Richard Foster Archives - Page 45 of 48

Closing the GAP

Without the Center for Innovative Technology (CIT), Leesburg-based Disrupt6 wouldn’t exist.

Just two years ago Disrupt6 co-founder and CEO Joe Klein was a defense contractor with more than 30 years of cybersecurity experience — he battled his first hacker in the 1980s. But Klein had never been able to get his own business off the ground until he was asked last year to pitch his business idea as part of CIT’s MACH37 initiative to promote cybersecurity startups.

“I think I have a better opportunity for successfully running, executing and building this business into something amazing with their assistance,” says Klein, whose business was one of six that were accepted into MACH37’s spring 2014 cohort out of more 80 pitches. “They’ve also educated me on the current issues of business, the IRS, accounting, HR, and introduced me to the right people. In fact, I have four follow-ups this week. They’re really awesome.” Since graduating from MACH37, Klein now works for himself and employs four part-time workers. Disrupt6 provides threat intelligence to corporations and governments, with special focus on the Internet of Things and IPv6 technology.

A nonprofit founded in 1985, Herndon-based CIT is a subsidiary of the Innovation and Entrepreneurship Investment Authority, which was created and funded by the state General Assembly. CIT promotes economic development opportunities for technology entrepreneurs and startup companies across the commonwealth. State-funded CIT initiatives such as MACH37 and the CIT GAP Funds program help CIT reach this goal.

Named for the velocity needed to escape earth orbit, MACH37 is a 14-week educational business accelerator program for early-stage cybersecurity businesses that provides companies with a $50,000 investment and matches businesses with investors and well-known business mentors. MACH37, which was established by a one-time $2.5 million appropriation from the General Assembly, is open to any cybersecurity company around the world. However, as a condition of entering the program, companies must agree to establish a significant presence in Virginia within 24 months of graduating MACH37 or it forfeits the $50,000 investment from CIT. CIT invests in about 10 companies via MACH37 each year.

“It has an increasing national and global reputation. We’ve had 23 companies go through the [MACH37] program and we have eight more scheduled in our fall cohort this year,” says CIT Managing Director and Vice President Thomas Weithman, who launched MACH37 in fall 2013. He compares MACH37 to Techstars, an international mentorship-driven startup accelerator led by Colorado entrepreneurs and venture capitalists David Cohen and Brad Feld.

MACH37 is “a very intense program,” says Klein. In addition to attending class all day and completing the assigned reading, “you’re still trying to get your business off the ground any time that you don’t have a class or [a meeting with] a contact. It’s pretty incredible. It’s not for the faint of heart.”

To graduate, company owners deliver a presentation to an audience of MACH37 alumni and investors. Graduates are also encouraged to continue attending MACH37 classes and meetings, as some of the companies work together or partner to develop technologies.

“I can’t speak highly enough of [CIT],” says Michael Markulec, president and CEO of Harrisonburg-based AXON AI Inc., which develops products to identify and classify cyber threats and systems anomalies in real time.

AXON AI was started in March 2014 and graduated from MACH37 in November 2014. In addition to its $50,000 MACH37 grant, CIT also provided AXON AI with additional commercialization grants and helped connect AXON AI to state grants.

For Markulec, the mentoring and networking that CIT provided to his company in its earliest days also was invaluable. International security expert Matthew G. Devost “helped us refine the strategy and really determine who the target market is. He helped me streamline our strategy and product road map with the needs of the end user.”

About a decade ago Weithman also started the CIT GAP Funds program, which provides small but promising early-stage technology, life-sciences and clean-tech startups with an infusion of funds to help them stay in business so that they can build their market share and raise the venture capital they need to become self-sustaining.

Explains Sean Mallon, senior investment director for the CIT GAP Funds: “If you’ve ever watched ‘Shark Tank,’ they basically pitch us on what they’re working on and when we like the story, and we like the people and we like the opportunity, we have the ability to write relatively small checks, usually about $100,000, to help them get off the ground … For every dollar we’ve invested, there’s been $16 of private capital” invested in the companies.

The General Assembly allocates about $3 million to $4 million per year to the CIT GAP Funds initiative, allowing CIT to invest $100,000 to $200,000 each in 15 to 20 businesses per year.
In exchange for its investment, CIT gets a small equity stake in the business but what CIT brings to the table is more than worth it, CIT GAP Funds recipients say.

“CIT was an early investor and big supporter of WealthForge,” says Mat Dellorso, co-founder of the Richmond-based online private securities trading platform. For WealthForge, more important than the financial investment was the credibility CIT brought to their company. “They do pretty good due diligence,” Dellorso says, adding that CIT helps them network and connect with investors. “It was sort of a stamp signaling to other investors that WealthForge was something to check out.”

“They can really connect you with the right group of investors,” says Wayne Chiang, co-founder and CEO of Dulles-based ThreatQuotient, which helps protect Fortune 500 companies and government agencies from cyber attacks. “Based on the introductions that they’ve made, our last $2 million in funds have largely been facilitated by introductions through the CIT GAP Funds.”

