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Texas Emerging Technology Fund

State tech fund seeding a new crop of Austin startups

By Lori Hawkins, Austin American-Statesman
October 18, 2009

Tucked away in an anonymous Southeast Austin business park, scientists at HeatGenie Inc. are developing technology that heats soup with the push of a button to activate a warming element in the can—no stove or microwave needed.

In a laboratory in Cedar Park, Mystic Pharmaceuticals researchers are designing devices to deliver drugs through mists sprayed in the nose or eyes, a more precise method than drops for diseases such as glaucoma.

And at the Hornsby Bend wastewater treatment facility in East Austin, Sunrise Ridge Algae Inc. is testing ways to use algae to create renewable fuel.

Their work is far-ranging, but the three have one thing in common: Money paying their salaries and funding their research has come from the Texas Emerging Technology Fund, which invests state money in promising startups in cutting-edge fields such as biotechnology, robotics, and clean energy.

The Legislature started the fund in 2005 to support advanced research at Texas universities and speed the commercialization of that research to create companies and high-quality jobs.

So far, Central Texas has scored big, with 20 companies taking in about $28 million of the $110 million the state has invested in 88 companies. Another nine area companies are in the pipeline to receive more than $20 million in funding, according to officials.

As the region continues to be rocked by recession—with venture capital investment slowing and unemployment rising—the state money is supporting Austin’s unique population of creators and inventors while seeding a crop of companies that might produce some home runs in the future.

“At a time when it’s hard to get bank loans or raise money on Wall Street and the venture capitalists are in hiding, this money is keeping the dream alive,” said Bud Weinstein, an economist with the Cox School of Business at Southern Methodist University. “ETF represents a fairly modest investment by the State of Texas into companies that may one day yield significant payoffs in terms of new jobs and revenue for state and local governments as successful companies become taxpayers.”

Austin’s list of fund winners offers a glimpse into the intriguing mix of promising ideas. Among them:

Terapio Corp. received $1.7 million to create a cream to treat hand-foot syndrome, a painful swelling and numbness of the hands and feet that can occur as a side effect of several chemotherapy drugs.
Merkatum raised $1 million for fingerprint and facial recognition identity technologies.
Agile Planet is using $1 million to create more responsive and intelligent robots.
“These startups represent the next generation of high-tech innovation, and this funding is crucial to helping them push forward,” said Susan Davenport, vice president of business retention and expansion at the Greater Austin Chamber of Commerce. “Without this funding, some very promising entrepreneurial companies might wither on the vine.”

In return for the money, the state gets an equity stake in the company, but entrepreneurs say they give up far less ownership than they would with a venture capital investor. If the company eventually is acquired or goes public, the state gets a share of the return. If the company goes bust, the state is out its investment.

“There will be some winners, and there will be some losers,” Weinstein said. “But in today’s economic climate, when so much is shut down, ETF is helping small companies get started, and it’s helping them to keep going.”

Monebo Technologies CEO Dale Misczynski says his company, which makes wireless heart monitors, would have folded if not for the $500,000 grant it received three years ago. The company used seed money from its founders to develop its product, called Cardiobelt, which lets users obtain their own electrocardiogram while at home and wirelessly transmits the information to a doctor.

“We were in a very difficult position, because we needed funding to take our product to market, but most venture capitalists don’t care to invest until you’ve got customers,” he says. “ETF carried us through until we could get our first customer orders. It was the bridge we needed to survive.”

Although Monebo has only six full-time employees, the company is already creating a ripple effect: It manufactures the Cardiobelt in Bastrop, and the device is being used by patients in the United States, the United Kingdom, Germany, and China.

Misczynski is bullish about his company’s future. “According to our plan, five years from now, we should be a $50 million company,” he said.

The Legislature created the fund at the request of Gov. Rick Perry, starting with a $200 million allocation, and has renewed it twice. Since 2006, aside from grants to companies, the fund has given money to researchers and initiatives at The University of Texas, Texas State, and other schools, and it helped the state attract top research talent.

“We’re looking for the technologies that could be game changers,” said fund director Alan Kirchhoff. “There is so much intellectual property at universities, or people’s garages, or inside companies. We’re getting it into the hands of entrepreneurs and providing the capital to turn it into something.”

Because most companies that have received money are still in the very early stages of development, Kirchhoff said, it’s too soon to place bets on the investments.

“They could become the next Google, or they may not. That’s part of the risk,” Kirchhoff said. “If these companies are successful, the State of Texas, which put the riskiest early-stage money in, will get a return back.”

So far, one company—Austin-based NanoCoolers Inc., which received $3 million to develop a semiconductor cooling device—has failed. It’s a given that there will be others; that’s the nature of investing in unproven, out-of-the-box ideas.

Keeping jobs in Texas isn’t a sure thing, either. Although fund recipients must agree to remain in Texas, that’s no guarantee that they’ll expand here, as demonstrated recently by Xtreme Power, a 5-year-old green energy company based in Kyle, which has received $2 million in fund money.

