TECH TRANSFORMATION
By Christina Dyrness.

Cover story: Nov/Dec 1998 TECHcapital

Can Carnegie Mellon and Pitt Forge Tech Transfer Into Tech Transformation?

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."

Tech Transfer Meets Venture Capital

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.

Rising Stars from CMU

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.

Just So Much Support

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.

Keeping the Company at Home

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.

Build It and They Will Come

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.

Buy It and They Will Stay

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 Copyright © Post-Newsweek Business Information, Inc. All rights reserved.