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National Research Council (US) Committee on Capitalizing on Science, Technology, and Innovation; Wessner CW, editor. SBIR and the Phase III Challenge of Commercialization: Report of a Symposium. Washington (DC): National Academies Press (US); 2007.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium.

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Keynote Speech Accelerating Innovation: The Luna Innovation Model

Kent Murphy

Luna Innovations

Dr. Murphy began by saying his firm was in the business of “driving innovations to equity, creating actual corporate value.” His firm had built several successful businesses, has a continuous pipeline of opportunities, and pursued the objective of “accelerating the whole innovation process.”

He said that he began his career as a teenager, working as a janitor at an ITT laboratory. While at the laboratory, he was introduced to the nascent field of fiber optics, and by age 19 had learned enough to earn several patents for fiber-optic telecommunications components. Recognizing this talent ITT allowed him to work not only as an inventor, but also to build manufacturing equipment that helped develop these inventions into marketable products.

He then earned a degree in engineering at the Virginia Polytechnic Institute and, while completing a master’s program, invented a fiber-optic sensor that was licensed from Virginia Tech even before the university had a technology transfer process. He published a paper, and several large defense contractors began buying the devices. Later, Dr. Murphy and his partners began performing contract R&D work for the defense contractors and then for other Fortune 500 companies. At that point they learned about the SBIR program and won their initial SBIR awards, which helped move their products more rapidly into the marketplace.

Reflecting on their business model of moving innovation to the marketplace, Dr. Murphy and his colleagues realized that they did not have to invent everything they needed themselves. They realized that the laboratory shelves of universities and federal laboratories across the county held an undeveloped backlog of interesting technology. They knew that there was a wide gap, however, between those inventions and the ability of university professors and scientists to write business plans and find corporate sponsors or venture capitalists to fund these ideas to commercial fruition. Recognizing this opportunity, they built a network of researchers and developed their company into what is now Luna Technologies. Their work was supported by licenses and patents from products developed through R&D contracts and equity in the spin-off company themselves.

Today, Luna today consists of:

  • Luna Technologies. This parent company is headquartered in Blacksburg, Virginia, where it was formed, and has divisions in Roanoke, Danville, Charlottesville, and Hampton Roads, and, most recently, northern Virginia. While the locations in south and central Virginia attracted little venture capital, even during the “bubble days,” the SBIR programs helped the company grow and create hundreds of jobs in rural parts of Virginia where high-technology employment is scarce. The parent company employs more than 135 full-time scientists and engineers who work on contract R&D projects. It also funds 40 to 45 full-time people at Virginia Tech, most of them experts in materials and integrated systems. Dr. Murphy noted that he spent most of his time in what he called the “Luna Triangle,” bounded by Baltimore, Maryland; Blacksburg, Virginia; and Research Triangle Park, North Carolina. This area, he added, supports some $15 billion in federally funded research. About a third is done at the top research universities and two-thirds at federal laboratories. He said that his company had much to offer in moving the worthy technologies produced by that research into commercial products.
  • Luna Innovations. This first spin-off company grew out of a technology developed at NASA Langley. It was brought into Luna Technologies, which combined its own money with an SBIR award to build a prototype technology that was then sold to Lucent. Even with this customer acceptance, Luna was unable to find funding for the model it was building, so it commercialized a simple product for the telecommunications market that the financial community could understand. It raised two rounds of venture capital, totaling $12 million, and built a line of telecommunications products that competed with products from Agilent, JDS Uniphase, and other large companies.
  • Luna Energy. This spin-off is based on a technology that was part of Dr. Murphy’s original master’s thesis. Dr. Murphy and his group steadily developed the technology with early funding from Boeing, Northrop Grumman, and Lockheed Martin. Luna later won SBIR awards from the Air Force to develop strain gauges, and from NASA to develop skin friction balances based on this new technology. Even though NASA products typically have a small market, the skin friction gauges caught the interest of the oil and gas industry because of their potential for use in harsh environments—the high pressures and temperatures of deep wells. These energy companies invested $12 million to build a product line, and eventu ally bought the organization, named Luna Energy, and located a division in Blacksburg, Virginia.
  • Luna i Monitoring. Founded in 2002, Luna iMonitoring, developed beta prototypes of harsh environment wireless sensors that won SBIR Phase I and Phase II awards from the Navy. While the firm was working to integrate this technology into the Navy, it was acquired by HIS Energy, an information-handling company that is part of a $20 billion European conglomerate. This Luna spin-off, given $2 million in operating capital, $1 million in up-front capital, and a 10 percent royalty stream on the product line, moved into an abandoned warehouse in Roanoke, where it manufactures these products and continues to expand the product line.
  • Luna Analytics. The founding technology for this spin-off was discovered “on the shelf,” this time at Lucent, which had developed it for the telecommunications industry. Luna was interested in using it for life sciences and won SBIR awards to develop and build prototype systems. The products were sold to life sciences companies to study protein-protein interactions, which led to an agreement with a biotechnology firm to keep the company in Blacksburg as it continued to introduce products commercially.

