The Next American Economy by William J. Holstein - Read Online
The Next American Economy
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At a time when debate is raging about how to create jobs and revive
the American economy, veteran business writer William J. Holstein
argues that the best way for us to recover our economic footing is to do
what Americans do best-innovate and create new industries. Contrary to
the perception that the American economy has run out of inspiration and
new ideas, Holstein uses compelling case studies to celebrate the
innovation and business success being experienced in many industries,
from technology and energy to retraining and exporting, across the
country, from Boston to Orlando, Pittsburgh to San Diego.In
the face of economic powerhouses such as Japan and China that are
pursuing conscious national strategies, Holstein argues that Americans
must find new avenues of cooperation among universities, business, and
government to create the kind of sustainable growth we need. Replete
with fresh insights into how Americans can create a real economic
recovery, The Next American Economy is essential reading for business leaders, politicians, strategists, and anyone who cares about our future.
Published: Bloomsbury Publishing an imprint of Bloomsbury USA on
ISBN: 9780802778666
List price: $18.20
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future.

PART I

TECHNOLOGY CLUSTERS

ONE

MIT and A123 Systems

How Innovation Happens in a Premier Hot Spot

RIC FULOP, a twenty-six-year-old serial entrepreneur originally from Venezuela, was looking for a new idea in early 2001 to create his sixth company. He approached the technology licensing office at the Massachusetts Institute of Technology in Cambridge, Massachusetts, which had licensed technology to him for a previous company. My next start-up is going to be a battery start-up, he told tech officials. Whom should I go see?¹

Fulop was pushing a carbon nanotube notion, and the MIT officials thought that would be of interest to Professor Yet-Ming Chiang, who had displayed interest in commercializing technologies from his lab. They knew he had just filed a statement with the tech office announcing that he had achieved a promising breakthrough on what he thought was a revolutionary new self-organizing battery.

At their recommendation, Fulop knocked on the professor’s door just as Chiang was preparing to leave for a battery conference and told him he wanted to launch a new business on the basis of the nanotube idea. Chiang, however, told him that he had a better idea.² After returning from his conference, the professor called a colleague, Bart Riley, who was working at American Superconductor at the time. Riley recalls Chiang’s first description of Fulop: I met this crazy guy who walked into my office and said he’s starting a company, but you have to meet him too.

Chiang’s father was born in mainland China but escaped in 1948 in front of the advancing Communists and fled to Taiwan, where he became a train engineer for the Taiwan Sugar Company. Young Chiang arrived in Brooklyn at age six without speaking English. In one of those classic tales of young immigrants making huge advances, he went on to become an American citizen at age sixteen and earn a PhD from MIT in materials science.

Chiang and Riley—who also has a PhD in materials science—started meeting with Fulop. Their project was secret because they did not want anyone else to discover what technology they were considering. They created their company in November 2001 and chose the name A123 Systems, which comes from the obscure Hamaker force constant used to describe how the self-organizing battery would work.

Fulop was instrumental in attracting the first venture capital money, the so-called A round. Some $8.3 million came from North Bridge Venture Partners, YankeeTech, and Sequoia. Also putting up money was Gururaj Desh Deshpande, founder of Cascade Communications and Sycamore Networks. Deshpande’s role would prove to be very important because he joined the board as chairman and served as an adviser and mentor for the team. Motorola and Qualcomm added $4 million shortly thereafter. Qualcomm’s chairman and CEO, Paul Jacobs, would join the A123 board, giving it more credibility and experience.

Chiang didn’t halt his research into other ideas, maintaining one foot in the business world and one in academe. At about this time, A123 received a $100,000 Small Business Innovation Research (SBIR) grant from the Small Business Administration, in cooperation with the U.S. Department of Energy, that helped the company start commercializing a completely different idea that also originated in Chiang’s MIT lab. This was for new materials for the cathodes in batteries in hybrid electric vehicles.

It wasn’t clear that A123 needed a full-time CEO at this point because they did not truly have a product and had only five employees. But they knew that they would need a seasoned business leader who could help the company grow, a skill set that none of the founders possessed. The three cofounders found just the man—Dave Vieau, who had worked for Texas Instruments starting in 1972. He had worked most recently at American Power Conversion for about ten years as vice president of marketing and sales before running a series of small start-ups. In short, he had spent several decades managing companies, large and small, and had a successful track record. We all felt Dave was the right guy, Chiang recalls.

