Pittsburgh's got a problem. You might
not know it to see the city. It's a compact grouping of attractive
buildings sitting on a point of land triangulated by the Allegheny and
Monongahela rivers. Gone are the soot-belching plants and in their
place the rivers' edges are graced with shops, restaurants and parks.
Pittsburgh has spent the last few decades shedding an ugly,
steel-town image for one slightly more refined and more successful.
Pittsburghers are still fanatical about their sports teams, but the
average citizen can also rattle off the names of a few of the
technology companies in the region: FORE Systems, Ansoft Corp., Janus
Technologies, the Carnegie Group.
And while you might not call it
a technology center, there is the same proportion of technology jobs (6
percent) in the greater Pittsburgh area as there is in the greater
Boston area. In an effort to change its profile, Pittsburgh is leaning
heavily on its high-profile, higher education universities: Carnegie
Mellon and the University of Pittsburgh. But while Boston's MIT has
been spawning start-ups for decades, Pittsburgh's universities are just
now getting in the game.
Indeed, both CMU and Pitt have developed
aggressive technology transfer offices to take technologies nurtured in
university labs and transplant them into the community as start-up
companies. The hope is that they will take root, flourish and
eventually create seedling companies of their own. Plant enough of
them, folks reason, and the economy changes.
But Boston's a tech town and Pittsburgh just isn't.
In Boston, new jobs stay in Boston
or filter through the city's extensive network of high-tech
suburbs.
In Pittsburgh, there's a real concern that the ground
isn't fertile enough to accommodate the needs of the start-ups once
they are weaned from university labs.
In 1994, Michael "Fuzzy"
Mauldin, a Carnegie Mellon professor, announced a new Internet
technology that evolved into the World Wide Web portal site known as
Lycos. Working closely wit h the CMU Technology Transfer office and its
director, Mark Coticchia, Mauldin was able to create a company around
the technology and took a leave of absence to get it off the
ground.
"I was the business guy and he was the technology guy,"
recalls Coticchia. He and Mauldin flew all over the country making
deals and securing partnerships for Lycos.
Yet when all was said
and done and the company was formed, its headquarters ended up in the
more Internet-savvy city of Boston, not Pittsburgh.
After all his
hard work, was Coticchia disappointed? He says no. After all, both the
university and Mauldin each received a 10 percent stake in the company,
which amounts to about $10.2 million based on a Sept. 29 stock price of
$34. And some 90 technology jobs (out of a total 460) remain in
Pittsburgh as part of Lycos' operations. "There was a clause in the
licensing agreement that a significant part of the business will remain
in southwestern Pennsylvania," says Coticchia.
To be sure, CMU is
a presence here. According to a recent study of its own, the university
is Allegheny County's 26th-largest employer, contributed more than $450
million to the regional economy during 1997, and has created some 70
Pittsburgh-based high-technology companies since 1963. Further, those
companies now have total annual sales of $1.3 billion and together
employ more than 5,000 people.
Impressive numbers. But Richard
Florida, a professor at CMU's Heinz School of Public Policy and
Management, says Pittsburgh needs more than just intellectual property
flowing from its universities. "It doesn't seem to matter what you
generate in places like Pittsburgh. A lot of it flows away," he
says.
Florida points out that CMU and its world-class computer
science school is the leading source of talent for Microsoft Corp. in
Redmond, Wash., and that every year a large number of tech graduates
end up moving to places like Silicon Valley, Boston and
Seattle.
"These young people are part of a social movement,"
Florida says. "It's
no longer cool to be a lawyer or a doctor or to get a job in a large
corporation. They want to have a job that allows them to be creative.
They want to go rock climbing and snow boarding."
Claiming this
new kind of worker is taking part in a phenomenon that's as much
cultural as it is economic, Florida opines that it's a nationwide
trend. But it's also something that Pittsburgh, traditionally a
business community dominated by big companies and country clubs, is
behind the eight ball on. He says the region needs to start thinking
more like a technology center and building an infrastructure to
support it.
"It's naive to expect universities alone to rescue
regional economies," Florida concludes.
"We do more than some
universities do, but we don't have the infrastructure or the
foundation to go all the way," says Arthur Boni, director of
technology management for the University of Pittsburgh's technology
transfer office, where efforts lag a few years behind those of
Carnegie Mellon.
