Entrepreneurs like Mason are solving our "insolvable" problems.
It was like trying to brief a bunch of hummingbirds in an airplane hangar," says Stanley Mason of his first appearance before a U.S. congressional subcommittee.
Mason, the president of Simco Inc., a small research-and-development company, had been invited to talk about how oil-bearing plants like the Chinese tallow tree might help reduce U.S. dependence on foreign oil. But neither his presentation nor his charts nor the suitcase full of tallow-tree seeds seemed to make an impression. The senators kept coming in and out of the hearing room on other business.
Granted, the legislators weren't the first people who refused to give Mason's ideas the attention that the silver-haired entrepreneur thought they deserved. Large companies he had approached had told him that the project was "gang-busters," he says, but they weren't interested in a joint venture because the payback was almost certain to be further out than two years. However, the senators had invited him to speak and -- being new to the subcommittee circuit -- he says he thought the government really was soliciting his help. By the end of the day, when 75 pounds of pea-sized tallow-tree seeds spilled from the suitcase onto the floor of his congressman's office, he figured he could write the trip off as a loss.
It was frustrating. Mason has been convinced for four years that the Chinese tallow tree is part of the solution to one of the country's major problems. You can literally crush the seeds of the tallow tree, filter out the particles, and put the liquid directly into a diesel engine with no processing or refining. The engine will continue to run at the same power level, but the smoke will turn from black to white and smell more like honey cooking than like diesel fumes. The tallow tree produces far more oil and wax per acre than any other vegetable oil plant grown in the United States. Mason thinks enough tallow trees could be grown on marginal land in the United States to replace 5% of the petroleum used in this country, at a cost equal to that of diesel fuel.
But more interesting to Mason than the tallow tree's value as a fuel is its potential for industrial use. The whitish outside part of the seed can be used as a substitute for edible fats, like cocoa butter. The oil can be used in the manufacture of plastics. Chemicals in the seed can be used as a finishing oil in paint. The leftover solids can be compressed and fed to cattle. And branches cut in harvesting the seed can be chopped up and sold as wood chips.
"It's like the pig," says Mason. "You use everything."
But neither the senators nor the large companies seemed to take his plans for the tallow tree seriously. Though Chinese farmers had used its seeds for centuries primarily for making soap, the U.S. market had already rejected it twice -- in the late 1700s and the early 1900s -- as a raw material for commercial production of soap. The tree grew well in the coastal areas of Texas and Florida where it was planted, but the cost of harvesting the seeds by hand, as the Chinese did, was prohibitive in the United States. Mason had come across it in 1978 when Dr. H. W. Scheld, then a researcher at the University of Houston and now the director research and principal scientist for Simco, was studying the tree's potential as a source of woody biomass for the Department of Energy. Mason knew the oil market from a stint he did with the Hunt-Wesson Foods subsidiary of Norton Simon, and he suggested that Scheld look at the tallow tree as a source of edible oil.
Mason was also at Hunt-Wesson during the development of the tomato harvesting machine and figured he could get a tallow-tree harvesting machine designed. But his plans for tallow-tree development would go nowhere if he couldn't find an outside source of money.He had calculated that he would need something like $3 million per year for five years to get it ready for the market.And though Simco is financially successful, he says, like many small companies it doesn't have the resources to fund an idea on that scale.
Funding innovative ideas has never been easy, of course, but some people say the problem is getting worse. United States spending on research and development as a percentage of the Gross National Product has declined steadily, if not dramatically, since 1964, from 2.97% of the GNP to an estimated 2.33% in 1980. By contrast, West Germany and Japan have been spending an increasing percentage of their GNPs on R&D.
The government funds about 60% of all R&D in the United States, and well over half of that goes to defense and space projects, which have only indirect application to commercial markets. President Reagan proposes to boost the space and defense portion of government-funded R&D to 68% in 1982, up from 60% in 1980.
And where does this money go? Last year, the government spent almost $31.7 billion on R&D, about 70% of that in private industry. (The rest went to government labs and universities.) But R&D grants and contracts awarded to companies with fewer than 500 employees accounted for less than 4% of the government's total R&D expenditures.
The odds are decisively against the small-company entrepreneur.
"This country is horribly underfunding start-up research and development," says William Chandler, founder and president of Bay Venture Management, a San Francisco venture capital firm that specializes in start-ups. "People with good ideas have a much more difficult time getting money than their track records justify."
