develop partnerships with global firms who are testing T/J Technologies’ materials and building batteries collaboratively for demonstration purposes.¹⁷ The company is executing its commercialization strategy with its strategic partners.

“We’ve been granted these larger contracts because of some of the technologies developed with SBIR. All of these things are very synergistic. Without the SBIR, we couldn’t have won the ATP. And, without the ATP and SBIR, we may not have had the technology with which to earn the larger contracts and the joint development agreements. So they are all linked.”

Ms. Thompson noted that SBIR grants are still part of the company’s funding mix, “helping us to round out our capabilities in certain areas, such as hydrogen storage and high temperature membranes.” About 15 to 20 percent of the company’s funding reportedly is coming from SBIR grants in 2005, and most of the remainder is from contract research. A small amount is from sales of material samples in conjunction with the joint work with global companies that is expected to lead to commercialization of the materials.

Emphasizing that the building block model may need to be repeated as they look at different materials, Ms. Thompson said, “We need a family of materials for multiple applications. Multiple materials are needed for batteries, and also for the various components. You have to demonstrate a whole system, and that takes time and money,” she said.

“STTRs also can help a company like ours,” noted Ms. Thompson, “because you may need a piece of technology from a university to help put together a broader system.” Also, along the way, the company has received funding from angel investors.

Thus far, T/J Technologies has received a total of 33 Phase I SBIR grants, 15 Phase II grants, 2 Phase IIB supplemental grants, and 1 Phase III grant. It has received SBIR grants from multiple agencies, including the Army, Air Force, NASA, DoE, and NSF. The amount the company has received in SBIR grants since its founding in 1991 totals about $12.3 million, and the total in SBIR and STTR grants amounts to approximately $13.4 million. Table App-D-7 summarizes the company’s SBIR/STTR grants in number and amount.

TABLE App-D-7

T/J Technologies, Inc.: SBIR/STTR Grants from NSF and Other Agencies.

BUSINESS STRATEGY, COMMERCIALIZATION, AND BENEFITS

As a materials development company, T/J Technologies typically faces a 5 to 7 year cycle to develop a material. With materials development, it is unrealistic to expect to advance from the discovery of a nanomaterial to an end product with one cycle of SBIR Phase I, II, and IIB funding. “It just doesn’t happen that way,” said Ms. Thompson. She noted that the company is now focusing on “moving further up the value chain. We have demonstrated the value of our proprietary technology to the end user in specific applications. When the customer understands that our materials will enable them to enter new markets, the conversations with suppliers in that value chain are much easier.”

“T/J Technologies has a pipeline of cutting edge alternative energy technologies which has made the company interesting to larger corporations seeking to get into this market. While forming partnerships can be beneficial, they need to be negotiated with great care. There must be real need for both parties,” she said. “The increasing need and interest in alternative energy technologies, and the cutting edge intellectual property that we have developed through the SBIR and ATP programs, have attracted multiple players to us. Small companies have a stronger negotiating position when more than one company competes for their technology.”

“It is essential that these small companies—particularly those run by scientists—not be forced into a position where they will be taken advantage of,” she said, commenting on public policies that might lead to this outcome…. Yes, the requirement for a match for the Phase IIB grant is useful in ruling out dumb technologies which will never be commercialized. But, too often the companies that you go to for matching funds want too much in return—if you go too early to the table…. A better approach is to work with them, develop a relationship. Find out what the end customer wants; what the relevant problems are. Let them test your materials. They will spend resources to do so, and they will not do so unless there is real interest. It is usually possible to get them to put a dollar value on those resources.”

The significance, Ms. Thompson explained, of obtaining such valuation of resource expenditures comes into play if it is acceptable for meeting SBIR matching funds requirements of the Phase II grant. This is a good indicator of interest in commercialization, she explained, “Because companies are busy; they are not going to give you in-kind support unless they are interested.” However, she went on to say that letters of commitment and estimates of resource committed for testing are also very difficult to get. “You might get an agreement from the scientist or business person, only to be shot down by the company’s legal department. They may agree to do the testing, but refuse to put it in writing.”

