After 65 years, SRI is still creating new technologies on many fronts, with SRI Ventures serving as its profit-sharing font of spinoffs
These days, it seems there's a new incubator for just about every pair of 19-year-olds working on a mobile-payment startup. Long ago, before Y Combinator and 500 Startups, there was SRI International: the old school, nonprofit research and development organization that's had a hand in the creation of everything from Disneyland (DIS) to the Internet. Started by Stanford University in 1946 as a way to drum up enterprise in the then-sleepy Bay Area, SRI is best known for churning out a smorgasbord of inventions such as Technicolor (for which it won an Academy Award in 1959), to the first computer mouse, created in 1968. The 2,400-employee organization celebrates its 65th birthday this year. Today the federal government is the organization's bread and butter, accounting for 70 percent of the $500 million in revenue from sponsored research that SRI brings in annually. The Defense Dept. is by far the company's biggest client. While research contracts keep the robots juiced up, the revenue doesn't provide for extras such as an endowment fund. Nor does it allow for the type of financial compensation that a team of top-shelf scientists, business development specialists, and executives could make in private industry. That's what SRI Ventures and the in-house incubator is for. Over the past 20 years, SRI has been spinning off major biotech, Internet technology, and advanced materials companies created by its own researchers, who then must decide if they will keep creating at SRI or pursue opportunities for riches at the new venture. The Menlo Park (Calif.)-headquartered company has created more than 50 spinoffs based on breakthrough technologies developed in its laboratories. Three of the ventures—Intuitive Surgical, Nuance Communications and Orchid Cellmark—have become public companies with a combined market cap of more than $20 billion. A Huge Sale: Siri to Apple
More recently, a government contract to develop an intuitive, automated-personal-assistant program for military personnel resulted in a huge deal with Apple (AAPL): In April 2010, SRI sold online-personal-assistant app Siri to Apple for an undisclosed sum that "made us very happy—very, very happy," says Norman Winarsky, vice-president at SRI Ventures. This monetization model resulted from the 1980 Patent & Trademark Law Amendments Act (otherwise known as the Bayh-Dole Act), which gave universities and nonprofits intellectual property rights to commercial applications that grew out of government grants. In 1993, the Sarnoff Corp. (previously an SRI subsidiary and now fully part of SRI) began a ventures strategy, with an iris-recognition company called Sensar its first official spinoff. Within two years, all of SRI had adopted the venture strategy. Researchers who work on projects are encouraged to think about potential commercial applications and to approach the SRI Ventures board with ideas. The company incubates spinoff ventures within its facilities, providing seed money, work space, infrastructure support, and business-development resources that include early access to white-shoe venture capital firms that have invested in multiple SRI enterprises and can weigh in early on an idea's commercial potential. "We want to distinguish ourselves from academic institutions. We are not here to educate people," says Winarsky. "It's an unnatural act for an academic institution to bring together diverse solutions to market opportunities and integrate them into something that can be delivered into the marketplace, and for us its a natural act."
A Division of Rewards
When a venture spins off or a product is licensed, 66 percent of the funds go to an SRI endowment fund, which 15 years ago was an empty bank account. The remaining 34 percent goes to SRI staff. The biggest chunk goes to the team that worked on it, while 7 percent to 8 percent goes to senior staff "that suffered the five years of effort they had to put in" and 4 percent goes to all employees in a profit-sharing deal, Winarsky says. He credits this model with preserving SRI. "I personally believe SRI would have been hollowed out by Google (GOOG), Apple, and everybody else you can imagine for its great researchers," Winarsky says. "But as a result of having spinoff strategy for royalty and equity—by the way, that's vested, so we keep the golden handcuffs on them for three to four years—by having spinoff strategy we can offer stock, even though we are a company that's nonprofit and has no stock. An employee has to decide: Do you want to stay here and do great research and keep your equity and royalty or do you want to leave and keep all your eggs in that basket?" Angel Sanjurji, SRI's materials research laboratory director, has been faced with that choice more times than most. A 30-year veteran at SRI, he's been involved in at least five spinoff ventures to date. While some co-workers have chosen to go the entrepreneurial route, Sanjurji says he will be staying put. "Here you really have the freedom to do research and implement your own ideas. Basically, you're only budgeted by your imagination," he says. "I think at SRI, we have the best of the both worlds. You may not make as much money as you could on the outside but at the same time, you are not taking that risk. And for me, at the end of the day, everyone that stays has the same driving force. They want to develop new things." Also from GigaOM: The Case for Increased M&A in 2011: Actions and Outlooks (subscription required) Infographic: The Enterprise Mobile Explosion Meet Facebook, the Web's Social Entertainment Operating System What PG&E's Rate Change Means for Clean Power and Energy Efficiency