Funding the future
CTO DALE SKEEN had knocked on the doors of many a risk-averse investor before he happened upon a federal funding program friendly to the complex ideas for integrating commercial systems at his company, Vitria.
Although under heavy political fire lately, the Advanced Technology Program (ATP) within the U.S. Department of Commerce could prove a fruitful funding avenue for CTOs looking to finance high-risk technical propositions that private investors, at least initially, may be loath to take on.
Such was the case with Vitria’s core EAI (enterprise application integration) technology, which in 1995 was branded by investors as too “researchy” and “scientific,” Skeen recalls. “The big problem [with venture capital] was that investors wanted a big ROI.”
But at ATP, program administrators fund R&D that average venture capitalists might not choose due to their concerns about the project’s technical complexity and/or longer-than-usual time to market. “We are funding those efforts in which the VCs find the risk too high or the rate of return too far out,” says Omid Omidvar, ATP program manager.
The Advanced Technology Program, run by the National Institute of Standards and Technology, grants early-stage funding investments averaging $2 million for a total of about $60 million per year. An equity stake is not taken in the company.
The program has been around for more than a decade. And unlike many government R&D programs, ATP is not focused on defense or other government-specific functions.
Program participants enter a cooperative agreement with ATP, which among other clauses mandates cost-sharing that varies depending on a company’s size. Fortune 500 companies pay at least 60 percent of funded project costs, whereas smaller companies pick up at least all indirect project costs. Although used mostly by vendors, ATP has some enterprise, end-user participants, mostly those teaming with vendors in joint ventures.
“We are looking for innovative technology that has a great degree of risk and visibility, those efforts that may have a major payoff or solve path-breaking problems. We are not looking for incremental R&D,” Omidvar says.
Especially now, these types of funding sources are hard to come by, says Gary Demos, CTO of DemoGraFX, in Marina Del Ray, Calif. “A lot of innovation has its roots with people exploring things and not knowing whether they will pan out,” he explains.
Federal royalties?
The program itself is suffering a degree of uncertainty. For sometime, the program has drawn political ire and incurred the label “corporate welfare.” Critics argue that the ATP underwrites research tasks too close to product development.
The program’s current political conundrum is twofold. First, its budget looks to be cut significantly for fiscal year 2003. Second, Congress is currently considering structural changed to ATP. Commerce Secretary Don Evans outlined possible changes in early February, including a requirement that companies pay royalties to the government — between 5 percent and 500 percent of the initial award — after use of the program leads to a successful product. Another suggestion includes tighter constraint on ATP dollars to ensure the money is spent on research, not product development or marketing.
Despite the politics surrounding ATP, executives who have used the program claim it could be the ideal way for CTOs and others to fund projects that have been either shunned or not fully understood by investors and sometimes their own company.
“[CTOs] can make use of the program to convince their company it is worthwhile to take on high-risk projects with not too much funding from the company,” says Armand Prieditis, CEO of Lookahead Decisions in Berkeley, Calif.
Prieditis landed Lookahead $2 million from ATP last October for the development of real-time decision-making tools for manufacturing systems. “VCs didn’t understand the technology, for the most part,” he says.
Rigorous requirements
In fact, VCs have experts sift through technical details before funding complex ideas. That added expense seems to quell enthusiasm for complicated proposals, ATP sources say. “Some of this technology can be pretty esoteric. Some of the stuff, like ours, is coming out of university labs or other research labs. But those are exactly the types of things ATP has historically targeted,” says Rick Gold, CEO and president of Genoa, a Fremont, Calif.-based networking company. Genoa used ATP funds to develop a linear optical amplifier.
A wealth of experts are at ATP’s disposal. “We have tapped into the expertise of [Department of Defense] scientists and experts at the National Institutes of Health as well as our technical experts,” says ATP program manager David Hermreck. Technical evaluations are matched with examination of a technology’s viability and potential benefits for the overall economy.
Those polled on their ATP experience reflect on the stringent technical evaluations. “I’d say that 80 percent to 90 percent of the questions we got in meetings revolved around whether the technology was feasible,” says Rob Utzschneider, executive director at Ascential Software in Westboro, Mass. The founder of Torrent Systems, which Ascential acquired last year, Utzschneider leveraged ATP to develop parallel software environments that are now bearing fruit in applications used by mega-enterprises such as United Airlines.
“What we were proposing was risky from a technical perspective. In addition to that, there were some spectacular bankruptcies going on in our field,” Utzschneider says, referring to the demise of one-time parallel computing high flier Thinking Machines. His experience led to what he says is a cruel reality — the VC “herd mentality.” Investors either jump on board en masse or back off in much the same fashion, he notes.
And that phenomenon is not limited just to small companies. “There are lots of perfectly big companies with a lot of good ideas that are not being funded right now,” Utzschneider continues. “It is the small to midsize companies that need the money. That is where innovation is coming from, not from the big labs at IBM, AT&T, and GE.”
Larger facilities have made use of ATP. IBM teamed with Vitria for one of Vitria’s three ATP awards. Additionally, IBM used ATP funding to develop high-definition television technology.
CTO opportunities
Separate R&D facilities are usually a luxury of the larger vendors. “Programs like ATP are perfect for the CTO office,” Vitria’s Skeen says. “That is where I would expect these efforts would originate.”
ATP’s Hermreck agrees, describing two scenarios in which CTOs tend to pursue funding. “The CTO in the technology company is often an engineer or technologist with great ideas they want to pursue aggressively, and that is a fit for our mold,” he says. At a larger enterprise, a CTO may emerge as a sponsor for “guys in the back room with great ideas.”
Despite such opportunities, ATP has gone somewhat underused by the IT community, which accounts for only 25 percent of all ATP awards. The program has garnered more visibility in other sectors such as biotechnology, many experts note.
Government IT initiatives tied to Homeland Security overshadow ATP. In the end, those dominating security themes could spur program manager interest. Says Hermreck, in reference to the portion of IT research supported by ATP, “Certainly with Homeland Security issues and issues surrounding information and network security, that [funding] figure could go up.”
