Published March 27, 2006

A new emphasis on R&D;


Industrial research and development in the U.S. is under attack, according to a January 2006 report in R&D; Magazine: "It's under attack from offshore [R&D;] investments, primarily in Asia; a likely decline in government funding of R&D; and a drop in staffing sources, both domestic and imported."

This trend is compounded by the fact that American manufacturers are under "constant pressure [by foreign competition] not only to lower prices, but also to increase the value that they add to their products," says the Department of Commerce in a 2004 report, which adds, ". . . continuing R&D; [should be seen as] the primary means of gaining a competitive edge."

Firms throughout the Blue Ridge Region are doing their part, however, as R&D; activities-rippling out from Virginia Tech and local industry sectors- have been growing over the past several years.

"We can't compete with China-paying 34 cents per hour in manufacturing," says Roger Beeker, project manager for the Region 2000 Economic Development Council. "But we can compete in other niche areas, such as R&D.;"

He says that in his region, there is a considerable amount of R&D; in the wireless and nuclear industries, in such fields as mechanical, electrical and materials. "We're heavily focused on staying in the middle between R and D, with global competition and 'commoditizing' [of ideas] happening so quickly," says Eric Hansen, president/CEO of Innovative Wireless Technologies in Forest. He has about 40 percent of his employees focused on research in the wireless arena, looking at technologies such as cognitive radio and mesh networks-"leading edge stuff that won't hit prime time for several years," he says. "We probably have two to three times the percentage of investment in research [versus similar companies]. That's our key to success."

"We're doing most of our hiring in R&D;," says Pat Matthews, CEO of Blacksburg-based Webmail.us, an e-mail hosting company. He says 17 of the firm's 36 employees work in R&D.; "If we don't invest in R&D;, another competitor will. A lot of the companies that are hiring are putting people into R&D.; And software companies are popping up faster than in the dot-com days."

He says Webmail's R&D; efforts include looking at next generation e-mail hosting technologies, tackling issues such as e-mail storage and scalability, developing new software, reading publications, gathering feedback from customers.

Webmail.us hires many Virginia Tech undergraduates as part-timers, "another form of R&D;," says Matthews.

Webmail.us is one of 138 companies in the Virginia Tech Corporate Research Center (CRC), adjacent to the Virginia Tech campus. According to CRC president Joe Meredith, the number of tenants/businesses has grown about 10 percent per year over the last four years. He estimates that about 95 percent of the businesses are primarily involved in R&D;, employing about 1,800 people.

Local impact

"The explosion of [Virginia Tech] spin-offs over the last 15 years has taken over the economic growth in the area," says Mike Miller, COO of Prime Photonics in Blacksburg which does R&D; in the area of fiber- optic sensors for harsh environments. "The pace has picked up within the past five years, but we may be at the crest of the wave now."

He is chairman of the Montgomery County Industrial Development Authority and vice-chairman of the Montgomery County Regional Economic Development Commission. Aric Bopp of the New River Valley Economic Development Alliance recently announced that Generic Systems would open an R&D; operation in Christiansburg, related to automated coating and material handling systems, underscoring Miller's point. In addition, Luna Innovations Inc. (the Journal's 2004 Business of the Year) plans to consolidate and expand its Blacksburg-based research and development offices. It expects to add up to 20 jobs at this facility over the coming 12 to 18 months in molecular technology and sensing.

Opportunities in commercial R&D; are increasing, says his colleague Joan Nelson, "because we have access to expertise that used to be tied up with the university." She describes a new ripple effect. "Now if we need to outsource our own R&D;, we might sub-contract with each other, whether we're in the CRC, Blacksburg, or the Roanoke Valley." Nelson is controller of Prime Photonics, and former CEO of Teleworks in the CRC.

Alec Siegel is a recruiter and director of operations for the Blacksburg office of MBA Management, an executive search firm (also in the CRC). He has an unusual perspective as a Blacksburg native, a son of a Virginia Tech professor, and a 19-year resident of Northern Virginia. He returned to Blacksburg in 2002.

"Since I've been down here for the last three years, I see way more R&D-as; a percentage of investment and number of employees-than in NoVA and D.C.," he says. "The job openings I'm getting here are more R&D; than [other types]. One reason is that, while a lot of the companies in NoVA are already established, the companies here are in early stages of growth-more in the R&D; mode."

Siegel says industries in high demand include wireless technology, nanotechnology, Internet voice and video streaming, and software. "I see in a couple of years, these companies will be looking for more 'straight development' once this research turns into great ideas-and gets funding," says Siegel. "But we're still struggling to get venture capital down here."

"It's always a balancing act- where is the money going to come from?" says Nelson. "Either it's from federal SBIR ('Small Business Innovation Research') grants, an initial equity investment, product sales -or sometimes you have to sell part of the equity to get funding."

Miller credits SBIR funds for the pace of area spin-offs in recent years. "At the end of the '90s, venture capital came to a halt, and small companies discovered SBIR funds." He explains that this funding serves to direct technology to what the government needs.

Webmail.us is able to internally fund its R&D; because of its rapid growth. Matthews says the company is adding 1,000 customers per month.

Regional potential

Speaking of the growth potential for R&D; activities in the region, Daniel Barchi says, "Short of Boston or San Francisco, we're as well positioned as other parts of the nation. We're wide open." He is chief operating officer of the Carilion Biomedical Institute, which is building a biotechnology research and development park in Roanoke. It has served as an incubator to numerous start-up companies.

Says Barchi, "There is physical space available, for little money; there is a world-class university in this area; housing is affordable here; and there are a lot of people clamoring to come here. I get [unsolicited] e-mails weekly from people around the U.S. who grew up in this area or went to Virginia Tech and want to come back," he says. "I recently received one from a woman in Hawaii. [The e-mailers] are generally well-educated-most have graduate degrees, including a lot of MBAs."

Siegel, the recruiter, sees a similar phenomenon. "You can't imagine how many people are Tech grads living in NoVa who would love to get back. If you went to Tech, it gets in your blood." He says they are surprised to find out there is a headhunter in Blacksburg.

He sees a parallel between the Blue Ridge Region and NoVA. "Years ago, Reston, Herndon, Alexandria, McLean were all competing. But around 1990, when they truly realized it was a complete region, things really started taking off. And now it's called NoVA. They're on the top of the growth cycle, and we're on the way up."

R&D; activity is not just around academic communities, and is not always recognized, says Barchi. "R&D; is a romantic idea of all of these things happening in grant-funded research, but it leaves out companies that have been doing internally funded R&D; for years." He says the unsung hero is the risk-taker in the small company who is covering payroll and basic operations, and diverting some of his or her funds into the next product.

Likewise, companies performing R&D; in Region 2000 are relatively isolated, which is one of the reasons behind the proposed Center for Advanced Engineering and Research. The center would facilitate R&D; linkages between local companies and universities like Virginia Tech, as well as attract Federal research funds.

The model, says Eric Hansen, "is to build a center where creative work occurs. If you look at government, university and industry coming together, it is a hatchery for knowledge capital and innovation, which will create multiple spin-offs."

"People don't realize what we've got going here," says Siegel. "It takes time to get the word out. But it's going to happen; it's all set. The question is-how big will it get? If the venture capitalists decide to throw their money down here-we're sitting on a time bomb."

(Deborah Nason is a contributing editor with the Journal. She lives in Roanoke.)

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