But while he echoes Florida's warning, Boni is
hopeful about the region's future.
A self-proclaimed start-up
specialist, Boni was hired by the university in 1996. He arrived
intending to turn the office into a proactive entity, not waiting for
the technology to come to him, but going into the labs and finding it.
The numbers show intentions achieved.
During fiscal 1998 (which
ended June 30) Pitt's technology transfer office reviewed 74 invention
disclosures (most coming from the School of Medicine), up from 63 in
1997 and 46 in 1996. Boni oversaw the early stages for five start-ups
each in fiscal 1997 and 1998.
"It's a process," says Boni. "I talk to people about managing their
expectations a lot. Our revolution will take some time to develop. Five
or 10 years will be the time to look."
Mark Coticchia's office is out of place in a generic
university office building at the edge of the CMU campus in a suburb
called Oakland. The campus is crowded with backpack-laden students
scurrying to the next class. Coticchia jokes that they get in his way.
Unlike them, he's there all year — no summers off and no winter
holiday. He wears a deal-maker's tie and a starched white shirt with no
tweed in sight. His expansive, polished desk is dotted with the
paperwork for dozens of deals in progress.
His world is a little
different than that of your average venture capitalist. Deal flow
becomes project flow; instead of advisory services, he might offer
incubation support; and instead of educating young upstarts, he's
patiently explaining the entrepreneurial process to middle-aged
academics.
But make no mistake — Coticchia is playing
essentially the same role as a VC. When he was hired by the university
in 1993, it was to create a venture capital model for the technology
transfer office.
Coticchia came to CMU with a background in civil
and industrial engineering including time with Westinghouse Electric
Corp. and Carnegie Mellon's Software Engineering Institute. A native of
the Pittsburgh area, he received both his undergraduate and graduate
degrees at University of Pittsburgh. (Ironically, while Coticchia
studied at Pitt, Pitt tech transfer director Boni got his undergrad
mechanical engineering degree from CMU.)
Coticchia says the
university churns out some 100 new technologies each year. Of those,
his office sees financial promise in about 20. "Most of these are
straight licensing agreements with existing companies," he says. "But
if it isn't a technology that's already adopted widely and broadly,
then it presents a start-up opportunity."
That's when the venture
capital model kicks in. As he did with Lycos, Coticchia shepherds CMU
spin-offs through the start-up phase. Granted, he does more at a much
earlier stage than most VCs, but the roles are still similar. And once
the company is out of the starting gate, he will generally keep a seat
on the director's board.
"We go in where even angels fear to
tread," says Coticchia, referring to individual "angel" investors.
Where the technology talent is still looking for entrepreneurial
talent, where business plans are still on the to-do list, where even
the products are still a little fuzzy.
It has taken some time to
change the way the university views technology spin-offs — the
administration was wary of supporting companies that may eventually
steal faculty away — but Coticchia's efforts are starting to pay
off. Not only is the university starting to see the financial benefits
of technology transfer, but the entrepreneurial spirit is starting to
take hold where it had been absent.
"The culture is changing,"
says Coticchia. "Now you hear people talking about it in the faculty
dining room." Maulder's success with Lycos was real inspiration, he
says — "When you hear about [a professor] who is suddenly worth
$40 million, that gets your attention."
It wasn't always so.
Just ask Eric Cooper, chairman of Pittsburgh-based FORE Systems.
When Cooper left his job as a faculty member at CMU to start the
networking company in 1990, there was no technology transfer office to
speak of at the university. "We never got a response from them about
spinning off the technology," Cooper recalls. Instead, he and the other
three founders got a grant from the Navy to develop a prototype of the
high-speed network system that became the company's mainstay.
At
that time, entrepreneurial inklings were rare in academia, and CMU was
no exception. After years of high-speed networking research, the
university was channeling its efforts along a track that would result
in a network too expensive for any practical use. So Cooper, two other
faculty members and a graduate student left the university, secured the
federal grant and started a company. "We didn't have a lot of money to
wast e so we did everything short of dumpster-diving to get the
equipment we needed," he says.
When FORE Systems went public in
May 1994, selling 3 million shares at $16 each, the new technology
transfer office director at CMU was there to see the missed
opportunity, but too late to change to past.
