A (long) tale of three energy-tech companies

With all the attention on renewable-energy technology, and for all the hopes that politicians have expressed that by pushing dollars into the innovation system they can magically get “cluster” jobs out the other side, I thought I would tell the cautionary story of three extremely impressive energy-tech-type companies that my colleagues1 and I assisted when we worked for the (lately defunct) New Jersey Commission on Science and Technology (NJCST) back in the late 1980s/early 1990s.2

As free-marketeers like to say, politicians don’t create jobs: entrepreneurs and investors do. Absolutely correct. All we did in government was help by providing resources that the entrepreneurs leveraged and exploited at a very early stage of corporate existence. Except in one case where we provided a modest amount of pre-seed financing, I wouldn’t say we even tried to “pick winners.” We applied public funding to create physical environments and incentives for academic/industrial collaboration, we provided a little free publicity and moral support, and then we sat back and watched the inventors and innovators/entrepreneurs do their thing.

After the break I’ll tell what I remember about these firms from the days years ago when I had some inside knowledge, and what I can deduce about their trajectory since based on current publicly available information.3 And then I have some questions for you to ponder about how complex are the forces at work, and what you might expect from innovation programming in energy-tech if you are a politician or policymaker.

Amazingly, about 20 years on, none of these three high-risk companies has failed. None has outsourced itself to China. All three founding entrepreneurs are still involved in their respective creations, one as CEO and two as non-executive chairmen of their boards. Two of the companies have gone public and the other received substantial inflows of private equity after it secured a major federal R&D award supporting a high-risk R&D partnership with a Fortune 500 company.

Although all three have received substantial, repeated grants from the federal SBIR program4, they could not fairly be called SBIR “mills” and are not being run as “lifestyle” companies: they are all targeting big-time commercial sales and may one day get there.

They employ dozens of people in the aggregate. Over time, and financed through various sources, they’ve supported hundreds of person-years of high-wage payroll: the dream all economic-developers pursue. And yet, these 20 years on, none is yet past the “valley of death” and an unambiguous success, either, and two of them are doing pilot-scale manufacturing outside New Jersey with federal support.

UNIVERSAL DISPLAY CORPORATION (NasdaqGM: PANL)5 is a developer of organic light-emitting diode (OLED) technology, targeting applications both in flat-panel displays for electronic devices and in energy-efficient solid-state lighting. In my recollection, UDC probably would not exist at all if it had not been for the NJCST’s capital support ($10 million) and operating grants (topping out at about $400,000 annually) starting in the late 1980s for a center of excellence in photonics and optoelectronic materials at Princeton’s engineering school.

That center supported a lot of faculty research, attracted a lot of federal and industrial matching money, and aided a lot of entrepreneurial companies over the years it was funded by the NJCST. One thing it did was support the lab of Professor Stephen Forest (now the VP Research at University of Michigan), a Bell Labs alumnus who in 1992 returned to New Jersey to lead the center. He came from USC, where he and a colleague had co-developed some very specific ideas for manufacturing OLEDs — luminescent electrical devices based on organic materials with capability for phosphorescence, the same phenomenon that undergirds the ability of certain living creatures to glow in the dark long after exposure to light. Once at Princeton as the center’s director, he came to the attention of Sherwin Seligsohn, an experienced entrepreneur from the Philadelphia region who was captivated by this idea of “biomimetic” technology and foresaw the range of applications noted, plus a few others he placed in a sister company.

In 1994 Seligsohn formed a privately held company and by 1997 had executed a licensing and development agreement with Princeton and USC, leaving Princeton the owner of shares in the “spinoff.” The company went public early on through a reverse merger, and has supported ongoing research at Princeton, USC and then at Michigan, financed both by equity issuance and awards from the federal SBIR program, where program managers were impressed with the academic pedigree of the intellectual property and thought it could be developed into applications that support federal agency needs. Last I checked the federal “TECH-Net” database, it showed 21 awards to UDC totaling more than $12 million over the period 2001 through 2009, from DOD, NSF and of course DOE.

