TechAlert - June 2007

Welcome to the June 2007 edition of TechAlert, the bi-monthly newsletter of the Illinois Technology Development Alliance. Our issues feature articles of great interest to entrepreneurs; to investors interested in leading-edge, high-technology opportunities, and to established companies looking for innovative solutions to pressing business needs.

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ARTICLES

- Advanced Diamond Technologies, Inc. (ADT) Receives ITDA Commercialization

Award

- Entrepreneur Briefcase LIGHT: Raising Your Patent IQ

- Innovative Illinois Companies Present at June 18 Monday Morning Meeting

- ITDA Sponsors NASA and Navy Federal Development Seminar

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Advanced Diamond Technologies, Inc. (ADT) Receives ITDA Commercialization Award

Advanced Diamond Technologies, Inc. of Romeoville, IL is the latest company to receive an ITDA Commercialization Award. ADT’s unique technology turns natural gas into diamond to make products and machine coatings that are extremely durable and significantly reduce friction which makes machines last longer and run more efficiently.

“To understand our business, you have to get away from the notion of pieces of diamond,” says Neil Kane, president. “Our process is a vapor deposition process similar to the type used by semiconductor companies. We deposit a thin layer of diamond on top of things.”

Commercializing Technology Spun-out from Argonne National Laboratory

ADT doesn’t start with diamond powder; the process doesn’t take pieces of diamond and crush them up. “We are literally rearranging the carbon atoms of natural gas on the surface of materials,” Kane says. “Through our thin film process, the diamond only exists when it is on something.”

The technology uses a patented process originally developed at Argonne National Laboratory, Argonne, IL to create UNCD® (for ultrananocrystalline diamond). ADT improved the process for commercial purposes and has received awards for excellence in technology transfer and for developing the model for spinning technology out of Argonne and into the marketplace.

“The film that we make is mirror smooth,” Kane says. “We use it to provide hardness and reduce friction by putting a film of diamond on top of surfaces used in industrial components. We make rotating equipment last longer which reduces warranty costs.”

In business for about three years, ADT (www.thindiamond.com) has been applying diamond film to mechanical seals that are used in industrial pumps for some time. The ITDA grant supports the development of that same technology in over-the-road military vehicles. The technology would potentially reduce the requirement for spare parts and increase fuel efficiency.

“ITDA has been a great help in giving us guidance and counsel about where our technology can be applied in the military,” Kane says. “They’ve helped us identify contacts and understand the process. The grant evolved out of that.”

ADT is past proof of concept. “In terms of applying the diamond, the vehicular application is similar but smaller than the industrial pump,” Kane says, “but the operating environment is much different. The grant milestones are targeted at testing and proving the technology in the military’s demanding environment.”

Diamond Has Broad Industrial Application

“Up to now most industrial diamond has been used for abrasive applications,” Kane says. “We are turning that on its head because we make diamond that is smooth.” ADT has been internationally recognized for innovation by The Wall Street Journal and the World Economic Forum among others.

The firm also is pursuing applications in the fast-growing field of micro-electrical mechanical systems (MEMS) including microscopic, extremely precise mechanical devices that today are made out of silicon. “Examples might include the ink jet printer heads on your office printer,” Kane says, “or the mirror array that drives the overhead projector in your conference room, or the DLP (digital light processor) projectors that are becoming popular in televisions. There also are many of these silicon chips in automobiles. Instead of silicon, we are making them out of diamond.”

ADT does that by taking the vapor process that they use on seals to deposit diamond on silicon wafers. “We then micro-machine the diamond,” says Kane, “and perform other operations to turn it into these micro-devices. In doing so, the diamond actually becomes the structural material.”

Besides hardness and low friction, diamond has a raft of other properties—such as being an excellent thermal conductor and chemically inert—which make it a desirable engineering material. Integrating UNCD into other systems opens up new vistas for diamond applications heretofore unimagined.

“Our ability to control diamond’s shape, geometry, and placement as it is integrated into products means that we can start using diamond like we use silicon, silicon carbide, and gallium arsenide, which is used in wireless devices and cellular phones,” Kane says. “Our vision is that diamond should be included in arrays of materials, and we are working to overcome some of the limitations to diamond so that it can be.”

Next Steps

“We are making the transition of going from development to a company that is shipping product,” Kane says. “Although we have paying customers, up until now a significant portion of our revenue has been from government grants and contracts.”

