The Perils of Living Grant to Grant

AccSys Technology Has Found Its Millions in Government Grants and Contracts to be a Double-Edged Sword. The Company is Still Struggling.

DATE: Saturday, June 10, 1995
BYLINE: By Gilbert M. Gaul and Susan Q. Stranahan, INQUIRER STAFF WRITERS

Contributing to this article was Frank Donahue
of The Inquirer's News Research Library.


Robert Hamm points to a large wooden conference table and says proudly: ''Got it at an auction."

Ditto the Xerox copier in a nearby cubbyhole. The lathe out back in the shop. Even the coffee cups are secondhand.

"When we go to these auctions, we always try to find coffee cups with the logos of companies that are now bankrupt," the 50-year-old physicist says. ''We have a cabinet full of them. They serve as reminders."

As well they might.

While the Clinton administration has promised to create hundreds of thousands of high-paying jobs by investing in technology programs, Hamm's experience offers a cautionary tale of the difficulties of creating private wealth with public money.

His 10-year-old company, AccSys Technology Inc., has received nearly two dozen federal grants - worth more than $5 million - to develop innovative technologies for hospitals, airports and universities, as well as a $6 million contract to work on the ill-fated Superconducting Super Collider.

Even with all that, AccSys has yet to make it in the market.

And its reliance on government contracts nearly broke the company two years ago when Congress killed off the Super Collider, a giant particle accelerator the Department of Energy was building in Texas.

Today, AccSys has a staff of 20 - down from a peak of 43 in 1992. Revenues have shrunk from $4.5 million to $2.5 million.

"The lesson we have learned? We can't just live off of the government. It isn't why we started the company. And it's not what we want to do," says Marianne Hamm.

The Hamms remain optimistic. But even as they struggle to end their reliance on federal grants, they have once again turned to the government for help.

They recently signed a $1.6 million deal with a federal laboratory to work on a Hamm technology; the lab will pick up half the cost.

"This is all part of our trying to get out of the valley of death," Robert Hamm explains without a trace of irony.

The Hamms' decade-long effort to develop a marketable technology points up broader issues affecting many of the government's multibillion-dollar technology programs.

Even in the best of cases, it takes years, sometimes decades, before there is a payoff of real products, let alone jobs and profits.

Novel technologies are rarely developed with a single grant.

Often the government funds technologies for which there is no market. Potential private investors shy away from complex technologies they are afraid won't offer a quick return. And would-be customers are reluctant to be the first to buy untested devices costing millions of dollars.

So technology sits on shelves.

Still another issue is the lure of government funding itself. The attraction can be insidious, diverting attention from the business of developing products for the market.

Some companies use the government's array of technology programs as a kind of permanent R&D fund. Others become captives of government programs, relying on federal subsidies to develop technologies that they then sell exclusively to federal agencies. In short, they become government contractors.

A 1992 study by the General Accounting Office of one technology program found that one-third of the sales reported by small firms were to government agencies.

Companies that depend on the government for development funding and sales are vulnerable to political shifts and cutbacks in those programs. Witness the Hamms, who say they are now trying "desperately" to develop private markets.

This is the story of their struggle to make it in the marketplace with the help of grants from the Small Business Innovative Research program, one of dozens of federal technology efforts.

Created in 1982 by Congress, the SBIR program was intended to increase small businesses' share of the federal R&D pie and spur innovative technologies.

Small companies, defined by the federal government as having 500 or fewer employees, account for about 75 percent of all new jobs in America. Yet they receive less than four percent of federal dollars for industrial research and development.

The legislation has been only marginally successful.

In 1979, small companies received 2.7 percent of federal R&D dollars. In 1991, they got 3.7 percent.

"There's been some improvement. But it's still too small a share," says William Scheirer, an economist with the U.S. Small Business Administration.

Nevertheless, the $1 billion-a-year SBIR program is praised by government officials and participants alike.

Proponents point to its success in generating commercial sales, compared to other technology programs. And small business owners such as the Hamms say it is the most effective of the government's many technology efforts.

"I have high praise for the SBIR. It has helped us at every point. It isn't perfect. But for a small business, it's the only government program that's accessible," Marianne Hamm said.