While Luna does some basic research, its main emphasis is to tap into federal and commercial markets and use market-driven knowledge to educate the university and federal laboratory partner about potential markets and their needs. It also works with many corporations that have intellectual property that they would like to develop for the market. Luna takes those ideas and tries to fund them through R&D contracts with either federal or commercial partners. After the proof-of-concept stage it seeks additional funding, which is usually supplied by venture capital, corporate partners, or internal investments. (See Figure 17.)

FIGURE 17. The Luna business model.

FIGURE 17

The Luna business model.

Luna’s objective is to accelerate the innovation process in this way; the outcome may be a spin-off, a stand-alone company, a licensing agreement with a bigger partner that has better access to markets, or a product that Luna keeps at the parent company. As the company continues to grow, it accumulates more expertise internally, both at identifying markets and the tech transfer process, including how to raise financing and how to build sales and marketing channels.

Dr. Murphy illustrated how his products move through the “technology flow pipeline” from basic research to applied research to prototype to product, by describing several current programs:

  • Flame Retardant Additives. Luna responded to a Phase I opportunity for flame retardant additives by gathering unique data during Phase I that led to a Phase II award and then a prototype. This prototype consisted of a simple composite panel of carbon fiber and resin to which a fireproofing polymer was added. Unlike most flame retardants, which emit toxic smoke when burned, this additive emits only a low-toxicity smoke and is suitable for use with bedding, bed clothing, and other fabrics.
  • Luna nanoWorks. Luna has been working with nano-materials for four years, using a trademarked base molecule called a “trimetasphere.” This is a carbon-80 “cage” with three metal ions and a nitrogen atom at the center. The key to the technology is to place Gadolinium chelates securely inside this cage, which mitigates the reliability and safety problems that have beset current nano-technologies. The company hopes to use this technique to develop a more effective, safe, and durable contrast agent for use in magnetic resonance imaging. Another hope is to achieve the long-sought goal of safe cell targeting to combat cancers and other diseases. Currently, cell targeting has not succeeded because attaching the cell-targeting molecule to the outside of existing contrast agents allows the Gadolinium to remain inside the body long enough to be toxic. Luna has demonstrated the ability to securely attach binding molecules to the trimetaspheres.

Dr. Murphy emphasized the value of building not only several successful businesses but, more importantly, maintaining “a great continuous pipeline of opportunities and a way to utilize the research already in the federal labs and the universities and to help them move it into the marketplace more rapidly.” He said that an important tool was the flexibility to use multiple mechanisms for funding, including SBIRs, venture capital, corporate partners, and profits from Luna’s work.

In summary, he emphasized the need to pay attention to the whole innovation process, not just segments of it. Within his organization, some people enjoy the research world more than the products world, he said, but in every meeting, Topic A is always “where are we on the research, development, and product pipeline. There’s always a need for basic research, but there’s also a need to make sure we’re pushing all these things toward a market.” This, he concluded, is what is meant by accelerating the innovation process.

DISCUSSION

Dr. McGrath began the discussion by noting that the role of venture capital had barely come up in the context of SBIR. He noted that several of Luna’s spin-offs had attracted venture funding, and asked whether venture backers had owned more that 50 percent of the company, which would make them ineligible for SBIR.

