The Next American Economy
Can America’s idea factories save the day?
April 28 2010 by William J. Holstein
When Ric Fulop, a 26-year-old serial entrepreneur originally from Venezuela, was looking for a new idea in early 2001, he approached the Technology Licensing Office at Massachusetts Institute of Technology in Cambridge, Mass. He was told that Professor Yet-Ming Chiang had just filed a statement with the tech office announcing a promising breakthrough on a revolutionary new battery. Armed with that information, Fulop knocked on the Chinese professor’s door as he was preparing to leave for a battery conference and told him he wanted to launch a new business on the basis of Chiang’s ideas. Chiang was interested and brought in a colleague who was working at American Superconductor at the time. The three started meeting at a local restaurant to hash out their ideas for the company.Â Â
Flash forward to 2010 and the company that the three men launched, A123 Systems, is the American leader in the lithium ion battery industry, which is poised to become a multibillion- a-year industry as auto companies, electricity utilities and others turn to the new technology. Named for an obscure scientific formula, A123 has raised $249million from the Obama Administration and $100million from the state of Michigan. But perhaps more importantly, it went public in September 2009 and now has a market value of $1.4 billion. It has some 1,600 employees in the U.S. and Asia, and 2009 revenue of $91million. It is building a factory in Michigan to serve the auto industry, which will create hundreds more jobs. “This is the kind of opportunity that people historically come to America for,” says Chiang. “This is the American dream.”
At a time when the U.S. is hungry for good jobs, CEOs, technologists and economic development experts are examining America’s universities for clues on whether new industries can be created on American soil, rather than in China, Taiwan or Singapore. Corporate research centers like Bell Labs and Xerox Park have all but disappeared, leaving universities as increasingly important idea factories. The reality is that for every A123 that reaches viability – or for every Hewlett-Packard or Google – dozens of others fail. And for every disruptive technology that is commercialized, dozens remain locked inside the ivied halls of academe.Â Â
“The question is: How we can get real contributions to the economy, as opposed to letting professors play in their sand boxes working on things that seem completely irrelevant?” asks Lita Nelsen, director of MIT’s tech licensing office.Â Â
Experts like Nelsen are increasingly using the word “ecosystem” to describe the complex environment that needs to be built so would-be knowledge entrepreneurs can commercialize their ideas in fields ranging from new materials to genomics, and from robotics to solar energy. There are several steps in this ecosystem -Â universities must have enlightened policies to allow ideas they own to be commercialized and to allow professors time to try to do it. The entrepreneurs often need incubators or half-way houses to take the first step out of a university setting.Â Â
Making matches between the best ideas and the world of finance is obviously critical. Chiang received an early $100,000 grant from the Small Business Administration that helped him develop his battery idea, and a variety of foundations, networks of angel investors and others make commitments long before there is any real prospect of commercialization. “You can’t have the research sitting there in the lab without the individual wealth available to commercialize the ideas,” says John Sibley Butler, professor of entrepreneurship and director of the Herb Kelleher Center for Entrepreneurship and of the Institute for Innovation and Creativity (IC2) at the University of Texas in Austin, one of the nation’s leading experts on the diffusion of technology. “Wherever I go, I want to meet the wealthy people. I’m not interested in what the governor has to say. Established wealth has a tremendous role in investing in new ideas.”
That’s what happened in Austin -Â the institute manages the Texas Angel Network, offering millions of dollars worth of seed money from wealthy individuals to start-up firms earlier than venture capital firms would. Butler also oversees $280 million in annual start-up funds as part of the Governor’s Emerging Technology Fund, which is targeted toward biosciences, clean energy, wireless communications and information technology, including software and semiconductors. Over the years, companies created at IC2 include Dell and Whole Foods. Some companies take root in the Austin Technology Incubator, which IC2 also oversees.
At the earliest stages, entrepreneurs need “patient money,” funds from individuals or firms that are not seeking exit strategies within a year or 18 months, and also “smart money,” funds that are administered by CEOs who have run businesses before. In short, the money has to be the right kind of money; if venture capitalists lend money and want double-digit rates of return, the new business may be doomed. If outright grants are made, as they are to students and academics attempting to commercialize advanced robotic ideas from Carnegie Mellon University, the danger is that entrepreneurs will have an incentive just to keep taking free money and not to make tough decisions about how to commercialize their ideas.