Stanley Mason is a prime example. Mason brought the world an eclectic variety of products including the first "no-glug" plastic bottle, the first form-fitting disposable diaper with tabs, a burglar alarm that hangs on a door knob and goes off when anyone touches the knob, Masonware microware cooking dishes, and fertilizer printed on the back of black plastic for gardens.
At 59, he's no rookie. He worked for U.S. Steel as a draftsman, for Armstrong Cork as an ad writer, for Martin Aircraft Tool as a tool engineer, and later as a proposal director for projects including Titan and Project Vanguard. He was in charge of packaging and new products at Hunt-Wesson Foods, and was vice-president of development and technical services at American Can.
He gave up big-company security in 1973 to start Simco, a small company that specialized in conceptualizing and developing new products. He intended to stay small to ensure that his time wouldn't be drained away by administrative concerns. And he has. Today Mason owns three companies -- two R&D firms, Simco Inc. in Weston, Conn., and Simco Space Bio-Systems Research Services in Houston, Tex., and a third company, the Masonware Corp. in Newport Beach, Calif., which markets his line of microwave cookware. The two R&D companies have a total of 12 full-time people, with a network of about 120 scientists, technicians, and specialists who are brought in to work on various projects. Half of the companies' work is for large-company clients like Johnson & Johnson, S.C. Johnson & Son (Johnson Wax), Frito-Lay, Lipton (Tea), American Can, and Neutrogena. The other half is developing proprietary products of their own.
Though Mason has had no trouble getting contracts for major corporations' own projects, none he's approached have been willing to take the risks that a long-term commitment to an unproven (and off-the-wall) product like the tallow tree would entail. And he's convinced that attitude is typical of most large companies.
"Failure in large companies is not tolerated," he says. "There's dictatorship of the bottom line.Lots of people think they know how to control the bottom line, and they generally control it by not taking action, by not taking risks. They're protecting what has been built before by those who had guts or were foolhardy enough to take risks."
Therefore, goes the thinking of Mason and others who advocate federal support of R&D, since small companies don't have the money, and large companies won't spend it, the government should fund long-term R&D efforts. "The government has the power, the money, and the incentive to do it," says Mason. "How long do you think we could support a war without imported oil?"
The government does believe in supporting some R&D, of course. That's why it's spending more than $30 billion on it. But most of the money isn't going to small companies like Mason's.
If large companies produced more innovations, then few small companies would have reason to complain. But in fact the opposite is true: Small companies produce about twice the innovations per employee as large companies.
Passing over small companies is "cheating the taxpayer," says William Whiston, director of economic research at the Small Business Administration. Whiston has studies going back 20 years that support his claim. One of the most widely quoted is a 1977 National Science Foundation study that tentatively concluded that between 1953 and 1973 firms with fewer than 1,000 employees produced 24 times as many innovations per employee as firms with more than 10,000 employees, and 4 times as many as the companies in between. That finding later turned out to be incorrect. More recent analyses show that small companies are somewhere between 1.8 and 2.8 times as innovative as large companies per employee.
Whiston will settle for the smaller numbers. "I think all you have to do is establish that small business is at least at innovative as big business," he says.
If that is the case, then why, asked a panel studying industrial innovation for the Commerce Department in 1979, is so much of federal R&D awarded to large firms, federal laboratories, and universities? "We believe," the panel said, "that a larger share of federally funded R&D awarded to small businesses would produce substantially greater results." But the trend appears to be going in the other direction.
As it turned out, Stanley Mason's experience defied the trend. Though the congressional subcommittee didn't seem to pay much attention to what he had to say, a New York Times reporter passed the story on to a friend at Newsweek. When Newsweek quoted Simco vice-president Michael Handler in an article on alternative energy, someone at the NSF was intrigued enough to ask the company if it would be interested in a relatively new research grant program they had for small companies.
The NSF didn't start its Small Business Innovation Research program (SBIR) out of a concern for small companies or a conviction that they would do innovative work (see box page 32). In fact, Congress required it to set aside some of its applied research budget for small business. The NSF charged Roland Ribbetts, then a director of applied research programs, with seeing that the money was well spent.
Tibbetts and others he consulted devised a three-phase program that he thought might be a pilot for other agencies, as well as for a larger scale effort at the NSF. It was designed to lead a small company from a six-month feasibility study to a two-year larger scale research effort, and then to private sources of capital, such as venture capitalists and large corporations, for commercialization.
The program attracted 329 proposals from 34 states in 1977, and of those 42 got Phase I grants of up to $25,000. The following year, the entire $4.3-million budget was allotted to Phase II grants, which average $200,000, for a continuation of half of the first 42 projects. In 1979 and 1980 the number of applications and Phase I projects funded increased.