In August, the company announced it would build a manufacturing plant for its power-storage systems in Wixom, Mich., northwest of Detroit, with the help of a state incentive package estimated to be worth more than $200 million.

Although Texas officials had lobbied the company to expand here, Austin attorney Pike Powers said that Texas could not compete with the size of Michigan’s incentive offer.

Michigan officials say Xtreme might hire as many as 2,500 workers between late 2011 and 2014.

Xtreme is keeping its headquarters in Kyle. Because the company already had fulfilled the commitments it made to receive the technology fund grant, it faces no penalties.

Another Austin grant recipient, Molecular Imprints, is considered a candidate to become a home run.

The 125-employee company uses nanotechnology to develop advanced, extremely precise tools for the semiconductor and other industries. It has received $3 million from the fund. During its eight-year life, it has raised a total of $90 million in backing. Executives say they expect record sales of $25 million this year, up about 50 percent from last year, and there is the promise of more growth in the next several years.

The money isn’t meant to provide long-term sustenance for startups. Awards to Central Texas companies have ranged from $500,000 to $3.5 million. That’s small by most venture capital standards, but the amount can be make-or-break for companies still deep in research.

“These are companies with real science, and as a result it’s really tough to go out and get funding in the early days,” said Paul Tobias, an attorney with Wilson Sonsini in Austin who works with startups. “Private investors will look for more progress and a demonstration, or even customers, before making an investment, so ETF really bridges a gap. It allows a company to add that one expert who can really push them forward or buy that piece of equipment that they wouldn’t otherwise be able to afford.”

HeatGenie founder Brendan Coffey’s original laboratory was his two-car garage in Southwest Austin, where he spent nights and weekends developing energy storage technology for self-heating food packaging.

When the fund awarded the company $250,000 last November, Coffey, a battery industry veteran, was able to move to a formal facility and focus on HeatGenie full time.

The company recently received another $500,000 from the fund, as well as a $100,000 grant from the National Science Foundation, which allows the company to pay salaries for five full-time employees.

The company has had promising meetings with global food and beverage companies about partnerships, Coffey said. It recently added Dan Costello, former Nestle executive and now CEO of Austin-based Sweet Leaf Tea, to its advisory board.

Without the fund money, Coffey said, HeatGenie would not have been able to move forward so quickly.

“It really was a leap of faith on their part,” Coffey said. “Now we want to be a success story, so we can help generate investment for the next round of entrepreneurs.”

Central Texas recipients of Texas Emerging Technology Fund money

These Central Texas companies have received funding:

Company Funding
Agile Planet
Combining standard factory controls with innovative software to enable safe human-robot collaboration
$1 million
AnaLogix Development Corp.
Natural movement 3-D game controller for PC and gaming markets
$1 million
Faradox Energy Storage Inc.
New fabrication process for high-performance electrical capacitors
$1 million
Technology for self-heating food packaging
$1 million*
Image Trends
Image correction and enhancement products for commercial and amateur photographers
$1 million
Fingerprint and facial recognition identity technologies
$1 million
Molecular Imprints
Advanced technology for the makers of computer chips and disk drives
$3 million
Monebo Technologies
Heart monitoring device that enables users to obtain their own electrocardiogram
Mystic Pharmaceuticals
Devices to let patients self-administer precision doses of drugs
$1.56 million
Thermoelectric cooling system to help cool semiconductors
$3 million
NanoMedical Systems
Tiny implantable capsules that deliver drugs a few molecules at a time
$3.5 million
Quantum Logic Devices
Using single-electron devices to analyze DNA, protein and other molecular interactions
Receptor Logic
Developing antibodies to improve understanding of the immune system to lead to better drugs and vaccines
$2 million
RF Micron
Microchips that act as wireless bar codes for shipping items globally
$1 million
Smooth Stone Inc.
Using technology developed for cell phones to cut data center power use
$1 million
Flat-panel radiation source technology
Sunrise Ridge Algae Inc.
Technology to turn algae into biofuels
$1 million
Terapio Corp.
Cream to treat hand-foot syndrome
$1.7 million
Xtreme Power
Power storage and management systems to cut energy bills for large-scale users
$2 million
Advanced semiconductor testing technology
* Maximum grant over time
**Closed in 2007
Source: Central Texas Regional Center of Innovation and Commercialization

How the Emerging Technology Fund works

How the Emerging Technology Fund works
The process is highly competitive—about 10 percent of Central Texas applicants win grants—and can take nine months to a year.

Criteria: Companies must have a tie to a Texas public or private university. A substantial percentage of any new or expanded manufacturing arising from the grant must be in Texas. Companies must meet certain milestones to continue receiving allocations.
Who decides: Austin companies apply to the Central Texas Regional Center for Innovation and Commercialization. The center vets applications and then forwards qualified ones to a 17-member state advisory committee. Final approval requires the unanimous consent of the governor, lieutenant governor, and speaker of the Texas House.
Monitoring:The governor’s office checks up on the companies to determine if they are meeting the terms of their grant.

[ Statesman ]