“It has to be balanced,” says Nelsen. “You can’t just give people money.” Government money – whether from the National Science Foundation, the Department of Energy, the Defense Advanced Research Projects Agency, NASA or others – plays a major role in financing core research inside the university, but the vast majority of the funds needed to commercialize new ideas comes from the private sector.Â Â
If the ideas take root, the professors or their students who have a fascination for the technology need to bring in MBAs and people with solid business experience. This is critical, because very few academics have the skills to create large-scale businesses. A hefty percentage of scientists who launch ideas become chief technology officers or chief scientific officers and recruit professional CEOs, who often put the companies through a wrenching refocusing, because while the technologists focus on technology, profits come from managers focusing on market needs. Essentially, the company must turn to the market, not the university. An important test is whether a technology can be “scaled,” or manufactured in quantity.Â Â
Another key element of the right ecosystem is large, established companies that often invest in the start-ups, license their technology or sit on their boards. General Electric has played that role for A123; companies such as Boeing, Caterpillar, Intel and IBM are major players in seeking to identify and network with the best minds in key universities.Â Â Â
It’s possible to identify the key ingredients of a successful entrepreneurial ecosystem, even if it does not seem possible to force the creation of a successful company. But it tends to work best in cities or regions that have clusters of similar activity. Boston, California’s Silicon Valley and Austin have clear advantages because over the decades they have created several generations of IT companies and have smoothly oiled mechanisms for entrepreneurs to connect with financiers, managers and others.Â Â
It’s now possible to identify gaps in a region’s ecosystem. Orlando’s training and simulation industry, home to 100 companies, faces a shortfall of venture capital money, for example, so university tech development specialists have turned to the Small Business Administration for its vaunted Small Business Innovation Research loans. North Carolina’s Research Triangle is the home to R&D activities for many major companies, but has not spawned home-grown start-ups at the same rate that, say, Austin has. Experts attribute that to a relative scarcity of business leaders with MBAs.Â Â
If the body of knowledge about these ecosystems is shaping up so clearly, why aren’t more ideas making it out to market and creating more jobs? One reason is that it is devilishly difficult.Â Â
Take A123. Fulop, Chiang and Chiang’s friend – Bart Riley, a Ph.D. in materials science – created their company in November 2001. Fulop, who was instrumental in attracting the first venture capital money, wanted to be the CEO. But the others didn’t think he had the right skills or management style. “He wanted to be CEO, but he wasn’t allowed to,” says Riley. “It created a little bit of tension at the time.” The others insisted on hiring a professional CEO by the name of Dave Vieau. Fulop was obviously disappointed, but stayed with the company, until he retired as head of marketing in February 2010.Â Â
Riley, as vice president in charge of R&D, took responsibility for developing the idea that had come out of Chiang’s labs. This was a technique for making a “self-organizing” battery that relied on pouring two liquids into a container and allowing them to separate, like oil and vinegar in a salad dressing, to create the battery. The company had about 10 employees at this point, in the spring of 2003, but engineers who had been hired to work on the idea confronted Riley and told him the idea would never “scale” in time. It just wasn’t practical. Two co-founders of the company – Riley and Chiang -Â were told, in effect, they were wrong.Â Â Â
It was then that the company shifted to a second idea that Chiang was working on at MIT – a nanophosphate technology that could be used in lithium ion batteries – and CEO Vieau led its development. The company believed this powderized material created safer, lighter, more powerful batteries that could be discharged and recharged more times. “We killed the first horse and rode off on the second horse,” recalls Vieau.Â Â Â
The first customer for the battery was Black & Decker, which wanted better batteries for its hand-held tools. But A123 could not build all of the factories fast enough to produce its own technology. So Riley set up a system in which A123 made the nanophosphate powder that was shipped to Korea, where A123’s partner coated the powder onto metal foil, the next step in assembling a lithium ion battery. Then coated electrodes were shipped to China, where they were assembled into cells, before being shipped to Taiwan, where 10 cells were combined into a battery pack. “You should see my passport,” Riley jokes.