Kane anticipates that in the next 12 to 24 months the company will earn major revenue from commercial products that incorporate their technology. “We’re planning on making several product introductions soon,” says Kane. “We will be raising another round of VC capital after that. We’ve done two relatively small rounds of venture and angel capital so far."

The company is developing distribution strategies for current and upcoming product lines. “We have an alliance with the largest manufacturer of mechanical seals, we’re building distribution relationships, and anyone can order wafer products directly from us,” Kane says.

He makes it clear that Advanced Diamond Technologies is in business to make superior products that are enhanced or enabled by the company’s technology. “We are definitely a product company,” he says. “Our business is to make break-through products. We are not limited to R&D.”

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Entrepreneur Briefcase LIGHT: Raising Your Patent IQ

The US patent system provides an incentive to invent by granting inventors exclusive rights to their inventions in exchange for full disclosure of the invention. Obtaining a patent is one of the few ways that an inventor or company can create assets with only intellectual investment. Patents become an asset of the company—often a revenue-producing asset—as businesses can often borrow against their patents or sell or license them.

In the United States, application for a US patent must be made by the actual inventor(s)—the person(s) who actually thought up the invention as it is claimed. The scope of a patent is defined by its claims. The patent claims must define an invention that is novel (new), useful, and not obvious in view of the entire prior art that came before.

Two fundamental disclosure requirements of a patent application are that it teaches how to make and use the invention and expresses the best mode of carrying out the invention. An application must be written at such a level that a person of ordinary skill in the relevant technical field can understand and carry out the invention, including the best way(s) known to the inventors at the time of filing.

With few exceptions, the exclusive rights granted by a patent can be enforced for up to 20 years from the date of filing the application, as long as maintenance fees are paid to the US Patent and Trademark Office.

In the June Entrepreneur Briefcase, Mike Muczynski, partner at Marshall Gerstein & Borun LLP of

Chicago, IL, explained common misconceptions about the US patent process. If you are in a business where patents matter, take our brief Patent Aptitude Quiz, and then read Muczynski’s Entrepreneur Briefcase to learn what you do and don’t know about US patents.

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Innovative Illinois Companies Present at June 18 Monday Morning Meeting

It would be challenging to find three more diverse businesses than those represented by the entrepreneurs who shared the microphone at the June 18 Monday Morning Meeting.

Velocent Systems Inc. of Naperville provides software that monitors and collects performance information all the way through a mobile data network out to and including the individual user’s mobile device. Sword Diagnostics of Summit-Argo, IL makes a rapid detection system that identifies disease-causing agents in food; and Home School, Inc. of Des Plaines, IL (www.home-school-inc.com) is an e-commerce and community site that serves 1.6 million families in the $2.0 billion global home education market.

The event, co-sponsored by Northern Illinois Technology Enterprise Center (NITECH) and the Illinois Technology Development Alliance (ITDA), was held at the Naperville Campus of Northern Illinois University. More than 70 investors, entrepreneurs, government and public officials, and others interested the high-technology start-up space attended. Joel Dyer moderated the session.

Velocent Systems Launches End-to-End Mobile Data Services Assurance Solution

In May Velocent Systems (www.velocent.com) announced its flagship product, Velocent Session Engine (VSE) 2000, which is a low-cost software-based platform that provides real time visibility into mobile data session quality. VSE 2000 identifies the network components (hardware and software) that are affecting or may affect end-user service allowing service providers to better plan and implement new services and pro-actively address service problems in real time.

VSE 2000 is unique in providing end-to-end, non-obtrusive visibility into the complete data session’s quality and can monitor up to one million concurrent session on a per-user, per-session basis. “It’s not uncommon for a mobile service provider to have a small portion of its mobile customers generating the majority of its net revenue,” Peterson says. “The VSE 2000 is so complete it can provide visibility to pinpoint which cell sites have the most number of service-affecting instances ranked by ‘VIP’ subscriber usage to determine where to spend for maximum effect on net revenue.”

The single-box hardware is installed in a standard 19-inch communications rack and is based on either a 2U HP or IBM server running an Intel® network processor-based platform. Installation can be completed in a couple of hours. Velocent Systems partners with value added resellers, reporting companies, original equipment manufacturers, and engineering consultants as well as direct sales to make its products available globally. Pricing varies by configuration.