Judging by a recent 10-Q quarterly report available online from the SEC, UDC is still in many respect barely more than a small business. Sixteen years after it was founded, it’s reporting half-year revenues of $12.7 million, of which the vast majority are development contracts, presumably from OEMs in the display business and/or federal agencies. Its accumulated accounting deficit is reported as $204 million. Since the company is built on a demonstrate-and-license model rather than an own-your-own factory model, it has its headquarters and a pilot-scale lab for display applications near Princeton in Ewing. Together with a larger corporate partner, UDC just recently received a $2 million award from the 2009 ARRA (“stimulus act”) to set up pilot manufacturing of its lighting products in Canandaigua, New York, at a microelectronics facility that is subsidized through that state’s own centers of excellence program. Sixteen years after founding, commercial success seems possible but not yet assured, though one must now wonder if the job creation will be outside the state that made the initial “investments.”

SAGE ELECTROCHROMICS, INC. (privately held) is a developer of electronically tintable glass that can be controlled electrically and programmed to respond finely to changing sunlight and heat conditions, creating energy-smart windows. In my opinion, this company also would not have come to exist but for the NJCST’s capital support ($9 million) and annual operating support (topping at $2.8 million annually) for another center of excellence, this one in ceramic technology at Rutgers.

Just as above, this Rutgers center supported the research of many faculty members. Among them were Professors Lisa Klein and Stephen Garofalini, whose work on sol-gel processing6 came to the attention of founding entrepreneur and technology visionary John van Dine. Van Dine created SAGE in 19897, starting in a laboratory across New Jersey’s northern border in New York State, but soon moving on to campus as an informal incubator tenant at the ceramic center building. SAGE leveraged a matching-grant program provided by the NJCST to work directly with Klein; then a second NJCST technology-transfer award to advance commercialization; eight SBIR awards from DOD, DARPA, Commerce, NASA and DOE totaling more than $2 million; and in 1993 a $3.5 million federal Advanced Technology Program grant from the National Institute of Standards and Technology to work on high-risk research topics with Rutgers and 3M (whose business is based on expertise in coatings, exactly the technology on which SAGE depends).

For many years SAGE maintained its address care of Rutgers, but after the ATP award, the die was cast. By 1998, SAGE had picked up and moved to 3M’s home state of Minnesota in order to develop pilot-scale manufacturing in proximity to a corporate and university community known for its expertise in coatings. SAGE is privately held and so does not disclose sales figures, but it does report it has 100 employees, which makes it a large “second-stage company” or perhaps even a “middle market” one. We do not know if it is profitable. In 2010, the firm announced it had received a total of $100 million in federal loan guarantees (via the ARRA, again, and also the Energy Policy Act) toward construction of a full-scale manufacturing facility in Faribault, Minn., which would add 160 jobs, putting it on the cusp of success for its venture investors and partners. Twenty-one years after founding.

OCEAN POWER TECHNOLOGY (NasdaqGM: OPTT) is a developer of technology to generate electricity from the action of the ocean by harnessing the kinetic energy generated in wave-tossed buoys. Its case is somewhat different from the two above, since it never had a strong connection with a university program supported by the NJCST. Ocean Power was cofounded by New Jersey resident George Taylor in 1984 and became active 10 years later, at which time the NJCST was offering pre-seed investments in promising technology startups on a loan basis. Ocean Power applied for one and passed screening by an independent investment panel including prominent private equity investors, thus qualifying for $250,000 which it is shortly due to pay back.8

Like the other companies in the set, Ocean Power went on to harness SBIR (six awards from DOD, Navy, DARPA, and Homeland Security totaling $1 million) as well as support from the New Jersey Board of Public Utilities and from other federal programs that let it test in Hawaii. It went public on London’s AIM market in 2003 and is now traded on the Nasdaq Global Market. According to the latest 10-Q report available from the SEC, its three-month sales are $1.4 million and its total accumulated accounting deficit is $97 million. As of 2009, Ocean Power reported 52 employees9 at its base in Pennington, where it has been situated for many years, actually not very far from UDC. Sixteen (or maybe twenty-six years) after founding, it has achieved some growth but not yet “hockey-stick” growth, commercial sales, or unambiguous success.

So, some questions and observations.

