The Great Government Giveaway
NASA's jet propulsion laboratory had several goals in mind for the ultrasensitive heat detector it invented in the early 1990s--and none of them had anything to do with helping Mark A. Fauci get his business off the ground. The infrared digital sensor, developed with Defense Dept. funding, was designed to search for distant galaxies and spot missile launches as part of the "Star Wars" program. It took Fauci the entrepreneur to come up with a radically different idea for the heat-seeking device: to probe for the first signs of cancer in the human body.
That's what brought the Long Island business owner to the Pasadena (Calif.) lab in early 1997, only weeks after the quantum well infrared photodetector had been declassified. In a meeting with the lab's scientists, Fauci, a former semiconductor engineer whose career had turned to health care, laid out his case. Cancerous tissue, he explained, generates more heat than normal cells. His company would commercialize the defense technology, producing a machine that could screen for early diagnosis of breast cancer and vascular disease. After several months of negotiation with the lab's technology-transfer office, Fauci's OmniCorder Technologies Inc. in Stony Brook, N.Y., secured exclusive licensing rights to the sensor for biomedical applications. Today, Fauci is raising money from venture capitalists and already has placed four of the devices in medical centers. In five years, he projects, annual revenues will reach $170 million.
Fauci's good fortune was built on a little-known fact: The federal government spends $74 billion each year on research and development, and its labs are willing to transfer a lot of their technology and expertise to small companies. All sorts of arrangements can be made. The labs license off-the-shelf technology and provide technical assistance. They work jointly with companies on projects and offer access to high-tech equipment and facilities.
The goal is twofold. One is to promote U.S. competitiveness; without access to government technology, many products simply would never come to market. "Our purpose is to open the doors of the 711 labs and get the technology out to business. We want the widest possible commercial use," says C. Dan Brand, chair of the Federal Laboratory Consortium for Technology Transfer, a congressionally chartered nonprofit that links up government researchers with industry (box).
The other goal, says Brand, whose group is funded by the labs, is to enlist the private sector's help in creating products that federal agencies need to do their jobs. In many cases, he says, "We have the ideas, but no one is working on developing a product. So you commercialize it and we will buy it."
Of course, the government won't license its technology or make research arrangements with just anyone. Each agency has its own extensive rules and guidelines. In general, entrepreneurs must develop a business plan demonstrating they have the financing, personnel, and scientific and marketing skills to bring a potential product to market. And there's no bidding; the government approaches these deals with an investor's scrutiny. "A company has to be credible. We don't want the technology tied up," says James A. Rooney, deputy manager of the commercial program at the Jet Propulsion Lab. "We want a commitment to actively develop the technology."
It's an attractive offer. Interest in tech transfer is "exploding" among small businesses, says Joseph P. Allen, president of the National Technology Transfer Center. A part of Wheeling Jesuit University in West Virginia, the center tracks federal R&D at both the labs and 100 universities that conduct federally funded research. Its primary job is to help small companies find the technology or development partner that they need (box). Allen estimates 3,000 companies a year get assistance, while the number of licenses granted keeps growing (chart, page 48). "For small high-tech companies to stay competitive, they need alliances on the cutting edge," he says.
Such cooperation is still relatively new. Until the early 1980s, there was no formal tech-transfer program, and it wasn't until 1986 that Congress permitted joint-development deals between the private sector and federal labs--largely in response to competition from Japan. In 1988, to help get the word out to small business, Congress set up the NTTC, which was funded by federal agencies including the Small Business Administration. In recent years, the federal labs have stepped up their marketing, too.
A key selling point: the small-business preference. By law, companies with fewer than 500 employees get first crack at licenses and R&D partnerships. Why the break? Tech-transfer experts say that given the right resources, small companies, whose future may hinge on one product, are often more effective than larger companies at taking a single, small invention to market.
By that standard, Fauci's sharply focused startup was an ideal candidate, and his hope to commercialize off-the-shelf technology should have been the simplest type of tech transfer. But as he found out, nothing is ever quite so simple. On his first trip to the Jet Propulsion Lab, Fauci learned that CalTech, which manages the lab for NASA and owns the intellectual property, was already exploring civilian uses for the sensor. But, he says, "they were thinking conventionally"--detecting forest fires or keeping tabs on smoldering volcanoes.
The idea of a medical application drew a quick and enthusiastic response. Still it took months to reach a deal. The tech-transfer officials balked at resolving the specific terms until he had actually raised some money, Fauci says. And his lawyers didn't want him to seek financing until they knew what the agreement would say. Finally, in 1998, Fauci signed a contract with CalTech granting him the exclusive license for biological applications of the sensor. CalTech obtained a 4% stake in OmniCorder and will get royalty fees for each sensor.