Sword Diagnostics, Inc. Provides Diagnostics for Industrial and Clinical Markets

Sword Diagnostics, Inc. (www.sworddiagnostics.com) provides highly sensitive, low cost rapid diagnostics for the industrial and clinical markets. Sword’s Saber Detection System™ provides for the rapid detection of food-borne pathogens, which are disease-causing agents. The system provides results in hours, not days which can help a company be proactive in isolating and resolving problem to enhance food safety and reducing liability for food industry giants such as Kraft, Nestle, and Perdue.

Sword combines patent-pending intellectual property, an experienced management team, and a compelling business model to address this need.

Home School, Inc. Serves US and International Home Education Markets

With customers from all 50 states, all Canadian provinces, and other countries that range from the UK to South Africa and China, Home School Inc. (www.home-school-inc.com) provides four pillars of support for the home-schooling parent.

The company offers an Internet-based comprehensive planning, recording, and storage application that helps parents organize and improve recordkeeping. The application is delivered through a secure connection that also provides real time communication so that traveling parents can continue to be involved in their children’s tutoring and home-school work.

Home School also provides online instructional resources, chats, forums, and commentary intended to help parents make choices about curricula; books and movies, and teaching methods. National and state calendars of home-schooling events are provided. Future plans include tutoring and other specialized assistance.

Home School’s online store provides more than 30,000 competitively priced goods and services appropriate for the variety of methods used to home school. Materials include books, other curriculum materials, education software, teaching aids, and tools for students with special needs. The company also offers a client loyalty program that rewards customers with Gold Stars that can be redeemed for products from the store.

ITDA Surveys Monday Morning Meeting Participants

To assess the quality, value, and performance of the Monday Morning Meeting series, ITDA is offering participants the opportunity to participate in a brief and targeted online survey. “Our goal is to measure our progress, identify areas that need attention, and strengthen the bond with our audience,” says John Noel, ITDA interim president and program manager. “Candid and thoughtful replies will help our evaluation and will be treated with the utmost confidentiality.”

Funded by Northern Illinois University, NITECH (www.nitech.niu.edu) was formed to support the commercialization of new technologies and the growth of technology-based enterprises in the Nor

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ITDA Sponsors NASA and Navy Federal Development Seminar

More than 60 entrepreneurs and other interested parties representing dozens of technology-based companies attended the National Aeronautics and Space Administration (NASA) and Navy Federal Development Seminar hosted by the Illinois Technology Development Alliance on June 7 at the Chicago Cultural Center.

“The purpose of the session was to provide detailed information about federal and state programs that are available,” says John Noel, ITDA interim president and program manager. “We have helped numerous Midwestern entrepreneurs and their teams navigate through NASA and DoD to obtain technology development contracts, and we want to make sure that any regional company that has a technology or product that could be of interest to these agencies understands how to pursue the opportunity.”

Many companies are aware that Small Business Innovation Research Program (SBIR) and Small Business Technology Transfer Program (STTR) grants are a potential source of off-balance sheet capital for entrepreneurial businesses. What may be less well-known is how companies apply and qualify for these grants and what additional benefits can come along with the money.

Federal SBIR/STTR Program Overview

SBIR/STTR Programs are the largest source of early stage R&D funding for small businesses. All federal agencies with an extramural research and development budget of more than $100 million (SBIR) or $1 billion (STTR) must participate in these programs. In addition to receiving capital, participating companies also benefit by retaining data rights for four or five years, ownership of equipment purchased under the grants, increased credibility in the marketplace, and the potential of sole-sourced follow-on awards.

Eleven federal agencies participate and in FY06, about $2.3 billion funding went toward these programs. The general grant provisions are common across agencies, although there may be differences in processes, funding amounts, duration, and other provisions from agency to agency.

SBIR guidelines state that qualifying companies must have 500 or fewer employees and the Principal Investigator (PI) must spend more than half-time employed by the proposing firm. During Phase I, a minimum of two-thirds of the effort must be performed by the proposing firm; during Phase II the minimum is one-half. All work must be performed in the US.

STTR guidelines are similar to those of SBIR Phase 1 except that there is a requirement for the proposing company to be in partnership through licensing or shared intellectual property with a research institution that is a federally funded research and development center (FFRDC); a college or university, or a non-profit research institution. There is no size limit on the research institution. The small business must manage and control the STTR funding agreement and perform a minimum of 40 percent of the work with the research institution performing a minimum of 30 percent.

