This case study describes how SBIR grants helped a young company develop a large intellectual property portfolio centered on adding the sense of touch to diverse computer applications, and how the company grew the business over its first decade to approximately 141 employees and $24 million in annual revenue. It illustrates how government funding can be used by a university spin-off to leverage funding from private sources to achieve faster growth, eventually essentially eliminating the need for government R&D support. The case also illustrates how a basic idea—adding the sense of touch to computer applications—can be used to enhance entertainment experiences, increase the productivity of computer use, train doctors, and more. Immersion’s technology was inspired by a NASA system, but its growth centers on its embodiment in consumer products. The case provides a number of suggestions for improving the SBIR program.

 

SBIR Case Study: Immersion Corporation

Rosalie Ruegg

TIA Consulting
 

THE COMPANY
 

As a Stanford graduate student in mechanical engineering, Louis Rosenberg investigated computer-based and physical simulations of remote space environments to provide a bridge across the sensory time gap created when an action is performed remotely and the resulting effect is known only after a time delay. For example, a satellite robot tightens a screw and scientists on the ground find out with a delay if the screw was stripped. As earlier described by Dr. Rosenberg, “I was trying to understand conceptually how people decompose tactile feeling. How do they sense a hard surface? Crispness? Sponginess? Vision and sound alone do not convey all the information a person needs to understand his environment. Feel is an important information channel.”
 

From aerospace researcher, Dr. Rosenberg turned entrepreneur with a focus on the less-studied sensory problem of feel, which was also closely attuned to his specialization in mechanical engineering. He took as his first business challenge to convert a $100,000, dishwasher-sized NASA test flight simulator into a $99 gaming joystick. To take advantage of his breakthroughs, he founded Immersion Corporation in 1993 in San Jose, initially drawing heavily on other Stanford graduates to staff the company. Reflecting the early NASA-inspired challenge, Immersion’s first products were computer games with joysticks and steering wheels that move in synch with video displays. Other application areas followed.
 

The company grew to 141 employees. Growth over the first seven years reflected internal gains mainly in the entertainment area. Then, in 2000, Immersion grew mainly by acquiring two companies: Haptic Technologies, located in Montreal, Canada, and Virtual Technologies, Inc.10, located in Palo Alto, California, both acquisitions now an integral part of Immersion Corporation. And, in 2001, Immersion acquired HT Medical Systems, located in Gaithersburg, Maryland, renamed it Immersion Medical, and made it a subsidiary of Immersion Corporation. In the case of Haptic Technology and HT Medical Systems, the acquisitions brought into the company competitors’ technologies in application areas new for Immersion. In the case of Virtual Technologies, the acquisition brought in a complementary technology.
 

IMMERSION CORPORATION: COMPANY FACTS AT A GLANCE
 

• Address: 801 Fox Lane, San Jose, CA 95131

• Telephone: 408-467-1900

• Year Started: 1993

• Ownership: Publicly traded on NASDAQ: IMMR

• Revenue: Approx. $23.8 million in 2004

  • Revenue share from SBIR/STTR grants & contracts: approx. 4 percent

  • Revenue share from sales, licensing, & retained earnings: 96 percent

• Number of Employees: 141

• Patent Portfolio: Over 550 issued or pending patents, U.S. and foreign

• SIC: Primary SIC: 3577, Computer Peripheral Equipment
   

35779907, Manufacture Input/output Equipment, Computer

Secondary SIC: 7374, Data Processing and Preparation

73740000, Data Processing and Preparation, Computer
 

• Technology Focus: Touch-feedback technologies

• Application Areas: Computer peripherals, medical training systems, video and arcade games, touch-screens, automotive controls, 3-D modeling, and other

• Funding Sources: Licensing fees, product sales, contracts, stock issue, commercial loans, federal government grants, and reinvestment of retained earnings

• Number of SBIR grants:

  • From NSF: 10 (4 Phase I, 3 Phase II, and 3 Phase IIB)

  • From other agencies: 33 (20 Phase I and 13 Phase II)
     

THE TECHNOLOGY AND ITS USE
 

Of our five senses, the sense of touch differs from the others in that “it requires action to trigger perception.” Development of a technology to sense touch draws on the disciplines of mechanical and electrical engineering, computer science, modeling of anatomy and physiology, and haptic content design. The technology uses extensive computer power to bring the sense of touch to many kinds of computer-based applications, making them more compelling or more informative processes. As a company publication puts it, “At last, the world inside your computer can take on the physical characteristics of the world around you…. Tactile feedback makes software programs more intuitive.”
 