Only a year later,
though, Coticchia was waist deep in the Lycos deal, which has proven so
successful that CMU is now gradually divesting its 10-percent Lycos
share through the sale of stock. In 1997, realized capital gains, such
as the sale of Lycos stock, made up $10.4 million of the $13.3 million
brought into the university by its technology transfer office for the
fiscal year. The remaining $2.9 million came from licensing.
While the flow of start-ups continues, however, the nagging
question remains: Can Pittsburgh keep them? Consider WiseWire, a
company founded in 1995 by CMU graduate student Ken Lang to use
intelligent-agent technology to sort and deliver information over the
Web. In April, it was acquired by Lycos for $39.75 million and, while
some operations stayed in Pittsburgh, Lang and the other company
leaders moved to Boston.
Spin-offs are the most tangible achievements by technology
transfer offices. In fiscal 1997, CMU had 12 while Pitt spun off five,
with each school having its own specialties. Technologies that Pitt
focuses on are in the life sciences and medical areas. Coming from CMU
are new applications in robotics, some bio-medical technologies,
artificial intelligence, disc technology and software.
The
birthplace of the artificial intelligence that became IBM's chess
piece-wielding Deep Blue, CMU is known worldwide for its research in
artificial intelligence. Angela Kennedy, a native Tennesseean, was a
graduate student at the university when a Spanish utility, Union
Electrica Fenosa, and the Spanish government funded research to develop
an artificial-intelligence technology to automate cash-management
decisions for the utility's finance department.
Kennedy, who says
a penchant for entrepreneurship is a "genetic defect in her family,"
was brought in to develop the market potential of the software after
the utility deployed a prototype and saved $1.6 million in the first
year.
In 1996, after months of market research she founded Wisdom
Technologies with the help of CMU professor, Jaime Carbonell and
researcher Peter Shell. Kennedy says she found that the market
(industry lingo: the treasury workstation market) got its start in the
1980s but was still lagging behind in technology. "They had the
information-exchange layer. Then came spreadsheets and a
data-management layer, but decision-making was still manual," she
says.
Wisdom Technologies offers a software that uses artificial
intelligence to "reason" through myriad possibilities that face
international companies regarding different currencies and options
involved in their cash-management decisions and helps them come up with
the best alternatives. Craig McDonald, who studies the market for World
Research Advisory in Reston, Va., says it is an arena worth about $175
million worldwide. Wisdom Technologies' s oftware appeals mainly to
multinational companies with complicated portfolios that need to manage
the risk inherent in currency exchange and international
banking.
The company incubated on the CMU campus, getting initial
funds from the university. A small round of angel investment was
secured in September 1997 and a year later the company opened new
offices in downtown Pittsburgh. Wisdom has been concentrating its
resources on reworking the software, changing a European perspective to
a global one and tweaking it to run on Windows in addition to its
original Unix platform.
Wisdom, which has eight full-time
employees, plans an unveiling of sorts in November at the Treasury
Management Association Conference in Orlando, Fla., where it will
launch the new software. Kennedy says a marketing relationship with a
major investment organization will be announced in the second quarter
of 1999.
The company received support from the university and the
city of Pittsburgh. But while she appreciates the city's efforts and
enjoys being downtown, Kennedy says that the city has a long way to
go.
"Over the past 15 years, Pittsburgh has recreated itself as
far as the focus of its energy, but economics are hard to change," she
says. "The quality of life is why I'm here."
Mark Juliano,
president of another CMU spin-off, ISLIP Media, says that Pittsburgh
needs more than an economic change.
"The main problem is
attitude. It's gotta be cool to get a new job every two years and not
wear shoes," he says.
Juliano's contribution to a change in
attitude is his participation in a "new guard" of 10 technology CEOs
who meet regularly. Though its official name is Next Step, he calls it
a "technology support group." He says it's a way to make a formal start
at what happens more organically in other technology centers.
It
was Juliano's entrepreneurial experience and passion that made him
Coticchia's draft pick to head ISLIP Media.
He came on board late
in 1996 to take ISLIP Media's technology — ; an audiovisual
archiving system — to market. Juliano's background includes a
Stanford MBA and a stint at a Silicon Valley start-up before returning
to his hometown and joining the staff of FORE Systems when there were
only 15 employees. Having grown up with FORE, Juliano was hooked on the
start-up environment and eager to launch his own.