That is one reason why the Hamms keep going back.

They met in graduate school at Florida State. Bob Hamm had moved to Tallahassee in 1967, after graduating from the University of Southwestern Louisiana. Marianne arrived a year later from Virginia Tech.

One day Marianne was late for a physics class and burst through a door of a laboratory, nearly bowling over her future husband.

"I don't think he noticed me, but I noticed him," she said. They were introduced later that day, and soon began to date.

After receiving their master's degrees, they left for Houston. Bob worked for a large oil-drilling company. Marianne took a job as a researcher at a medical center. In the early 1970s, they returned to school and earned Ph.D.s in physics at Texas A&M.

Job prospects were slim for couples on the same career track - all the more so in the field of physics. Among the few exceptions was Los Alamos National Laboratory, one of the nation's three weapons laboratories, located on a series of mesas in northern New Mexico.

"It was an appealing place. It had trees," said Marianne.

The couple settled into their jobs at the lab. Bob worked on particle accelerators - elaborate devices that produce streams of charged particles through electric fields.

Marianne worked initially on particle-beam experiments, a precursor to Star Wars technology. Later, she switched to another division and developed
innovative software and hardware for use in lab experiments.

One day in 1977, while attending a seminar, Bob Hamm learned of a potentially revolutionary Soviet technology for making compact high-energy accelerators a fraction of the size of the huge units then in use.

Scientists at the lab were skeptical. But by 1980, they succeeded in building a compact accelerator that produced streams of highly charged ion particles.

Hamm, who worked on the project, immediately saw potential commercial uses in research and medicine. Hospitals could use the smaller accelerators to make radioisotopes for use in detecting cancers and other diseases. The device also had the potential for detecting explosives in airline baggage.

He began to think about forming a private consulting group to commercialize the compact accelerator and other technologies. There were few such lab spinoffs at the time, but Congress had just passed legislation to encourage technology transfer. Los Alamos officials had held a symposium in 1980 to tout some of their technologies.

When his boss learned about his consulting idea, Hamm said, he and several colleagues were called in.

The signals were different than the ones Congress was sending. "We were given a very long lecture about the downside of trying to start a business. I was told, in essence, that this was something I should not be doing," Hamm said.

He pondered his future. He was being recruited by a small high-tech company in northern California. The Hamms were torn between leaving the comfortable lifestyle at Los Alamos - what scientists called "the fur-lined rut" - and going out on their own.

"On the one hand, you have a nice existence. Good jobs. You're paid well. The area is nice. Schools are good. We had a lot of time. On the other hand, you get to the point where you wonder if you are growing professionally as scientists," Marianne said.

In the end, they decided to leave.

In 1981, Bob Hamm joined Cyclotron Corp. in California, lured in part by a promise that the company would look at his idea for compact accelerators. Marianne set up a software consulting business, initially run out of her bedroom, with the Los Alamos lab as one of her main customers.

A year later, Cyclotron filed for bankruptcy, a victim of the 1981-82 recession. Bob took a job in R&D at Varian Associates in Palo Alto, Calif., a high-tech spinoff of Stanford University. It was a good job with a large staff and ample resources. But Hamm was still restless.

He believed in his idea for a compact accelerator. All he needed was the money to develop it.

Then one day he heard about a government program for helping small companies fund innovative technologies. It was called the Small Business
Innovative Research program - SBIR for short. And it seemed to have Bob Hamm's name written all over it.

Owners of many start-up firms, especially those involved in physics or other complex sciences, will tell you their biggest problem isn't getting the technology to work; it's finding the money to develop it.

The Hamms were no exception. Before hearing about the SBIR program in 1983, they had approached a number of venture capitalists. The response always was the same: Investors didn't want to put money into technologies where the payback would take five or more years.

"We came to the conclusion very quickly no venture capitalist would touch this," Marianne said.

In the summer of 1983 a former colleague, now working at the National Cancer Institute, told them about the SBIR program.

Small firms could win Phase I grants worth up to $50,000 to study an idea, and then apply for a Phase II grant of up to $500,000 to develop a prototype.

