Weathering the Storm

Gary Boas, News Editor, gboas@eggship-media.com

“Financial crisis.” “Economic meltdown.” “The end of Wall Street.” Call it what you will. By now everyone knows what it is: upheaval in our financial center fueled by a hemorrhaging market that, so far, even huge infusions of cash by the federal government have failed to stanch.

And everyone knows that the turmoil extends well beyond Wall Street. As credit dries up, companies both large and small find that they are unable to cover their basic operating costs, much less to continue with planned expansions or new projects. Compounding these problems, sales are dropping precipitously as customers – including other companies faced with the same budgetary constraints – rein in their spending.

Optics and photonics companies are no different from other businesses struggling under these difficult economic conditions. To survive, therefore, many of them are looking to tap into different markets – ideally, markets that have remained relatively stable amidst the upheaval. But such markets are few, and competition is likely to grow fierce as others set their sights on them.

There is no doubt that these are difficult times. And they aren’t likely to get easier anytime soon. But by focusing their resources in the right way and keeping an eye on long-term goals, those in the optics and photonics arena might just see themselves through.

Exploring market options

But which markets are even viable these days? So-called “green” technology and alternative energy have generated considerable buzz, of course. Especially with the new administration in the White House and talk of a WPA-like plan to rebuild and improve upon the US infrastructure, these markets offer considerable promise for optics companies.

And, thus far, the health care sector has remained relatively stable during the recession. People will always get sick, as the old joke goes. Indeed, as baby boomers reach retirement age, the industry anticipates seeing increasing numbers of people in need of care. Given this, it’s not surprising that optics companies are considering expanding into that market by exploring the ways in which they can adapt their core technologies to biomedical applications.

“We saw this trend in the telecom and defense industries in the mid-1990s,” said Arthur “Buzz” DiMartino, president of TechEn Inc., an electronic design company based in Boston that has developed a number of biomedical devices. At that time, there was little work in the telecom and defense industries, so many businesses moved into the burgeoning hardware and software Internet market.

Electronic design company TechEn, Inc. develops biomedical devices as well as a range of products for other markets. Company president Arthur “Buzz” DiMartino recommends that those hoping to enter the health care market establish partnerships or collaborations with companies or researchers who have experience in the area and understand the problems that need to be addressed.

We’re seeing similar trends today, and companies that have developed products for other markets are now eyeing biomedical applications. TechEn has been approached by a company that manufactures a small but sophisticated device for use in cable television and communications: an amplifier that boosts signal as it travels through optical cable. The manufacturer wanted to know whether TechEn could adapt its device for use in medical imaging instruments – potentially a smart move, DiMartino said. “They need to broaden their market, and they have the company infrastructure to do it.”

Hoping to expand its reach, optics company Precision Photonics Corporation launched mBio Diagnostics several years ago to develop low-cost medical diagnostic solutions. Shown here is prototype of the mBio SnapShot instrument and diagnostic cartridges. The cartridges are analogous to home pregnancy tests, and the instrument allows extremely sensitive detection through the use of laser detection technology.

Other types of companies also could adapt their products for biomedical applications, he said. Lens or optical filter companies, for example, could develop their products, or cable companies could develop their fibers for use in endoscopes and other similar instruments.

New players, new challenges

Even as some companies are making use of existing infrastructures to expand into the health care sector, others are building new ones from the ground up. A tough economic climate can encourage new players to enter the technology development fray, DiMartino explained. “In times like this, what happens is that people get laid off from their jobs, and they look around and say, ‘Well, I have to do something.’ And if they can’t get hired, they might say, ‘Well, I have this idea for a new product.’ ” So they set up shop in the proverbial garage and get to work.

Today’s burgeoning entrepreneurs won’t always seek funding from outside investors. Most early-stage funding comes from people’s own bank accounts and from family and friends, DiMartino explained, so they won’t necessarily be hamstrung by the current tumult in the market.

But what of those who began work on a product several years ago and are seeking funding to move on to the next stage of development? DiMartino mentioned a couple of researchers who raised money early on, hit all of their objectives and came up with a product; they even sold a couple of units to big players in the field. Now they are ready for additional financing, which under normal circumstances would be relatively simple to find. But these are not normal times, and the money has not been forthcoming.

Theoretically, an economic recession should not affect private investment in new companies because the return on the expenditure is not expected until some years later. “The reality is investment is a mood issue,” said Dr. Milton M.T. Chang, founder of the Menlo Park, Calif.-based venture capital fund Incubic and a longtime player in the field of optics. “When investors are not in a good mood, they tend not to invest.”

He added, however, that there are always exceptions. Even now, some companies are reeling in significant amounts of money.

A recent Dow Jones VentureWire report showed that, in the third quarter of 2008, as the first dominoes of the current financial crisis were beginning to fall, the number of venture deals in the US dropped to its lowest total in almost three years – with information technology companies suffering their lowest total in more than 10 years. At the same time, however, the total number of dollars invested fell by only about 1 percent. So the dramatic falloff in the number of deals was counteracted by hefty deals elsewhere. Many of these deals were in the health care sector. Four of the Top 10 companies in terms of largest third-quarter deals could be found there, including CVRx, Pacific Biosciences and Proteolix.

Chang warned against extrapolating these findings, however, asserting that companies in the health care sector are not necessarily more likely to attract investors. “Really, only breakthrough opportunities should get funding,” he said, “and those are rare.”

Reimagining the mousetrap

The effects of retrenchment can be seen everywhere as companies defer expansion projects and adopt other cost-cutting measures – some of them quite drastic – in response to pessimistic prognostications.

This is not the first time this has happened, of course. A number of startups fell by the wayside during the tech slump early in the decade, when venture capital essentially froze. Commentators have noted that the sharp decrease in funding helped to comb out companies that probably were not all that viable to begin with and to smack some fiscal sense into those that remained – much needed, to be sure, after the go-go years of the late ’90s with million-dollar launch parties and all manner of other excesses. But the scarcity of money also served to stifle innovation because, much as is the case now, new projects were often the first on the chopping block.

History has shown, however, that those who continue to take risks during economic declines – startups and established companies alike – can reap much more significant awards than they might otherwise, in no small part because competition withers and blows away. For examples, just look to the mother of all economic downturns, the Great Depression. Even as their contemporaries cut spending across the board, companies such as DuPont and IBM pumped money and resources into new research, giving us the first-ever synthetic fabric – nylon – and any number of other inventions that would change how we live well into the postwar years.

Businesses of all stripes should take note: Simply battening down the hatches might – might – help them to weather the recession, but it won’t help them to grow, to emerge from it as strong, well-positioned players.

“The successful optics companies will be those that find new niches for their core technologies but also are willing to innovate along the way,” DiMartino suggested. “Nobody has enough money, but companies have to continue to innovate to pick up market share.”