NASA SBIR/STTR Programs, Space Act Agreements (SSA), and Simplified Technology Transfer Agreements (STTA)

NASA SBIR/STTR (www.nasa.gov) is a three-phase program. Phase I is an up to $100,000 feasibility effort that spans up to six months for SBIR and up to 12 months for STTR. Phase II is a two-year contract of up to $750,000. Applicants must have successfully completed Phase I to apply for Phase II. Phase III is non-SBIR funded commercialization activity based on the Phase II result. In FY06 NASA contracted about $105 million in SBIR and $13 million in STTR.

NASA Space Act Agreements are generally one-on-one negotiated contracts which offer three conditions: “non-reimbursable” where NASA offers services or goods as part of a collaborative agreement; “partially reimbursable” where mutual interests are served on a collaborative effort, and “fully reimbursable” where the customer pays full cost of the effort based on NASA price estimate. There is no public announcement or time limit on SSAs; each agreement tends to be unique. The ITDA can advise client companies on how to best approach NASA to find an interest in their technology or to identify a researcher who is working on a technology that they (the company) needs.

The purpose of Simplified Technology Transfer Agreements (STTA) is to facilitate the transfer of technology by the NASA Glenn Technology Transfer & Partnership Office in Cleveland, OH. STTA targets low risk activities and quick turnaround; the dollar amount of the agreement cannot exceed $50,000, and the terms and conditions of the agreement cannot be altered.

Navy SBIR/STTR Programs

At $1.3 billion of the total $2.2 billion funding, the US Department of Defense (DoD) is the largest SBIR/STTR contracting agency. The Navy uses SBIR/STTR to engage small businesses in developing innovative research and development that addresses a Navy need by implementing that technology into a Navy platform or weapon system.

Navy topics are found in every DoD SBIR/STTR (www.navysbir.com) solicitation, and more than 80 percent of Naval topics address a specific military application need. In FY06, Navy SBIR funding was almost $300 million and STTR funding was about $35 million. Within the Navy, management of solicitations is decentralized, and interested companies should be aware that specific guidelines can vary. About 40 percent of Phase I proposals go to Phase II, which is by invitation only.

Navy Phase I provides funding of up to $100,000 for activities of up to six months in duration. Phase II is up to $750,000 for up to two years. Phase III commercialization encompasses non-SBIR/STTR funding and derives from, extends, or logically concludes efforts performed under prior SBIR contracts.

The Navy also offers the Transition Assistance Program (TAP) to qualifying Phase I and Phase II award recipients. TAP is an intensive 10-month program that provides each small business with a free business consultant focused on helping the company transition their technology.

Illinois DCEO Sponsors Innovation Challenge Grant Program

John Barr, program manager with the Illinois Department of Commerce and Economic Opportunity (DCEO), discussed the Illinois Innovation Challenge Grant Program, which provides SBIR/STTR-related grant writing assistance and Phase I matching grants (www.illinoisbiz.biz/dceo).

“It’s a new initiative,” Barr says. “Given our base of industry and our private and public infrastructure, Illinois isn’t where we could be so our goal is straightforward—to increase the federal research and development dollars that flow into the state specifically for technology companies. We are hoping to encourage companies that may not have considered applying for SBIR and STTR programs to look at these opportunities.”

The program offers two services: Technical Assistance Program and Matching Grant Program. The state has provided $1 million in funding toward these programs.

For the Technical Assistance Program, DCEO is working with the Champaign County Economic Development Commission and the Science Applications International Corporation (SAIC) to perform SBIR/STTR-related grant writing and assistance services for technology-based entrepreneurs, innovators, and new venture start-ups. “Qualified staff from DCEO’s entrepreneurship network will identify, screen, and refer prospective clients to SAIC for grant-writing help,” Barr says.

The Matching Grant Program provides up to a 50 percent match to eligible Illinois companies that receive SBIR/STTR Phase I funding. The matching award may be used for any expenditure allowed within the SBIR/STTR program as well as for certain expenditures that aren’t covered by SBIR/STTR guidelines. These may include purchase of equipment, legal costs including intellectual property, commercialization costs, or costs associated with securing more robust financing.

Recently, Delcross Technologies, LLC (www.delcross.com/about.html), an engineering services and simulation software company with offices in Neoga and Chicago, was awarded a $40,000 matching Innovation Challenge Grant as a 50 percent match to their $80,000 SBIR. The grant will be used to help the company design and develop new software technology and expand its business.

Presentations from Federal Technology Development Opportunities Seminar can be found at www.illinoistechnology.com/stay_informed/document_library.