Twenty-five thousand dollars didn't sound like much money to Mason, but in spite of the relationships he'd built up with large companies over the years, no one else was giving him anything. Besides, the application called for just a 20-page proposal, and he thought the exposure to the scientific community might be good for the project. Mason and his colleagues put together and sent off what was 1 of 530 applications submitted by small companies in 1980.
Simco got its $25,000 and put in about that much more of its own. During the six months that the feasibility study lasted, the company continued its study of the growth, production, and seed characteristics of the tree. But the most important effects of the grant, says Mason, were a wider acceptance by serious scientists and the opportunity of coming up with a long-term research plan. "If it weren't for the NSF, we would not have been able to get the kind of brains working on this that we have," says Mason.
What the NSF gets out of the program is, of course, hard to measure, and figuring out what the nation's rewards are is even harder. Most of the products have yet to hit the market, though many of them sound promising, for instance a microcomputer that understands and answers questions in English rather than in computerese and a new process for making solar panels.And the charter recipients of Phase I and II grants, who received a total of $5.3 million from NSF, have attracted about $16 million in private funding.
But those rewards apparently haven't been enough. The NSF has reorganized itself several times during the four years of the SBIR program's existence, and after each reorganization, the percentage of money and manpower allotted to applied research has been smaller. Consequently, the SBIR budget, calculated as a percentage of the NSF's applied research funding, has not increased as rapidly as the program's supporters had hoped.
The effect has been not simply to distribute fewer resources to a smaller number of participants, but to shake the program's structure.Program managers and topic areas have been shuffled. Grants have been delayed by turnover and by uncertainties about loss of funding. Phase II money, which hadn't been awarded on schedule even before the major reorganizations, has been delayed for as long as 15 months.
The delay has slowed progress on some projects to a backwards crawl. Allocation of already scarce small-company resources has become very difficult when the fate of what in some cases is a significant portion of their efforts is unknown.
And the steady production of press releases by the NSF and other government agencies hasn't helped. News about projects went out when grants were accepted and project reports were filed, giving the grant recipients' competitors as long as 15 months to catch up.
"Small companies can't afford to be strung along that way," says one Phase I recipient who is still waiting to hear about a Phase II grant decision that was expected last September. He says he has been told over the phone since last December he would get the money, even that the check was in the mail, but so far, he hasn't seen a dollar. "There's no excuse for the way they operate," he says. The delay has cost him a specialist he couldn't afford to keep dangling and caused difficulties in his relationship with the third-party source of funding he was required to line up to complete his phase II application.
There are also complaints about the amount of time and money for Phase I grants -- mostly that it isn't enough -- and some concern that because proposals are usually reviewed by university professors, only academic-type projects get approved.
You might think with all the problems, that small companies would be wary of government support. And some, like Biospherics Inc., a $6-million company in Rockville, Md., have decided to reduce their dependence on federal grants and contracts. Biospherics, which recently received public attention for a patent on a process using "left-handed" sugars to make noncaloric sweeteners, has begun to emphasize the analytical and lab services that are more marketable to private industry.
Yet other small companies, some of the same ones that are most vocal in expressing dissatisfaction with the current state of the NSF grants, think the idea of the program is excellent, or at the least, a step in the right direction.
But is that step enough? No, says Dr. Gilbert Levin, president of Biospherics. "The nation has to be willing to risk more than $25,000 and six months."
Stanley Mason agrees. Though Simco has applied for a Phase II grant, the $200,000 he would get would fund only a small portion of the tallow-tree development plan he has in mind. Still, he's optimistic. The NSF program did help Simco get past some of the scientific community's initial skepticism. And though he has no large company partner firmly committed to a joint venture, he's getting lab support from the R&D departments of six major corporations. Deutz Corp. has tested tallowtree fuel in tractor engines, and a large hospital-supply company is considering using tallow-tree fuel in 200 of its diesel trucks. A couple of food-oil companies are testing the seed's edible oils. S. C. Johnson, Neutrogena, and Mars Inc. have worked on applications in their industry.
"The government should support this," says Mason. "Even though a little company like ours is maybe a hundred times more efficient per dollar than any large companies, there aren't very many dollars to be efficient with." In the absence of large-scale government support, Simco is "foolishly" supporting the project on its own. "This is a project which must be done," says Mason. "We're going to get this damned thing off the ground. And, we hope, make money on it."