T/J Technologies’ novel materials offer potential benefits in terms of meeting the need for alternative energy sources that can be used to power automobiles and other vehicles, as well as to meet stationary power needs. The materials offer high-rate performance and reductions in the cost, size, and weight of batteries. The materials also offer environmental benefits in that, unlike most other lithium ion cathodes, T/J Technologies materials do not contain cobalt, an undesirable component from a safety and environmental perspective. In addition, if the company’s technology furthers the adoption of alternative energy sources, it stands to yield broad environmental and national security benefits associated with reduced dependency on conventional energy sources.

VIEWS ON THE SBIR PROGRAM AND PROCESSES

Ms. Thompson expressed her views about the SBIR program and its processes. She also made relevant comments about broader public policy concerning government support of innovative companies in the United States. These comments are also summarized.

SUMMARY

This case study features an innovative materials research company facing a relatively long time to commercialization and a need to form partnerships with global companies to reach civilian markets. It shows a company moving up the value chain in order to increase the value it can receive for its technology in an environment where funding is scarce and negotiations difficult. The case illustrates a “building block” strategy, where SBIR grants enabled the company to start and build capacity; that capacity was leveraged into an ATP grant; the ATP grant leveraged the company’s ability to go after government research contracts; and research contracts leveraged its ability to form commercial partnerships with much larger companies for testing and demonstrating its materials. The next step is commercialization, which will be achieved through a partner. At the helm of the company is a grant-winning minority woman, during a time that woman-owned and minority-owned businesses have received a relatively low share of SBIR grants.

THE COMPANY

WaveBand Corporation emerged in 1996 as a spin-off of Physical Optics Corporation (POC). POC is a small, employee-owned company that specializes in optoelectronic solutions and products. WaveBand is one of several companies that POC has spun off. Six POC employees moved to WaveBand to assist with the spin-off, and POC retained major ownership of the new company. According to Ms. Quintana, WaveBand’s Director of Business Development and a former POC employee, “a goal of WaveBand was to become truly independent of POC.”

Based in Irvine, CA, WaveBand Corporation became known for innovation in the field of millimeter wave (MMW) technologies, including beam-steering antenna and imaging radar systems. In early 2005, the company had 24 employees, half of whom had Ph.Ds. Its revenue in 2004 was $5.5 million.

Today, WaveBand is a wholly owned subsidiary of Sierra Nevada Corporation (SNC). SNC acquired WaveBand Corporation in May 2005. SNC is a rapidly growing innovative systems integrator, located in Sparks, NV, specializing in the design, development, production, installation and servicing of defense electronics engineering systems. Founded in 1963, SNC is the parent company of a group of more than six companies with the following four areas of focus: air traffic control; unmanned aerial vehicle systems; instrumentation, test, and training systems; and intelligence, surveillance, and reconnaissance systems. SNC employs more than 750 employees, and, hence, is not eligible for SBIR grants.

THE TECHNOLOGY AND ITS USES

WaveBand’s antennas provide rapid beam steering and beam forming, and they do this without the use of bulky mechanical steering. Rather, the WaveBand antenna technology in one of its implementations relies on a grating formed on a spinning drum to steer the radar beam. In this way, it avoids the use of mechanically moved reflectors, which are slow, and electronically steered phase shifters, which are fast but expensive. In short, WaveBand’s antennas were developed to overcome problems of slowness or expense that characterize traditional antennas. Their more advanced antenna technology implementation is designed to meet the need for electronically steerable antennas that are comparable to phased array antennas in performance, but are highly compact, light weight, robust, with low power needs, without requirements for continuous calibration, and comparatively inexpensive. The antennas are smart; they can be set to provide multiple beams, each steerable. They offer a price advantage 100 times more favorable to buyers than traditional systems.

The antennas can help meet guidance needs for aircraft landing, missile seekers, and surveillance sensors. In civilian markets, they may also be useful for adaptive cruise control on cars, allowing cars to regulate their own speeds in response to traffic congestion. The advantage is that WaveBand’s antenna scans, enabling it to cover more area than the fixed-beam radar antennas in current adaptive cruise control systems, and, therefore, enabling it provide the car’s computer with more data on which to base its calculations. The millimeter wave radar beam can penetrate fog, rain, or snow, making it ideal for a variety of autonomous guidance and landing systems. WaveBand is working with both the automobile industry and avionics suppliers to develop prototype systems. It is in the process of validating application of the antenna to the Navy fleet.