Dr. Murphy said that of Luna’s spin-offs, only one did not qualify for SBIR, but none had actually sought an SBIR award. Once the firms found venture capital or a corporate partner, they had focused on the technology around which they had been formed. He said he had mixed feelings about using venture capital. Small VC firms should not be disqualified from the SBIR process, he said, but he was not sure that the largest investment firms, such as GE Capital, had a role. In such cases, he saw potential difficulties with ownership, control, and organization size.

Dr. Gansler said that distinguishing between operating companies that have a venture investment group and those that were “pure” ventures was now under debate, and would be one of the issues addressed in the Academies’ studies.

A questioner asked what the panel thought of (1) offering a 20 percent tax credit for angel investing, and (2) changing the fiduciary rules regarding foundations so they could take higher risks on angel/seed capital investments. Dr. Murphy agreed that both suggestions had merit, and said that he supported other creative suggestions for strengthening American innovation, such as tax incentives for purchasing capital equipment. He said that many industries had outdated capital equipment, but felt strong pressure to value their quarterly profits more highly than investing in the company’s long-term future.

SBIR as a Factor in Luna’s Success

Dr. Wessner asked whether the Luna model was likely to have developed without SBIR support, or ATP support.

Dr. Murphy replied, “Absolutely not. There’s no way we would have built the company that we’ve done today, and had the successes that we’ve had, without both the ATP and SBIRs.” He said that he had tried “multiple times” to raise venture capital, but that the only two venture capital investments they received came just at the end of the late-1990s “bubble” days. Since then, he said, the dollars invested by venture capitalists had declined sharply, and venture capital companies were interested only in firms geographically located near their own offices. One venture capital company had expressed interest in investing in Luna’s nano-technology company—provided Luna would move the operation to Silicon Valley. Luna had also had offers to sell operations to companies located outside the United States. Only the SBIRs had allowed them to keep the operations and jobs where they were.

The Need for Patience in Developing Technologies

James Rudd of the National Science Foundation congratulated Dr. Murphy on his company, which had some NSF funding for magnetic resonance imaging (MRI) work. He asked about the amount of time small business people should expect to spend developing an invention and introducing it successfully to the marketplace.

Dr. Murphy said that the time required varied by technology and by market. For example, their development of skin friction gauges took 10 years, from the time of discovery when he was a master’s student to the time it was proven useful in oil wells. From the time the technology was proven useful, it took another two and a half years to complete the sale to oil and gas companies. In the case of the MRI contrast agents, four years of work were necessary to produce amounts sufficient for animal and other testing, and another four years would be necessary to receive FDA approval, produce the product, and generate revenues. Dr. Gansler added that some software products might be developed in 18 months, while a new vaccine might require 18 years.

The Innovation Continuum

Kevin Wheeler of the Senate Committee on Small Business and Entrepreneurship staff asked for suggestions to increase the number of Phase III awards. Dr. Murphy suggested better use of market-driven research—evaluating market needs, especially in the Defense Department, and communicating those needs rapidly to the researchers. Ms. Wheeler asked if Luna placed greater emphasis on its innovation or on its business activities, and Dr. Murphy said that Luna saw the two as parts of a continuum, and the company’s mission was to facilitate the entire process. He described a need to sharpen the whole technology innovation process, bringing market information back to the researchers as rapidly as possible and helping to guide them. Even though not all discoveries and inventions end up as products, Luna tries to select the most promising technologies more quickly and reduce the cycle time. Ms. Wheeler also asked whether there was a difference between STTRs and SBIRs in the Phase III stage. Dr. Murphy said that awards differed by agency, and even by individuals within agencies, and changed over time, so a general answer was difficult to give.

Dr. Wessner added that Dr. Murphy’s firm is a remarkable example of the interaction of regional strength and federal support. Because it is locally rooted in areas where market funds are not likely to reach, its success owes a great deal to the SBIR program. He also raised the issue of the 20 percent tax credit for angel funding. While this incentive might benefit many small businesses, such as restaurants, few angel investors were attracted to the complex high-tech areas needed to strengthen and revitalize the industrial base and offer high-tech employment. The SBIR and STTR awards are more specifically designed for high-technology firms.

Copyright © 2007, National Academy of Sciences.
Bookshelf ID: NBK11412

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