Later, impressed by the success of the program, Congress increased the grants to $100,000 and $750,000. It also added a Phase III, in which federal agencies could buy the technologies.

That September the Hamms applied to the National Cancer Institute for a Phase I SBIR grant to study the feasibility of building a compact accelerator to be used by hospitals to make isotopes for medical imaging.

It was essentially the idea Bob had had back at Los Alamos. As part of the process, they requested help from Los Alamos scientists and permission to use the lab's computer codes and drawings.

Cancer institute officials reacted favorably to the application. However, months passed without a decision. The couple expected to hear by July 1984, at the latest. But the summer came and went.

Finally, in September they received word their Phase I application had been approved for $42,000.

Working nights and weekends, the couple finished the design study by February 1985 and applied for a Phase II award. Once more, officials indicated they would be funded.

"We thought we would finish that design study and that would allow us to go out and build this machine," Marianne said. "Everything was very positive. We decided we were off and running. We're ready to form a company."

The Hamms approached several former colleagues at Los Alamos about investing. One agreed. Another later joined the firm.

With initial capital of $60,000 and some furniture from Marianne's consulting business, AccSys Technology was incorporated on June 5, 1985.

Flush with optimism, the new owners leased 1,700 square feet at an industrial office in Pleasanton and set up shop.

The Hamms started AccSys Technology thinking the Phase II award from NCI was imminent. Their financial plan, and the office lease, were dependent on it.

But the simple act of incorporating threw the government into chaos.

The official recipient of the Phase I award had been Marianne's consulting business - Technical Program Services. The Phase II award would go to the new company. That required official changes.

The government bureaucracy couldn't deal with such complexity. Months dragged on. The money didn't arrive until March of the following year, 1986.

The Hamms estimated it would cost $1 million to build the prototype accelerator. They proposed that the SBIR program at the Cancer Institute put up $500,000, then the limit for a Phase II grant. And they would get the other $500,000 from an investor, who in turn would be given the prototype machine.

"We were told, 'No, you can't do that. Here's $500,000; do what you can,' " Bob Hamm said.

"We knew we couldn't deliver anything for $500,000. We would develop key pieces and show you could make a commercial prototype, but not a full-blown prototype."

The Hamms had begun to look at other uses for accelerator technology, including using it to make wafers for computer chips. They also realized they had to find other income to pay the bills.

As it happened, the Reagan administration was ramping up its Star Wars program and many big defense contractors were flush with work. A former Los Alamos colleague at Boeing Aerospace found out the Hamms were available to do design work.

"We very quickly received work from Boeing," said Marianne. "It was very fortuitous because we didn't have a lot of money."

In 1987, AccSys also received a Phase I award as part of the Strategic Defense Initiative to study whether a compact accelerator could be used in space to direct high-energy beams at a target.

The Star Wars work paid the bills. But it had little carry-over in the company's efforts to develop commercial products.

"Star Wars is inherently very high-power, very expensive technology," Marianne Hamm said. "You don't need that high power for commercial applications. Plus, no one is going to pay for it. We gained an appreciation for the engineering, but it didn't help our commercialization phase."

The Hamms developed a strategy to use the SBIR program to help underwrite the development cost of the accelerator. One or two grants wouldn't do, they realized. So they would use multiple awards from various federal departments to develop the technology in phases. Each application would be carefully crafted to match the needs of the federal agency.

"We had to formulate a strategy how we were going to come up with these products we wanted to commercialize," Bob said.

"With the SBIR, each award allowed us to develop another phase of the technology. We kept getting closer . . . putting the pieces together."

The targeted approach paid off. In late 1987, AccSys won a Phase I award
from the Department of Transportation to design a compact accelerator for screening airline baggage for explosives. A Phase II award for $539,000 followed.

In 1988, the company won Phase I awards from the Department of Energy and the Naval Weapons Center in China Lake, Calif. Phase II awards of nearly $1.1 million followed. Later still, the Naval Weapons Center bought an accelerator
from AccSys for nearly $1.2 million.

Each federal award brought them closer to their goal.

By 1992, AccSys was on a roll.

It had been named to Inc. magazine's annual list of fastest-growing small businesses - twice.

The company continued to win SBIR awards, in all but one case proving that the technology worked.