"The technology
transfer office is now starting to recognize that it takes more than
just the technology to start a company," he says.
After kicking
in $300,000 in seed money with co-founder and CMU computer scientist
Howard Wactlar, Juliano's first tasks were to write a business plan,
negotiate a license with the university and start operations in May
1997.
By December 1997, ISLIP (which stands for Integrated Speech,
Language and Image Processed) was shipping its first product and had a
customer list including U.S. television networks ABC and NBC along with
the BBC in Europe; the Air Force and the Navy; and IBM and Compaq
Computer Corp.
Juliano expects to bring in $2 million in sales
this year and is seeking a round of venture funding to expand and
further enhance the product. ISLIP sells a turnkey system, called
MediaKey, for archiving digital media. It allows the customer to log
video in real time and includes full indexing and searching
capabilities. Users can search by any word on a video's audio track, as
well as by featured images. There are a few other start-ups in the
marketplace.
Like Wisdom Technologies, ISLIP's roots are in the
research labs of CMU and can be traced to a $5 million research grant,
this time from the U.S. government, to build a digital audiovisual
library. At 18 employees and counting, ISLIP is outgrowing its campus
offices and is getting ready to join Wisdom Technologies downtown.
Start-up companies require seed funding, and while the
universities provide some support, they can't do it all. Despite a good
measure of "old money" in Pittsburgh, the city is foundation-rich, but
venture capital-poor. The larger venture capital funds generally
associated with Pittsburgh — PNC Venture Fund, Hillman Ventures,
Mellon Ventures — don't generally invest in start-ups, so seed
rounds are usually left up to angel investors.
Tom Canfield,
president of Enterprise Corp., a nonprofit company that helps
technology start-ups and other early-stage companies write business
plans and secure funding, says the angel investor network in the region
is pretty active. The recently formed Western Pennsylvania Adventure
Capital Club has 85 members who each put in $10,000, and the club is
looking for start-up investments.
"While we're not where we should
be, [the region] has improved pretty dramatically over time," Canfield
says.
Enterprise Corp. was founded in the early 1980s, when
Pittsburgh was in the midst of losing its metals jobs and unemployment
was rampant. Since then, Canfield has watched the level of
entrepreneurial wealth and sophistication inch upward. And he gives a
generous measure of credit to the universities.
Still, though,
spin-offs from academia are not without risks.
"You have a small
growth company and they want the technology and want it now," says Jim
Dalkin, a senior manager at Deloitte & Touche and a faculty member at
the University of Arizona. "And they're dealing with a large,
bureaucratic organization. That's two very different mentalities."
Further, Dalkin says, there is the risk that technology transfers can
end up as lawsuits.
Coticchia acknowledges that his office has had
the "normal disputes" that most technology transfer offices run into
when there is some question about what an original licensing contract
intended or meant — though he can't discuss any specific cases.
"We always insist
on strong indemnification of the university," Coticchia says of
licensing agreements. "And specify that the technology will be taken
as is." After all, he adds, the university's primary mission is
education, not litigation.
John Thorne, director of CMU's Donald
H. Jones Center for Entrepreneurship, takes the education mandate
seriously, but doesn't limit it to the classroom or to students. "I
spend a fair amount of time just coaching entrepreneurs who are at
various stages of starting a business," he says. "My point of view is
I'll help any of them."
But despite the efforts of Thorne,
Coticchia, Boni and others, Pittsburgh's brain drain continues, with
too much money and too many jobs following close behind.
"We
graduate 250 students from the business school every year, and of
those 10 percent stay in Pittsburgh," Thorne says. "Four times that
many would prefer to stay in the area."
If it's successful in
following the universities' lead, Pittsburgh may be able to lure them
back.
Technology transfer
as we know it has its origin in the Bayh-Dole Act, which became law
late in 1980. The statute was meant to provide a clear set of
guidelines for universities in any collaboration with the private
sector to commercialize inventions resulting from government-funded
research. In 1980 there were only about 25 universities engaging in any
kind of technology transfer activity; by 1996, there were some 250.
According to an Association of
University Technology Managers study in 1996 about technology transfer,
sales arising from technologies licensed by academic institutions were
estimated at $20.6 billion that year.