Fauci is now negotiating with venture capital firms to raise $5 million, following the Food & Drug Administration's approval in December of OmniCorder's BioScan System. Over the next year, Fauci thinks his 25-employee company will quadruple as hospitals and doctors catch on to the device.
A JOINT PROJECT
Not all companies are lucky enough to find ready-made technology. Since the late 1980s, about 5,000 companies have entered into Cooperative Research & Development Agreements (CRADA) with the labs. Under these arrangements, a company and a lab pool resources and knowhow. Depending on the terms, the government could provide scientists, facilities, or equipment, and the company might provide funds and its own experts. The government will give its partner an exclusive license to market any products, but will usually hold the patent on the invention. The feds also insist on the right to buy any product developed under the CRADA.
The government or a private party can initiate these deals. Either way, a key question is how they will work together. Case in point: Lee Williams. In 1995, Williams showed scientists at the Air Force Research Laboratory at the Wright-Patterson Air Force Base a patented prototype of a machine for de-icing aircraft. The technology relied on a high-velocity air stream, which Williams feared might damage a plane. "There were major design questions that were beyond me and my garage," says Williams.
His timing was opportune. Scientists at the lab were intrigued because the Environmental Protection Agency was pressuring both the military and the airlines to stop using hazardous fluids for de-icing--then the only method. Under the terms of their deal, Williams, 48, agreed to share the expertise he had accumulated in 12 years working on de-icing technology. For its part, the lab contributed volumes of data and computer models.
For about six months, Williams and the lab personnel brainstormed and reviewed his research. Then Air Force scientists spent 45 days preparing a report on how to make a nozzle that can produce a harmless 700-mile-per-hour air stream. With the document in hand, Williams approached the top executives of companies that make de-icing equipment, FMC Airport Systems Inc. and Global Ground Support LLC. The end result: He has granted them sublicenses to make and sell the AirPlus systems. He gets a royalty on each one, as does the Air Force.
You might expect negotiating with the government to be a hassle, but Williams says it was like any other deal. The government checked his background as well as potential clients; the contract ran just a few pages. His lawyers dealt with the Wright Technology Network, an agency funded by the Air Force and the state of Ohio that acts as an intermediary between the Air Force and entrepreneurs.
The biggest problem--no surprise--was the military bureaucracy. The agreement "took months going from desk to desk," recalls Peter A. Dreher, a technology network official. That's because the Air Force required 28 signature reviews for CRADAs. The newly streamlined process takes about a month and requires only four signatures.
What's the best tech-transfer deal for a small company? When the government seeks out a licensee. That's what happened to Brian E. Joseph, owner of 40-employee Touchstone Research Laboratory Ltd., in Triadelphia, W. Va. Luckily for Joseph, the Navy had worked with his materials-testing company before. So, when it wanted to quickly commercialize a coal-based carbon foam, developed by the University of West Virginia under another federal contract, the Navy suggested that Joseph negotiate the license rights. He did, and then got another boost: Navy and NASA grants to help refine the material for ships and aircraft. He thinks that CFOAM, the trademark name, will help boost company revenues from $3 million to $25 million within three years.
CALL FOR COMMITMENT
The Navy's objective in soliciting Joseph is common in tech-transfer programs. A commercial product--in this case a strong, lightweight, and fire-resistant material ideal for construction--is cheaper, and the supply more reliable, if it's made by a company feeding a booming market.
While Joseph was a known quantity, most entrepreneurs must prove their commitment. Dwayne Fosseen, a Radcliffe (Iowa) inventor, had a track record as an inventor, but only crude models of a proposed device when he approached the Energy Dept.'s Kansas City lab. Fosseen hoped to convince the lab's scientists that vehicle emissions could be sharply reduced with a computerized device that controls the amount of fuel going into an engine--regardless of whether the driver stomps on the gas pedal. Government scientists eventually helped develop a microprocessor and software that did the job. But first, Fosseen had to match the government's investment with $100,000 worth of engineering time and materials.
The investment paid off. His Mirenco Inc. already has raised $3 million in a direct public offering for Iowa residents, with a goal of $10 million. If that's successful, he hopes to list the company on the Nasdaq. He has already outfitted tour buses in the Grand Canyon with DriverMax, and has contracts with a Canadian bus company. St. Louis, Memphis, and Louisville, Ky., also are testing and installing the system.
"Mirenco wouldn't be in existence today without this support. This is an American dream," he says. Best of all, it's a dream brought to you by the American taxpayer. Don't laugh. When it comes to tech transfer, you can forget the cynicism next time you hear: We're from the government, and we're here to help you.
Learn more about small business grants for tech projects. Click Online Extras at frontier.businessweek.com
Learn more about small business grants for tech projects. Click Online Extras at frontier.businessweek.com