It had sold one accelerator to a cancer center in Loma Linda, Calif., where the high-energy beam was directed to an operating room to destroy tumors. More sales were expected.

The technology for detecting explosives had proven less successful. But it became the basis for another potential product - a neutron generator that could be used to inspect aircraft and other materials for corrosion and flaws.

Earlier, in October 1991, AccSys had beat out two larger companies and won a $6 million contract to supply accelerator components to the Superconducting Super Collider being built near the town of Waxahachie in eastern Texas.

Born of the grand dreams of the particle physics community and its backers in Congress, the massive collider was to be the largest, most powerful particle accelerator in the world. A series of counter-rotating beams of protons would be propelled around a 54-mile ring of tunnels, reaching nearly the speed of light before colliding in the center. The proton collisions would
allow scientists to study the very nature of matter.

In its own way, the Super Collider contract would have a profound effect on AccSys Technology and the Hamms.

The small company had to expand rapidly, doubling its staff and leasing additional space. A significant stream of money began to flow in. In one of their headier moments, the couple predicted revenues would double in two years - to more than $6 million.

"We were going great guns," Bob Hamm recalled.

In April 1992, Marianne was invited to testify before the House Committee on Small Business, which was preparing legislation to reauthorize the SBIR program.

She was frank; she testified that AccSys owed its very existence to the program. Now that it was on the threshold of commercial success, the company's need for additional grants was diminishing, as it should, she said.

"If you consider AccSys as an example of growth and job creation, we have grown from 2 people to 25 in 7 years, from $175,000 in sales to a projected $4 million this year, and we feel that by our 10th year in business (1995), we have the potential to employ 100 to 200 people, with $10 (million) to $20 million in sales," she told the panel.

In May 1992, an aide to James Watkins, secretary of the Department of Energy, called to ask if the secretary could use AccSys as a backdrop for a meeting - and photo opportunity - with small, high-tech entrepreneurs from the Bay Area.

Watkins met with about 10 CEOs on May 23 in AccSys's tiny cafeteria. "We got to ask questions. He made a little speech," Bob Hamm said. "We took it as an opportunity to get some beautiful publicity. We didn't care whether it was political or not."

Even as the Hamms basked in their newfound good fortune, beneath the surface trouble rumbled - and began to gain momentum.

For all its progress developing accelerator technologies with government grants, AccSys had not yet succeeded in the private market. Nearly all its sales, and most of its revenues, were tied to the government.

The medical market the Hamms had initially counted on never developed. To some extent this reflected a normal reluctance to buy expensive new technology. But AccSys also had gotten sidetracked. The interruptions from the Stars Wars contracts had taken their toll.

And there had been internal diversion. The two other founders, James Potter and Kenneth Randall, had quit in a disagreement over the company's direction. Accusations and lawsuits followed, eventually ending in an out-of-court agreement.

Just as the company began drafting a new plan to sell accelerators in the medical market, AccSys was dealt a potential death blow.

In October 1993, Congress voted to kill the Super Collider, contending the project had been mismanaged and the $11 billion pricetag was too high.

Virtually overnight, AccSys was on the brink of ruin. Sixty percent of its backlog of orders involved Super Collider work. To date, the company had received nearly $3 million from the contract; the Hamms figured an additional $1 million worth of work had been done, for which they had not been paid. That money now was in jeopardy.

Most of the $1 million was owed to vendors AccSys had hired to work on the project. They informed owners of these small companies they couldn't pay. A five-year lease had been signed for space they now couldn't afford. The staff had to be slashed.

"The effect on the company was devastating," said Marianne Hamm.

The Hamms wrote officials of the Super Collider program that AccSys considered its contract effectively terminated and expected to be paid for the work done. They were informed the program had no money.

Bob Hamm threatened to issue a press release that AccSys was being forced into bankruptcy. "That broke the dam. They saw we were serious and were prepared to embarrass them if necessary. But we were serious. We felt to protect ourselves from the vendors and landlord we might have to file Chapter 11 to give us some breathing room."