The technology was brought to life for the interviewer by a series of demonstrations. The first demonstration was of a medical training simulator that teaches and reinforces the skills doctors need to perform a colonoscopy. Low grunts from “the patient” informed the performer that a small correction in technique was needed for patient comfort. “Stop, you are really hurting me!” informed the performer in no uncertain terms that her technique was in need of substantial improvement.
 

Immersion has developed five main AccuTouch® platforms for helping to teach medical professionals. The five platforms teach skills needed for endoscopy, endovascular, hysteroscopy, laparoscopy, and vascular access—all minimally invasive procedures.
 

The next demonstration was of a gaming application. The weight of a ball on the end of a string was “felt” to swing in different directions in response to manipulating a joystick. The technology is used also to enhance the computer feedback experience when using a mouse or other peripheral computer controllers for PC gaming systems, arcade games, and theme park attractions, as well as for other PC uses.

A third demonstration was of a “haptic interface control knob” to provide human-machine touch interface on an automobile dash to help manage the growing number of feedbacks from navigational, safety, convenience, and other systems. The purpose is to lessen the risk of overloading the driver.
 

A fourth demonstration was of Immersion’s “Vibe-Tonz” system for mobile phones. The system expands the touch sensations for wireless communications by providing vibrotactile accompaniment to ringtones, silent caller ID, mobile gaming haptics and many other tactile features.
 

THE ROLE OF SBIR IN COMPANY FUNDING
 

Though the initial funding of Immersion Corporation was through private equity, the company applied for and received its first SBIR grant in its second year, 1994. In addition, the acquired companies, HT Medical and Virtual Technologies, had received SBIR grants prior to their acquisition by Immersion, and HT Medical had also received a grant from the Advanced Technology Program (ATP) that was nearing completion at the time Immersion acquired the company. All totaled, Immersion and its acquired companies have received 24 Phase I SBIR grants and 19 Phase II (including 3 Phase IIB) grants, summing to approximately $10.6 million. SBIR funding agencies include NIH, DoE, DoD, Navy, Army, and NSF.
 

Immersion Corporation: SBIR/STTR Grants from NSF and Other Agencies.
 

According to Mr. Ullrich, SBIR grants gave the company the ability to further develop its intellectual property and to help to grow its intellectual property portfolio, which is the very core of the company’s commercial success. The company has leveraged its government funding by investment funding from private sources in the amount of $12.7 million. The company attributes approximately $33 million in revenue to products directly derived from Phase II SBIR research projects, including licensing, direct sales of products, and product sales due to licensees. However, due to the company’s licensing model, third-party revenues and tertiary economic activity, which are very significant, are not tracked directly by Immersion.
 

The company now receives only a small fraction of its annual revenue from SBIR/STTR funding, with the percentage ranging variously between 4 percent and 9 percent from 2001 to 2004. Its objectives for rapid commercialization growth are expected to reduce this percentage to an even lower level in the near future.
 

BUSINESS STRATEGY, COMMERCIALIZATION, AND BENEFITS
 

From its beginning, Immersion’s prime business strategy has been to develop intellectual property in the field of touch sense and to license it. In addition, the company performs limited manufacturing operations in its 47,000 sq. foot facility in San Jose and in Gaithersburg, and arranges for some contract manufacturing. But far and away, the company’s wealth generation depends on its ever-growing portfolio of patents which it licenses to others. At the time of this interview, the company had more than 270 patents issued in the United States and another 280 pending in the United States and abroad.
 

Important to identifying and developing relationships with new licensing partners is the company’s participation in trade shows and conferences, and its ongoing interactions with industry associations and teaching universities. The company employs a business development specialist in each of its core business areas to cultivate these contacts.
 

Because direct sales for Immersion’s technologies are derived from the much larger markets into which its licensees typically sell, estimating ultimate market size is considered “complicated” for Immersion, and it takes a more narrow view. For example, Immersion markets its cell phone vibration technology to a limited number of cell phone OEMs, and those OEMs in turn market to millions of customers. Estimating the larger consumer markets is not Immersion’s focus.
 

