The article below appeared in the August 2009 issue of Technology Transfer Tactics. Click here to subscribe.

NM Tech is a bit of a neophyte at the spinoff game, with just one company beyond the infancy stage. But that company, Computational Analysis & Network Enterprise Solutions, LLC, or CAaNES, attracted $750,000 in revenue in its third year of operation, and the annual profit margin is roughly 30%. Those profits are shared by the company’s two founding partners, Mark Fidel and Srinivas Mukkamala, PhD, who each have a 25% stake in the company, and the New Mexico Tech University Research Park Corporation, which maintains the remaining 50% ownership stake.

When you consider that NM Tech did not need to put up any seed money for the venture, the results seem all the more impressive. But critical to the CAaNES story was the willingness on the part of key players to see commercial potential in a niche area of expertise the university had been developing for some time.

Customers want applied research

Clearly, there would have never been a CAaNES were it not for NM Tech’s Institute for Complex Additive Systems Analysis (ICASA), a group of PhD candidates that conducts research on issues related to computer networks and security. In the past, ICASA would help out state agencies on occasion with their computer network problems. Mukkamala was a graduate student at NM Tech at the time.

“The pro bono work became overwhelming at some point, so we had to find a way to do it as a service model,” says Mukkamala, who is now a full-time senior research scientist at ICASA. “When you do information security nobody wants basic research; they want applied research, so I started applying my graduate students to the state of NM and the [other] customers we had, and things started to look pretty good.”

Fidel, a local attorney, had provided some legal and business guidance to Mukkamala in his work with ICASA, and the two hit it off. “We realized that the work [ICASA} was doing would work well in a private setting," says Mukkamala. The university recognized the commercial potential as well, and with the University Research Park Corporation (URPC) -- which is separate from NM Tech but wholly-owned by the school -- it had the legal framework needed to grow and support the company.

"The Research Park Act [which was passed by the state legislature] gave us a tool to enter into a partnership with a private company and utilize the intellectual resources of the university, and to ultimately spin off this company,” explains Jerry Armijo, URPC’s president.

Labor pool offers advantages

Officially launched in 2006, CAaNES continues to contract out most of its work to ICASA. Since Mukkamala works with the grad students at ICASA, he knows which students are best suited to the various projects that come through the CAaNES office. Further, while the highly trained labor pool is clearly an advantage for CAaNES, the company also provides a good opportunity for the students to apply their research in a practical setting, and they get paid for their work.

“We are kind of a bridge between what a typical university does and what a typical company does in terms of training,” says Mukkamala. “In the university setting all you do is theory, theory, theory. You never talk about how you can apply this theory,” he says. “What we try to do is strike a balance. Here are the basics of this tool. This is the theory behind it. This is how we apply it.”

How does Mukkamala manage his dual roles in the academic and commercial arenas? It was very difficult at first, he says, because people tend to view academicians as able to “talk” but not “walk.”

“It took us two or three years to prove that we are not just academicians; we can truly do problem solving,” he tells TTT.

Since CAaNES is able to contract out most of its work to ICASA, it is able to maintain a very slim employee base, but Fidel points out that the company also has to pay an extra fee to NM Tech for the student labor supplied by the school. “The exchange for making our life easier with the labor resources is that we are paying a little bit more as a company,” he says. “We’re still competitive because we have a ready supply and a very good base of labor, so we don’t have to go through the pain and suffering of interviewing and having to worry about the traditional labor issues of highly talented technical folks. The tradeoffs are there, but they are worth it so far.” Further, when CAaNES gets to the point where it is ready to take on more employees, it will have a labor pool ready to choose from, adds Fidel.

When it comes to winning projects, CAaNES needs to go through competitive bidding like any other commercial entity, and Fidel points out that the company gets outbid on occasion. But he stresses that CAaNES is well-positioned for growth within the computer network security and digital forensics arenas. “What we offer is not unique within the national structure, but New Mexico is not a large market,” he explains. “We have developed automated techniques so that it takes fewer people to actually run our tests than it would take for others, and that level of automation helps us do either more jobs at the same time or individual jobs quicker. That helps us be very competitive, at least within the Southwest region.”

Goal is independence

While NM Tech did not need to provide start-up funds, it did initially provide low-cost work space to CAaNES, and it allowed the company to use university equipment. “That saved us some equipment costs up front until we could get projects underway and some paying jobs. But as soon as we could, we did buy our own equipment so that CAaNES, LLC, was the owner and not NM Tech,” says Fidel. “That was important because the stated goal that the Research Park Corporation has is not life-long ownership of the company, but to let the company develop to the point where it can either be purchased, or the non-school owners can purchase the NM Tech shares.”

There is no firm timeline on when CAaNES will become independent, but Fidel says he’s looking at a five-year time frame. “It has been a very good relationship, but it is not one that either of the parties wants to keep forever,” he says.

However, Fidel emphasizes that the university will continue to benefit from CAaNES because it demonstrates that the model established through the University Research Park Corporation is a good template for spinning off companies. “It should provide a halo effect for other research efforts regardless of the field,” he says, noting one lasting contribution may be to change the perception of academia as a strictly “ivory tower” enterprise.

Not a typical start-up

Stephen Rothman, a Los Angeles, CA-based attorney who specializes in university spinoffs, cautions that that the circumstances surrounding the CAaNES launch were not typical. “Since investors will usually take 40% to 60% or more of a company in its first financing round, not needing investor cash leaves a lot more ownership for the individual founders and the university,” he says. “Secondly, this company is a service business, and it sounds like it started making profits fairly soon in its life.”

In contrast, Rothman points out, a manufacturing entity might require significant investment for its plant and equipment. “There has to be enough equity for both investors and the individuals who will work full-time at the company and drive the business,” he says. “If the university takes too large a share, it can end up hampering the company, and [the institution] can end up owning a large percentage of nothing.”

Armijo emphasizes that URPC looks at every proposal for a spinoff on its own merits, and there is no magic formula as far as how much of the company the university will own. For example, the ownership ratios are different in the case of another NM Tech spinoff that makes specialized optic lenses. “The facts are different in each particular instance, so there is a risk-reward analysis,” he says.

While the CAaNES launch may be unique, Armijo believes there is much to be learned from the model’s success. “This has worked for both sides, so it’s a template we would want to follow in the future.”

Contact Mukkamala at 505-459-0951 or Mukkamala@gmail.com; Fidel at 505-324-2085 or mfidel@wssbonline.org; Armijo at jaarmijo@qwestoffice.net; and Rothman at 310-993-9664 or steve@stephenrothman.com.