  • Would these companies have existed, or done as well as they have, without our “market intervention?” In my opinion, at least one and possibly two of them would probably not have existed but for our programs. The relevant faculty members whose discoveries and collaboration supported their early development might not even have been working at Princeton and Rutgers without “center” support from the state, and even if they had been there, they would have had no real incentive to work with startup companies based on what was then a typical profile of federal grant support for a faculty lab. The third company might well have found seed-stage financing elsewhere adequate to its needs.
  • Is it surprising or disturbing that after so many years, these energy-tech companies are not yet giants, not the “Googles” of energy-tech? No, even though we’re used to biomedical companies taking more than a decade to mature due to regulatory hurdles while Internet companies may grow large virtually over night, it’s not surprising that the challenges of disrupting existing markets for actual manufactured products might be nearly as daunting as those of FDA clearance. I’d say it’s a matter of momentum, force, and impulse (to use some physics terms). So far, there has been progress in the right direction for each of these companies as they have gotten larger at a steady pace. But don’t expect them to behave like software, Internet or media companies.
  • Is it disturbing that federal support caused two of these companies to relocate all or part of their operations to states other than New Jersey? No, it’s just an expected outcome. Remember that a responsible federal agency doesn’t care in what state a technology is commercialized so long as it’s in the U.S. Only a state or locality cares that later stages of the innovation and commercialization process get done in its own jurisdiction. Accepting the manifold benefits of federal participation in the development of an early-stage technology means also accepting that sometimes federal support later works to loosen the “glue” that state or local support sought to apply. Could New Jersey have done more to have kept these companies all local in their growth? Very hard to say.
  • Isn’t it true that other energy-tech companies got started in New Jersey, and may have had equal success, without state support? Sure. But that doesn’t mean that the support wasn’t useful in building a broader energy-tech cluster. New Jersey is not yet quite as strong a cluster for these companies as states like California or Massachusetts, but it’s by no means in last place, either. Early success builds reputation, particularly among potential investors in other, similar ventures, and among federal agencies whose support is necessary.

Some questions I don’t have answers to — your own comments are welcome below.

  • Should the tbed community claim credit for these jobs? For how many years out from the initial success? What event, exactly, created these jobs? Or is not possible to say?
  • How much of New Jersey’s investment should be credited against those jobs? How much of New York’s? The feds?
  • More generally, what costs should be allocated to these “assists,” if some politician asks us for a cost per job? A lot of the benefit conveyed was indirect, stemming not from project grants but instead from much larger and broader investments that helped attract federal funding for the benefit of many other companies and entrepreneurs; and even in the cases where the state paid for innovation directly, these investments seem less significant over time given the huge flow of federal and private-sector capital that’s been applied to growing these companies. Is it even rational to do a cost-per-job or ROI calculation?
  • Overall, are results like this consistent with what political leaders seem to expect from clean-energy technology development? Or are we just pushing on a string?

There are dozens of questions involved, and the answers are cloudy at best, at least to me — and I work in the field! In my opinion, all that doesn’t mean New Jersey or any other state shouldn’t try to accelerate the development of energy-tech companies, but only that expectations need to be modest and humble. As in some of my previous posts, perhaps I’ve laid out some interesting “field work” for S&T Policy students…

  1. Especially Joe Montemarano, in the case of the first two companies discussed []
  2. No, this isn’t the first time in modern history that energy tech has been “hot,” and it’s been obvious for a long time that market innovations would be closely related to R&D in materials science and various engineering technologies. Hence the role for universities and tbed intermediary organizations. []
  3. Although I’ve done my best to be accurate, I’m sure I’ve made mistakes. If you see any and would like them corrected, let me know and I’ll update the post. []
  4. Note that they were not inhibited by the “control” rules that the VC industry is fighting so hard to break right now. []
  5. Disclosure: I own some public shares. []
  6. A coating technology that has applications both in ceramics and glasses – very different materials, but often both of interest to the same materials scientists []
  7. It’s not claimed as a spin-off by Rutgers, and the patents I could find do not appear to be co-owned by Rutgers []
  8. Originally we intended this loan program to carry interest, but the state Attorney General ruled that it must be interest-free – a great deal for the awardees! []
  9. Yes, I know — not necessarily consistent with the reported revenue. []
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