A123 had the wrong leadership at first, started with the wrong idea and lacked the ability to make its product in high volume, yet the company has blossomed. The keys appear to have been a determination to keep going and cohesiveness among the management team. Another important factor was the role of Gururaj “Desh” Deshpande, the founder of both Cascade Systems and Sycamore Networks, who was an early investor in A123 and who serves as chairman of the board.Â Â Â
Having been through the creation of two companies himself, he could offer wise counsel to Vieau and others.Â
Of all the steps involved in commercializing an idea, perhaps the trickiest is making the right kind of connection between the scientist and a business minded executive, says William A. Thomas Meyer, executive vice president of the Technology Collaborative. This is a non-profit, supported by federal and state governments, member organizations and foundations that provides seed grants to scientists at Pittsburgh universities. The leading recipient is Carnegie Mellon, home of the world’s largest robotics institute, which has spun out 35 to 40 robotics companies, including See Grid, which makes robots for ware houses, and Red- Zone Robotics, which makes robots that map and inspect water and sewer lines.Â Â Â
Thomas Meyer places a particular emphasis on attracting larger companies to would-be startups. “We’re finding the right formula is to try to marry the technologist with a sound business guy,” he says. “For a lot of the scientists who spin out companies, that’s one of the transitions they have to undergo. At some point, it’s not about the technology. It’s about engineering, production, support and marketing. If you match them up, you have the opportunity to shorten their learning curve.”Â Â Â
Calling for Commercialization
Some experts are beginning to suggest that the nation puts too much emphasis on doing research and not enough on exploiting its results. “You need to put the same amount of creativity and energy into the commercialization of intellectual property as you did to create it in the first place,” argues M.J. Soileau, vice president for research and director of the office of research and commercialization at the University of Central Florida in Orlando. “You need the same conscious, focused effort but with a different group of people,” including marketing, sales, and manufacturing experts.
UCF has emerged as the sparkplug of Orlando’s simulation and training industry, a cluster of about 100 companies representing a blend of what the military needs to train warriors and the entertainment and gaming skills that Disney and Electronic Arts offer. Military spending undergirds much of the nation’s research. From the economic point of view, the goal is to make it saleable to both the military and civilian sectors.Â Â
One piece of what Soileau does is to oversee the UCF incubator, which now has 80 companies in it. More than 100 have gone through it. Of those, 34 created successful companies. Thirty-one stayed in Orlando. As a result, the incubator has created more than 1,650 jobs and $200 million in local economic impact, according to a recent study.Â Â
Most of the companies are still small. “We don’t have venture capital, so what do we do about it?” Soileau asks. “We get venture money from outside the area,” and the incubator also is a leader in obtaining SBIR grants. Altogether, it has raised $190 million in capital investment over 10 years.
The university allows professors to take time off to develop ideas that show commercial promise and, like MIT and Stanford, does not charge upfront fees for the intellectual property, since such fees discourage scientists. In other cases, the university licenses technology developed there to established companies such as Lockheed Martin, and in others it does contract research. The guiding philosophy is to use all the ideas, wherever they come from, to create wealth in the Orlando area, not to hoard the knowledge, as some universities are tempted to do.Â Â
Soileau wants to adopt best practices from Stanford University and other mature research universities. “They are surrounded by a rich ecosystem that they helped develop,” he says. “We’re trying to build that ecosystem.”Â Â Â Â
The evidence is that, despite gloomy headlines about the U.S. economy, the heart of the country’s innovation engine is still beating strongly at key universities. Entire industries are seeking to be born and to grow to the stage that they can employ tens of thousands of people. Washington cannot wave a magic wand to create millions of high-paying jobs that can survive international competition. Promises to do that are political poppycock. But Washington could articulate a vision and create a sense of urgency so that the technologies coming out of the nation’s best idea factories create high-paying jobs on American soil.
William J. Holstein, the author of Why GM Matters: Inside the Race to Transform an American Icon, is working on a new book, The Next American Economy: A Blueprint for a Sustainable Recovery.