Potential benefits of the technology include boosting the productivity of software use; enhanced online shopping experiences; enhanced entertainment from computer-based games; improved skills of medical professionals resulting, in turn, in improved outcomes for patients; increased automotive safety due to reduced visual distractions to drivers; and savings to industry through the ability to experience prototypes “first hand,” but virtually, before building costly physical prototypes, and the ability to capture 3-D measurements from physical objects. In addition, visually impaired computer users may benefit from the tactile feedback of the mouse, keyboard, or touch-screen.
 

VIEWS ON THE SBIR PROGRAM AND PROCESSES
 

Mr. Ullrich made several observations about the SBIR program and its processes that may serve to improve the program. These are summarized as follows:
 

Difference in Agency Program Intent Helpful to Companies
 

Mr. Ullrich thought it was clear that there is “a difference in intent” among the various SBIR programs. In particular, DoD is focused on solutions to well-specified problems, while NSF and NIH are more interested in basic technology development that has commercial potential. This distinction is helpful to companies who may wish to develop technologies under both sets of condition. Given the need to respond to fast-developing commercial markets, Mr. Ullrich finds the openness and flexibility of a program to accommodate where a company needs to go to find market acceptance to be a big advantage.
 

SBIR Application Process
 

According to Mr. Ullrich, there are only minor differences among the agencies in their proposal application processes, and these differences do not pose a major concern in terms of proposal logistics. At the same time, he noted that the last time the company proposed to NIH, there was no electronic submission process, and he expressed the hope that this lack has been remedied.
 

SBIR Proposal Review Process
 

Mr. Ullrich has found the review process in support of the various agencies’ SBIR grant selection to be “tough but fair.” He has found the NSF review to be “much more academic” than the others. Overall, he sees no need for change in the review process.
 

Turning more exclusively to the NSF’s SBIR program, Mr. Ullrich offered the following comments.
 

Timing Issue—Funding Cycle Too Long for Software Providers
 

According to Mr. Ullrich, the biggest drawback in NSF’s SBIR program is the two deadlines per year, with six months between application and grant and 18 months to Phase II grants. This can be too slow for a software developer.
 

Timing Issue—Funding Gap
 

Mr. Ullrich pointed to an associated gap in funding that arises in the NSF program, which he thought would be a real hardship for start-up companies that had not yet developed any sales to sustain them in the interval. He pointed to the Fast Track program at NIH and DoD as being very good ideas. At the same time, he noted that having to develop both Phase I and Phase II proposals at once entails a huge investment of time for an all or nothing outcome. He suggested that providing a supplement—as he recalled some parts of DoD do—to close the funding gap would likely be a preferable approach from the company’s perspective.
 

Phase IIB Matching Funds Requirement
 

For Immersion, NSF’s Phase IIB matching requirement of “cash in the bank” was an easy test to meet—once the company had partners. At the same time, he found the associated review awkward in one respect: The company was required to take its business partner (the investor) to a panel review at NSF. The problem was that the company was required to discuss certain financial issues in front of its investor that it would have preferred to have discussed with NSF in private. Furthermore, it found the need to insist that the investor attend the meeting to be cumbersome and, in its opinion, unnecessary.
 

Commercialization Assistance
 

The company participated earlier in the Dawnbreaker Commercialization Assistance Program, and found that “it made sense.” However, given the company’s current level of business experience, Mr. Ullrich does not think the company would wish to participate again, and is glad participation is optional. Currently, the company is participating in the Foresight Commercialization Assistance Program for the first time and is “seeing if it will help.”
 

SUMMARY
 

This case study describes how SBIR grants helped a young company develop a large intellectual property portfolio centered on adding the sense of touch to diverse computer applications, and how the company grew the business over its first decade to approximately 141 employees and $24 million in annual revenue. It illustrates how government funding can be used by a university spin-off to leverage funding from private sources to achieve faster growth, eventually essentially eliminating the need for government R&D support. The case also illustrates how a basic idea—adding the sense of touch to computer applications—can be used to enhance entertainment experiences, increase the productivity of computer use, train doctors, and more. Immersion’s technology was inspired by a NASA system, but its growth centers on its embodiment in consumer products. The case provides a number of suggestions for improving the SBIR program.

Source: National Research Council (US) Committee for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program; Wessner CW, editor. An Assessment of the SBIR Program. Washington (DC): National Academies Press (US); 2008. C, Case Studies. Available from: http://www.ncbi.nlm.nih.gov/books/NBK23754/