Chiang’s academic research continued. In September 2002, he published a paper on nanophosphates in Nature Materials. The company organized a small team to evaluate this technology, but it was still on the back burner.

Riley, as chief technology officer and vice president in charge of R&D, took responsibility for Chiang’s original technique for making a self-organizing battery that relied on dispersing materials into a container and allowing the particles to organize themselves into a network. That would drastically reduce the costs of manufacturing a battery. MIT granted an exclusive license to the technology in exchange for an ownership stake in the company and a royalty stream if the company ever became successful. It did not ask for a big up-front payment of any sort. This policy is one of the reasons so many companies have been created by MIT professors or students.

A123 had about fifteen employees at this point, in the spring of 2003, but engineers who had been hired to work on the self-organizing battery idea confronted the founders of the company and told them the idea would never scale in time. It just wasn’t practical. CEO Vieau called a meeting, and all the employees sat together at a table and promised each other that they were not going to leave until they had forced a decision. Two cofounders of the company—Riley and Chiang—were being told, in effect, their original idea faced too many technical challenges.

It was at that point that the company, with its board’s agreement, shifted to the second idea that Chiang was working on at MIT—the nanophosphate technology that could be used in lithium-ion batteries. Traditional phosphates did not have high energy or power levels but were considered relatively safe in batteries.

What Chiang had done was to modify the structure of the phosphate using nanotechnology, meaning he made the particles even smaller. He also doped it—in layman’s terms, he revved it up—to improve its performance. The company believed this new powderized material would allow for safer, lighter, more powerful batteries that could be discharged and recharged more times over their lifetime. We were riding two horses for a while, but we killed the first horse and rode off on the second one, recalls Vieau.³

This flexibility was unusual because most founders of a company would insist that their first vision was right. If an idea is not working well, people typically dig in, and dig in until they fail, Vieau adds. The presence of an experienced business leader, with a seasoned board of directors, helped the founders adjust to a new reality.

The policies that a university puts into place to foster commercialization of ideas are hugely important, as the case of A123 demonstrates. MIT professors are encouraged to spend one day a week doing something other than pure academics. They can get time off to pursue their ideas, as much as a year. At many universities in the United States and around the world, professors can’t do any of that. They must stay in academia full-time or leave. It’s black or white. The fact that someone such as Chiang can move back and forth gracefully between the two worlds helps strengthen the connection between the laboratory and the commercial marketplace.

The role of the technology licensing office is also critical. MIT was one of the first major universities to take advantage of the Bayh-Dole Act of 1980, also called the Small Business Patent Procedures Act. This law, enacted in the waning days of the Carter administration, is an example of a piece of legislation that does not attract much attention when it is passed but proves to be enormously powerful. Prior to this act, the U.S. government owned all the patents that universities filed for because government dollars had supported their research. But only 5 percent of those patents had actually been put to commercial use. With this act, the government agreed that universities or institutes owned the intellectual property and could license it or transfer it to private companies.

The way this process works today at MIT is that professors alert the technology licensing office about promising research discoveries by filing disclosures. The office gets five hundred disclosures a year. It evaluates them, decides what to seek a patent for, and then hires outside patent attorneys to actually file for the patents. It is expensive work but necessary.

The office also serves as a matchmaker between researchers and the world of seasoned business managers and investors. The philosophy that guides the office is clear. The question is how we can get real contributions to the economy as opposed to letting professors play in their sandboxes working on things that seem completely irrelevant, says Lita Nelsen, director of the office. Yes, we want them to work on blue-sky research, but we also want to take the by-products of that basic research and make it useful.⁴ Blue-sky research means pushing the cutting edge of knowledge rather than seeking commercial application for a technology.

The federal government’s role in supporting the creation of ideas at MIT, as at many universities, is central. Academics obtain government grants for much of their research—whether from the National Science Foundation, the Department of Energy, the military’s Defense Advanced Research Projects Agency (DARPA), the U.S. Air Force, NASA, or others. Without federal funding, this whole thing goes away, Nelsen says. Industry labs such as Bell Labs, Xerox PARC, and IBM Research Laboratories have either disappeared or had their budgets cut over the years, and they tended to concentrate on applied research, also called development research, more so than blue-sky research. This is one of the most important debates about U.S. government support for research: To what extent should it support scientists who are pushing the edge of knowledge, and to what extent should it fund applied research that might create specific products for the