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SPIE Professional January 2006

High Tech Moves

Eric Udd describes how he built a successful startup in a rural area, demonstrating that technical entrepreneurs can overcome the business mantra "location, location, location."

By Eric Udd

Eric Udd, an SPIE Fellow, has created two successful high-tech small businesses. The first was Blue Road Research, in 1993; the second, Columbia Gorge Research, was created last year. Prior to starting these companies, Udd worked for 16 years at McDonnell Douglas, effectively creating a fiber-optic sensor group within the company. The group operated as a semi-independent entity and provided Udd with some of the training he would later put to use building his own small businesses.
In this article, he focuses on some of the key aspects of starting his first venture, Blue Road Research. Udd is currently working on a book on starting and running a small high-tech business to be published by SPIE Press. Starting a small high-tech business is not an easy proposition, and it requires a significant financial and personal commitment to be successful. The first question that needs to be asked is whether or not there is sufficient motivation and resources to try.
In my case, the motivation for creating Blue Road Research arose primarily from my wife's parents having health problems and her desire to move back to the Pacific Northwest. Further complicating things was that her parents wanted to sell the home she grew up in, located in an unincorporated area of Oregon with a Troutdale address. Looking at the area around Troutdale, it became readily apparent that the only way to continue working on fiber-optic sensors and live in Troutdale would be to create my own company.
This was a huge decision for me. I was a McDonnell Douglas Fellow at the time, had a job and location I liked, and really did not want to move. It took me several months to decide basically in favor of my family and to convince myself that I had a reasonable chance of success. It felt a bit like walking off a cliff, or, for those of us with children, having your first child?it's a big decision and life is never again quite the same.
Since my wife wanted to live in the house she grew up in, that pretty much defined the site. By selling our house in Southern California, where housing was relatively expensive, I determined that we could build a building to house the business and remodel and fix up the Troutdale house, which was in relatively poor condition. Fortunately the site had 2.9 acres of land, so room to expand was not an issue.
I also reached an agreement with my in-laws where I could essentially loan back funds from the sale of the house to underwrite starting Blue Road Research. I also used funds from a McDonnell Douglas savings plan and some royalties from patents I had generated for McDonnell Douglas. All combined, I felt that I had the necessary startup funding.
This initial financial planning is essential for a successful startup. Without it many people are forced to quit before their business has a chance to establish itself, which, from many discussions I have had with people who have started a small high-tech business, usually takes three to five years to reach a stable condition, five being more typical than three.
Sustainable Business Model
The next step after establishing motivation and initial financing was to build a business model that would allow an adequate income to live on and eventually result in a self-sustaining company. There was also the issue of choosing a name for the company and putting the legal papers in place. These efforts took place concurrently over several months prior to my leaving McDonnell Douglas in August 1993.
I've been asked, perhaps more than any other question associated with the business, how the name "Blue Road Research" arose. The process started by outlining perhaps a dozen potential names. "Blue" was chosen because it is my favorite color, "Road" has to do with the Wizard of Oz, my favorite series of books when very young, and the "yellow brick road" that leads off to the unknown. Basically I felt I was setting out on a road that I hoped would lead to something great, but it was definitely filled with unknowns.
Finally "Research" was added because that is what I wanted to continue to do, although the mission I defined for the company was to move fiber-optic sensor technology from concept to the field. My intent from the very beginning was to facilitate the transfer of fiber-optic sensors to fielded commercial applications.
To accomplish this mission the model shown in figure 1 was developed. It also was designed so that there would be sufficient income to allow a stable financial condition to be achieved before our savings ran out. From the customer's point of view this model is intended to serve the end user first by allowing a general introduction to the field of fiber-optic sensors. The intent here is to create customers that are as knowledgeable as possible and to introduce a new technology. By offering courses at reasonable rates, an easy entry point for potential customers was created. The very first courses offered by Blue Road Research also offered laboratories to show customers how to build and use fiber sensors and associated technology. Blue Road Research has offered these courses continually since it was founded in 1993 and continues to improve on them.