THE ROLE OF SBIR IN COMPANY FUNDING

When WaveBand spun-out of POC, it continued to work—in a subcontractor role—on some of the SBIR programs its personnel had been involved with prior to the spin-out. Later on, funding for the company came directly from SBIR, according to Ms.Quintana.

At the time of its take-over by SNC, WaveBand was receiving approximately half of its funding from SBIR grants. The remainder came primarily from studies and sales, particularly sales to defense agencies.

Earlier, WaveBand had pursued SBIRs that were mainly aimed at highly focused military objectives. But around 2000, the company made a decision to put increased attention on attracting commercially driven R&D to broaden the technology’s applications into nondefense markets, and to deemphasize the attention given to winning highly focused SBIR grants and contracts. It also went through a cycle of Phase 1, Phase 2, and Phase 2B NSF SBIR grants. More recently, it switched back to the highly focused defense SBIRs. According to Ms. Quintana, a result of this strategy was the development not only of technical prowess but also commercial strength for WaveBand.

According to WaveBand’s SBIR Commercialization Report to the Department of Defense, “the technologies that WaveBand has developed under Phase II SBIR research are all vital to our commercialization success. Each research project contributed to our commercial and Non-SBIR revenue.”

WaveBand received a total of 48 Phase 1 SBIR grants and 22 Phase 2 SBIR grants. It has received SBIR grants mainly from Navy, Army, Air Force, NASA, and DoE, and to a lesser extent from NSF. It received 2 Phase 1 STTR grants and 2 Phase 2 STTR grants. The amount the company has received in SBIR/STTR grants since 1996 totals $19.8 Million. Table App-D-8 summarizes the company’s SBIR/STTR grants in number and amount. Eligibility for SBIR grants has ended with WaveBand’s acquisition by SNC, a company with more than 500 employees.

TABLE App-D-8

Waveband Corporation: SBIR/STTR Grants from NSF and Other Agencies.

BUSINESS STRATEGY, COMMERCIALIZATION, AND BENEFITS

WaveBand’s beam-steering antennas are expected to find about equal market applications in civilian and military applications. Civilian applications are expected to include landing systems for commercial jets and helicopters, as well as intelligent cruise control for automobiles. Military applications include landing systems for military aircraft, guidance for missile seekers, and surveillance systems for Navy ships.

WaveBand has sold test units of its MMW steering antenna to major auto motive companies and to a major manufacturer of avionics instrumentation. MMW steering antenna units have been installed on unmanned ground vehicles; a unit has been demonstrated for a railroad grade-crossing monitoring system; it has been demonstrated for bird detection along airport runways; and it has been demonstrated to “see through” various atmospheric conditions to facilitate aircraft landing.

WaveBand’s acquisition by SNC has reportedly not changed WaveBand’s technology direction. However, the acquisition has changed its funding situation. Without the ability to receive SBIR grants and contracts to support its research, WaveBand is expected to develop more of a product orientation, even as it attempts to stay on its R&D path. The parent company is expected to provide some direct R&D funding, it is including WaveBand as a subcontractor on military contracts, and it is expected to encourage the group to attract R&D funding from other sources. Accelerated growth of sales revenue is expected to provide another source of support for continued R&D.

WaveBand’s antennas offer performance benefits and cost advantages. They stand to increase automotive and aviation safety in civilian and defense applications and improve the effectiveness of a variety of military-defense systems.

VIEWS ABOUT THE SBIR PROGRAM AND ITS PROCESSES

Ms. Quintana made the following several observations about the program and its processes, some of which focused on the NSF program:

SUMMARY

This case study illustrates the role played by SBIR grants in the creation of a company as a spin-off of another small company. It also shows how the company used SBIR and other research funding sources to develop a portfolio of technologies attractive to a larger company that recently acquired it. The case illustrates the dual special roles played by highly targeted SBIR grants from defense agencies and by less targeted grants from NSF. It describes SBIR-funded innovations important from both a military standpoint and important in civilian markets. The company has used its SBIR funding to develop antennas that rely on an electronhole plasma grating to provide rapid beam steering and beam forming without the use of bulky mechanically moved reflectors, which are slow, and without electronically steered phase shifters, which are fast but expensive. WaveBand’s antennas reportedly offer a price advantage 100 times more favorable to buyers than traditional systems. Approximately half of WaveBand’s revenue in 2004 came from SBIR grants and contracts. The company provided helpful comments for improving the SBIR program.