Uncle Sam Promotes Innovative Investments
Uncle Sam Promotes Innovative Investments
By Nick Wakeman, Senior Editor
If your new technology is promising but risky and the potential payoff too far in the future to attract venture capitalists, Uncle Sam could be the investor you are looking for.
The National Institute of Standards and Technology's Advanced Technology Program, started 10 years ago as a way to combat technological challenges from Japan and other industrialized nations, has doled out about $1.5 billion in grants to companies with research ideas that were deemed too risky and too long term by other investors.
"A lot of research efforts are focused on the short term," said program director Alan Balutis, who took over in April after serving as deputy chief information officer for the Commerce Department.
With most venture capitalists looking for a payoff to their investment within two years and the National Science Foundation and National Institutes of Health funding projects that may not bear fruit for 10 years, the NIST program fills an important niche between the two, Balutis said.
Not surprisingly, competition for the grants is fierce. In September, Balutis' office will announce about 60 grant recipients, picked from 417 proposals, who will receive $50 million to $70 million in fiscal 2001 funding.
The program in the past has targeted start-ups with promising technology, and also has helped corporate giants such as General Electric and the automobile industry initiate research in areas that would otherwise be ignored or take too long to bring to market, he said.
The program looks for research that can bring a significant technological breakthrough and that has broad economic potential or societal benefit, said Cita Fulani, deputy director of ATP.
For example, in 1994, the founders of Vitria Technology Inc. of Sunnyvale, Calif., believed the Internet's potential went beyond Web pages and browsers. They saw the Internet as a way to automate business processes within companies and among companies and their various suppliers, and so they proposed developing software that would allow various systems to communicate and share data automatically, streamlining supply-chain management and inventory control processes.
"But we knew we needed novel technologies because the notion of automation hadn't been defined yet," said Dale Skeen, chief technology officer and a founder of Vitria. "It was a huge technological challenge."
But Vitria's idea would take three to five years ? "exactly the type of situation the Advanced Technology Program funds," Skeen said.
The company won a $2 million grant from ATP in 1995, with a second grant that came two years later.
Vitria's idea worked, and once the technology had been proven and the company had a few beta customers, the venture capitalists stepped up, Skeen said.
Vitria now counts among its customers companies like 3Com, BellSouth, Federal Express and UUNet. In September, Vitria had an initial public offering that opened at $16 a share. On Aug. 14, the company's stock closed at $34.38. It had hit a high of $106.
In its quarter ended June 30, Vitria had $31.8 million in revenue, up 404 percent from the same quarter a year earlier. It also had earnings of $1 million.
Without the ATP funding, Vitria's technology would have taken several more years to develop, Skeen said. "We would be a fundamentally different company."
CVideo Inc. of San Diego probably wouldn't exist without ATP funding of its research in video compression, said Al Tumini, company president and chief executive.
The company received $1.2 million from ATP in 1995, along with another $800,000 from the state of California, to develop algorithms that compress video files so they can be moved more quickly through networks.
The company has a patent on its technology and is marketing it for security surveillance applications, but it also is examining other areas such as distance learning, he said.
Venture capitalists did not want to fund the research. "VCs will fund development of a product, but not the development of a technology," he said. "Even large companies are reluctant to fund research without a known product."
When CVideo first started working on the technology, "we didn't even know what the product was going to be," he said. "We figured out after the fact how to apply it."
The ATP program counts several other success stories among its projects, including CommerceOne Inc. of Pleasanton, Calif., a maker of electronic commerce software, and Aesthetic Solutions Inc. of Aliso Vieja, Calif., which develops virtual reality environments.
In addition to information-technology-related research, the program also provides money for areas such as biotechnology, materials, chemicals and chemical processing, electronics, and energy and environment.
Of the 500 projects the program has funded, Balutis estimated that 20 percent were "home runs" with major technological innovations. About 60 percent have achieved marginal success with some innovation. The remaining 20 percent were strike outs.
The failures don't bother Balutis. "That's all right because we are funding high-risk projects, so those are to be expected," he said.
The program has not been without its critics, who call the program a form of corporate welfare. About 45 percent of the grant money has gone to fund research at major corporations such as General Electric and the Big 3 automakers, Balutis said.
But he contends that NIST is funding only high-risk, long-term projects that otherwise would be shelved, he said.
In the case of General Electric, the company had a technology that potentially could aid in the early detection of breast cancer. The company, however, considered the likelihood low that the technology could be successfully developed.
But the research went forward with ATP funding and the required matching funds from GE, and the technology now is being credited with saving the lives of 20,000 women a year through early detection, Balutis said.
The ATP funding is similar to research grants that come out of the National Science Foundation and NIH, but the difference is that those programs take an even longer-term view and typically go toward academic research.
"We are really here to fill a gap between NSF and NIH funding and the venture capitalists," Balutis said.