BOX 4-5PSI Physical Sciences, Inc

Physical Sciences, Inc., was established in 1973. The founders left Avco-Everett to start their own firm partly because they sought a smaller research and working environment; Avco-Everett at the time had about 900 employees.

PSI’s growth was initially modest, based on contracts with the Air Force and DoE. By the early 1980s, it had approximately $10m in revenues and a staff of 35–50. After a decline in the early 1980s, PSI diversified its federal customer base as well as its range of technological expertise. As it has grown, SBIR awards have contributed a diminishing portion of firm revenues, falling from a peak of about 60 percent in the late 1990s to a projected 35 percent in FY2006.

Since the uses of optical technology have dramatically expanded, the firm’s technological and market bases have widened to encompass applied R&D, production operations, and bundling of “hands-on” service delivery with the application of newly developed products, especially in the areas of instrument development, diagnostics, and monitoring. PSI has strategically positioned itself in an R&D market niche defined by multidisciplinary expertise and research infrastructure in specialized high-tech areas too small to attract major investments by large DoD prime contractors, while at the same time too mission-driven to elicit competition from universities.

The firm’s successes led to opportunities in new directions, but the founding vision was to maintain owner/employee control of the firm. Hence the firm remains focused on R&D and prototype development rather than manufacturing, which would require additional external capital.

Some of the firm’s contracts with DoD involve development of specialized, one of a kind technologies. These can meet critical DoD needs, but may constitute a market with a small sales volume. Other DoD contracts led to the development of technologies, mainly in the area of instruments, that the firm does seek to market to the private sector. For example, PSI’s SBIR-funded development of sensor technology to detect methane gas leaks has been sold to gas utilities. In general, sales to the private sector are largely based on technologies developed for DoD under SBIR awards—a classic case of spin-out development.

PSI will engage in limited production of specific instruments for DoD and other federal agencies. When its technological developments lead to commercially viable products, PSI follows a mixed strategy. One approach is to form new firms, with new, independent management, that operate as partially owned spin-outs. Shaping this business decision is the firm’s view that the “cultures” and operational needs of contract R&D and manufacturing firms differ sufficiently that it is more efficient to operate them as separate entities rather than attempt to combine them into one larger firm. Conversely, PSI also creates wholly owned subsidiaries, focused on R&D activities, which have become eligible for SBIR competition on their own (as long as PSI remains a small business).

From: 4, Outcomes

Cover of An Assessment of the SBIR Program at the Department of Defense
An Assessment of the SBIR Program at the Department of Defense.
National Research Council (US) Committee for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program, Policy and Global Affairs; Wessner CW, editor.
Washington (DC): National Academies Press (US); 2009.
Copyright © 2009, National Academy of Sciences.

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