A series of brutal, time-consuming negotiations ensued. By the end of January 1994, AccSys had received two checks, totaling $570,000. A third check - for $616,000 - did not arrive until January 1995. A claim for $256,000, which included costs of negotiating with the government, is outstanding.

The year spent haggling with government officials again sidetracked AccSys' plan to develop commercial sales.

"Nothing got done during this period. We were basically in limbo, holding on by a thread," Bob Hamm said.

As its 10th anniversary approached, AccSys descended into a yawning economic chasm that high-tech entrepreneurs call the Valley of Death.

The company essentially had become a custom job shop for government. Grants had begun to dry up. AccSys had exhausted most of its one-time customers. Sales to industry were negligible. The company was undercapitalized. And
revenues were a fraction of what the Hamms had hoped for by 1995 during headier days.

"We started this company for the wrong thing," Bob Hamm now says. "We had a technology that was wonderful. But we had a product that was looking for a need. It's called shotgun marketing."

His wife has another term for it. She calls it Darwinian marketing.

"That's what we were doing. People were coming to us and asking, 'Could we do this? Could we do that?' The idea was, we got as many machines out with as many applications as we could. And ones that caught on, we would continue."

Not enough caught on.

If AccSys were to survive, it had to get back on track as quickly as possible. That meant ressurecting the business plan abandoned during the Super Collider crisis, deciding which market to focus on, and lining up another investor.

In some ways, the questions about technologies were the easiest. The company had an accelerator for use in cancer treatments. But other companies had similar equipment and that market was already maturing.

Another emerging market - supplying radioisotopes for a medical imaging device known as Positron Emission Tomography (PET) - appeared more promising.

AccSys had developed a compact accelerator that would take up less space and cost less to operate than the large PET cyclotrons currently in use at hospitals, the Hamms believed. But timing was everything, and the window for gaining advantage appeared to be short.

PET imaging had been used largely as a research tool, which meant most medical insurance didn't cover it. Now hospitals were starting to use it in clinical practices. That would generate a new revenue stream for hospitals and demand for more machines.

Or at least that's what the Hamms hoped.

"The time is right to introduce a new technology into the market," Bob Hamm said. "Two or three years from now it will be too late."

Once again, the couple turned to the government for help.

Their accelerator technology worked fine. But they were missing two pieces necessary for a complete production system - a targeting device and a chemical production system to make the radioisotopes.

As it turned out, two scientists from Brookhaven National Laboratory on Long Island had seen a prototype of the AccSys accelerator a year earlier and wanted a copy. Brookhaven, in turn, happened to have the targeting and chemical production technologies.

This spring, AccSys and Brookhaven signed a $1.6 million Cooperative Research and Development Agreement in which AccSys would provide the lab with an accelerator and Brookhaven would license its technologies to AccSys. They agreed to split the cost.

About the same time, the Hamms applied to take part in a Department of Energy program called Dawnbreakers, which helps SBIR participants commercialize their technologies. They were accepted and in late March they made a presentation in Washington to a group of venture capitalists assembled by the Energy Department.

Obtaining outside funding was critical, Bob Hamm said in April. Without at least $1 million, the company would be unable to pursue the PET market. It would be reduced to doing customized work for others, or forced out of business, he said.

"Dawnbreakers has been great for us. They lead you by the hand through the process. We have gotten a lot of free market data. And it made us finally finish the business plan we had started in October 1993," he said.

The Hamms did not see the latest government financing as a step backward. They viewed it as a logical progression in their long effort to commercialize technologies.

"We don't want to depend on government work. That's why we're so desperately trying to get into the commercialization phase," Marianne Hamm said.

"It's been 10 years, with lots of gray hair, lots of blood, sweat and tears, and a lot of SBIR grants, and a lot of other government contracts," her husband added.

The private financing the Hamms hoped to attract by participating in the Dawnbreakers program never materialized.

"We've given up on venture capitalists," Bob said late last month. "They don't understand a company like ours."

The Hamms are now talking to larger companies and searching for individual investors to take a stake in AccSys. In the meantime, they have landed a contract to sell an accelerator to Indiana University, and are negotiating with other institutions.

On June 5, AccSys celebrated its 10th anniversary.

"We're still here," Bob Hamm reflected, "hanging on by a thread."

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