Fig. 1 The Blue Road Research business model. In the very early years, education and consulting dominated, but within three years, R&D activities were at the forefront. Today, the company's focus is on commerical products and applications.
To complement the courses, the Pacific Northwest Fiber Optic Sensor Workshop was created to promote the technology in the Pacific Northwest. The second part of the business model involved offering consulting services to customers who needed more than a general introduction to the field. During the very early years of Blue Road Research, the majority of the revenue generated by the company derived from these two activities. By the end of the second year, a significant portion of Blue Road Research revenue was generated by research and development contracts from commercial and government sources. Initially commercial contracts were dominant, but by the end of 1996, Blue Road Research won its first Phase II SBIR, and since that time government contracts have played a major role in funding Blue Road Research growth.
Viable Product Base
Since its inception, the fact was recognized that in order to have a viable product base, intellectual property would be essential. Through negotiating with McDonnell Douglas, 18 patents were licensed, and sublicensing rights were obtained on patents I generated while at McDonnell Douglas. Seven other patents associated with fiber-optic gyros and secure fiber-optic communication were not licensed since other companies already had or were in the process of negotiating licenses. In addition, patents were filed on a continual basis to strengthen and expand the overall patent base?a process that has continued and has become increasingly important to business operations.
After surveying all fiber-optic sensor technology and reviewing the patent base, it was determined that fiber sensors based on fiber gratings and the Sagnac interferometer would be the initial principal target product areas for Blue Road Research. While there have been times when research work on the Sagnac interferometer was a major part of Blue Road Research, funding products based on fiber grating sensors and their application gradually became the dominant focus of the company. This, in turn, resulted in the generation of products such as dual- and three-axis fiber grating strain sensors, educational and industrial kits, and fiber grating demodulators for high speed and sensitivity.
By around 1996, Blue Road Research approached a break-even condition and by 1998 the product side of the business started to become significant. Between 1994 and 1998, Blue Road Research, moved to a stable financial condition and the distribution of revenue sources in 1998 as efforts to implement the business model became increasingly successful (see figure 2).

Fig. 2 By 1998 product sales were beginning to become a significant segment of Blue Road Research business. By mid-1997 the company reached the break-even point and ceased to require additional investment to sustain operations. The performance of the company continued to improve in 1999 and 2000, eventually resulting in the acquisition of Blue Road Research by Standard MEMS in January 2000.
In 1999, and more aggressively in 2000, Blue Road Research was approached by larger companies interested in acquiring the company. At this point the question became that of trying to determine what the best next step would be. Standard MEMS seemed to offer the best prospect to grow the company to the next level in terms of technology and raising capital expertise. As a result, effective January 2000, Blue Road Research became a wholly owned subsidiary of Standard MEMS.
Myriad Startup Aspects
There are many other aspects of starting a small high-tech business that can make significant differences in the rate at which stability can be achieved. These include winning proposals, consulting, setting up an accounting system acceptable to the government, low-cost patent protection and procedures, optimum business structures, marketing, and other topics. It takes time to learn to run a small high-tech business effectively and a portion of my new company, Columbia Gorge Research, is dedicated to trying to provide a structure and information that will help make that task easier and faster.

Acknowledgment
Portions of this article are drawn from E. Udd, "How to Start a High Tech Business in Troutdale, Oregon," Proceedings of OFS 15, 2002. Illustrations are based on figures courtesy of Eric Udd.

DIY: Do It Yourself
Thinking of stepping out on your own or creating a new division within a large company? Udd frequently teaches the workshop "How to Start a Small High-Tech Business Almost Anywhere" (WS756).
The introductory course focuses on the elements that can help minimize investment capital and the time needed to set up a viable and vibrant organization capable of functioning on its own?and growing?whether it's done within a large company, as a spin-off, or as a new stand-alone business.
Elements discussed include motivation, startup planning, the types of organizations that can be operated, and the set up of structures that will greatly aid success. Other crucial topics covered include consulting, small business contracts and subcontracts, intellectual property, licensing, product development, long term planning, and mergers/acquisitions.
These topics are intended to help attendees understand how to smooth out some of the rocky bumps associated with traversing a difficult, but often wonderful, road to a viable small high-tech business.

Eric Udd
Eric Udd is the founder of Blue Road Research and Columbia Gorge Research.

DOI: 10.1117/2.4200601.007