While universities
everywhere are beefing up their technology transfer offices, each
institution is going about it a little differently. Here are snapshots
from two Mid-Atlantic universities.
Virginia Tech,
Blacksburg, Va. Soon after the Bayh-Dole Act was passed, the powers
that be at Virginia Polytechnic Institute and State University came up
with the idea for the Virginia Tech Corporate Research Center. Today
the idea is a reality. With more than 80 private companies on a
120-acre campus near the university, the corporate research park is not
quite an incubator, but not quite an office park, either.
The concept is straightforward: Build a corporate business park
that will attract technology start-ups and other small businesses and
facilitate a close relationship with the technology transfer office at
the university.
"It's a feedback loop," says Joe Meredith, president of the
research center. "We try to build relationships to create more
sponsored research. That builds the next generation of seed corn."
The center is a for-profit subsidiary of the Virginia Tech
Foundation, which has invested $4.3 million in building and developing
since the center's start in 1985, not including land purchased and
donated to the complex. Some of the buildings on the site are owned by
the foundation while others are owned by the center itself.
"We've had one company that left to go to Texas," Meredith says.
"That's one out of 125 companies." Currently there are some 80 company
tenants in the research center in industries including biotechnology,
the Internet, telecommunications, electronics and chemical materials.
Meredith says the environment created by the companies in the center
has added a lot of options to the Blacksburg job market. "We have a
high quality of work and home life that a lot of people leaving
Virginia Tech would like to remain in." Now, he says, there are the
high-quality jobs to go with it.
Mike Martin is executive vice president of Virginia Tech's
Intellectual Properties Inc., a nonprofit entity established in 1985,
affiliated with the university and dedicated to commercializing its
technology. Virginia Tech averages between 25 and 30 licensing deals
per year. Martin says the corporate research park is just one enabler
of an entrepreneurial environment and that the Virginia Tech Foundation
has taken steps to attract venture capital to the area by investing
between $500,000 and $3 million (a total of $7.5 million) in five funds
in Virginia and North Carolina.
"We're starting to establish a critical mass," he says.
Stevens Institute of Technology, Hoboken, N.J.
George
Korfiatis, director of Stevens Center for Environmental Engineering,
says the traditional model for technology transfer — giving an
exclusive license to some third party for a return of royalty — is
like "giving away your first child."
"The university doesn't have
involvement once the technology is licensed," he says.
So to stay
involved, Stevens Institute of Technology helped to form Technology
Holdings LLC in 1996. Ownership is spread among technology specialists
on the institute's board of directors, friends of the institute and the
institute itself. Joe Moeller, vice president for research at Stevens,
says each party made an investment with an eye toward the holding
company being a vehicle for disseminating technology. The initial
investment coming from the university was in the neighborhood of
$300,000. "It is a for-profit company to help us accomplish our
technology transfer," Moeller says.
Stevens Technology Inc., the
for-profit arm of Stevens Institute's technology transfer office, acts
as a managing partner for Technology Holdings. While some tech transfer
from the university will still go through its traditional technology
transfer office, Technology Holdings represents a new vehicle for the
university to play an active role in spinning off its technology.
Technology Holdings is currently in the final stages of
agreements with two start-up companies to become a major equity holder
in them. Both companies, Plasmion and Ecosol, are using plasma
technology developed at Stevens and represent Technology Holdings'
first potential investments.
"As time goes forward, there will be
variations on the [equity stake] model," says Moeller. "That was the
best fit in these two circumstances." In the future, Technology
Holdings may start companies under its own umbrella to bring Stevens
technology to market.
Stevens Institute is also working with the
city of Hoboken to devel op the city's waterfront into industrial and
corporate office space. Stevens Institute president Harold Reveche
envisions a "technology pavilion" in the area that would be available
to house Stevens spin-offs and other technology companies.
As for
Stevens, an entrepreneurial bent is nothing new. In fact, it can be
traced to its founder, Col. John Stevens, who petitioned Congress to
introduce patent law in the United States in 1792.
"This is part
of our philosophy. It's the way we recruit at Stevens," Reveche says.
"The education and the research are part of the same overall
scholarship. It's concept to prototype."
With the help of the holding company, the last leap —
to market — may be achieved.
-Christina Dyrness