For Bob Summers, founder and CEO of Blacksburg-based Fitnet, CIT Gap Funds helped his company make a critical hire in order to make their launch date.

Founded three years ago, Fitnet is a fitness app that uses proprietary technology to measure a user’s exercise quality via the camera on their smartphone or tablet — essentially a virtual private trainer. The company was founded in part with a grant from the National Science Foundation, but the federal money wasn’t coming fast enough to make the hires Summers needed. Enter CIT, which has invested a total of $200,000 in Fitnet so far, including an initial $50,000 grant that helped Summers make a critical hire needed to keep their launch on schedule.

“We wanted to launch on New Year’s Day because people really start thinking about fitness on New Year’s Day,” Summers explains. “CIT was really critical for us getting it [launched] on time to meet that date. That was a big moment in our company’s history.”

Today Fitnet has more than 250,000 users in more than 200 countries and has six full-time employees.

“The mission of CIT is to invest in really innovative companies that have potential for really high growth and that are just starting up,” says Ben Hastings, co-founder and CEO of Arlington-based PerformYard. “I think that they’ll get a great return on their investment, but they’re also making a meaningful contribution to companies that are going to grow and create a lot of jobs and do big things in Virginia. We’re a good example of what they’re trying to make happen.”

CIT has also invested $200,000 in PerformYard, which was founded in 2013 and markets a software platform that helps companies increase employee performance and track corporate goals. The company has 10 employees and plans to grow to 15 employees by mid-2016.

Klein from Disrupt6 says he highly recommends CIT to other tech entrepreneurs: “If you have a great … idea and you have some prototypes that you could demonstrate and you have a team around you that can help you do this, go talk to them. They are the people that can make it happen.”

Lawyer or boss?

Calvin “Woody” Fowler took over as president and CEO of the Richmond-based law firm Williams Mullen on April 1, literally two days after the first of several lawsuits was filed seeking to keep his client, Sweet Briar College, from shuttering its doors.

Instead of spending his first few months as CEO focusing on strategic plans and his vision for the firm, Fowler was working seven days a week, sometimes as long as 16 hours a day. As lead trial and appellate attorney on the case, Fowler argued before the Supreme Court of Virginia.

While representing the college, he made time to visit a few of Williams Mullen’s 11 offices, dine with clients and speak at a youth awards banquet for the nonprofit Richmond Sports Backers. (The Sweet Briar case ended with a settlement that will allow the school to remain open through at least next another year with a new president and board of directors and a badly needed infusion of money.)

Fowler’s experience is an example of how managing partners and CEOs of law firms must balance the demands of practicing law with their leadership roles. “It was just a matter of spending a lot of time at the office, frankly,” Fowler says. Most law-firm leaders split their time almost evenly between duties related to managing their firms and taking on busy caseloads, representing their own clients.

“I wouldn’t have taken the job if it had meant giving up my practice for management,” says Monica Monday, managing partner of Roanoke-based law firm Gentry Locke. “I love to practice law … That’s just an important part of who I am.”
Monday, who became managing partner in 2013, heads the firm’s appellate practice group. She estimates that she’s argued five cases in the past year and filed numerous briefs.

“It’s very difficult to tell other people to stroke if you’re not raising the paddle yourself,” says William “Bill” Van Buren III, managing partner of Norfolk-based Kaufman & Canoles. “That really puts a lot of strain on most law firm leaders because many times you feel like you have to work just as hard and bill just as promptly and market just as effectively as you ask anybody else to do in the firm all while you’re dealing with complex business and management issues that are constantly challenging you and demanding your attention.”

Former Virginia Attorney General Richard Cullen is chairman of McGuireWoods, one of the state’s largest law firms. Since being tapped as chairman in 2006, he has represented a Who’s Who list of high-profile clients, including former U.S. House Majority Leader Tom DeLay; Tiger Woods’ ex-wife, Elin Norgren; and most recently (according to news reports) embattled FIFA President Sepp Blatter.

“It’s important at McGuireWoods for our chairman to be a practicing lawyer. That’s been our tradition,” Cullen says. “The partners expect us to continue being real lawyers so that means that managing the firm is done through specific, delegated managerial roles … A firm the size of McGuireWoods, with about 980 lawyers in 20 cities, really one person by himself can’t run it, and I don’t pretend that I do.”

Instead, Cullen works very closely with McGuireWoods’ managing partner, Thomas E. Cabaniss, a lawyer who is completely devoted to day-to-day firm management, and Executive Director Robert J. Couture, who oversees all the firm’s operational departments, including information technology, finance, marketing and human resources.

Even a smaller firm such as Gentry Locke, which has about 55 attorneys, employs an executive director to run day-to-day operations. “That leaves me free to deal with some of the broader issues and the direction of the firm’s overall management, but it doesn’t mean that I’m having to pay the light bill,” Monday says.

Oblon, McClelland, Maier & Neustadt, an intellectual property law firm of 130 attorneys based in Alexandria, hired its first chief operating officer to oversee administrative functions two years ago. “That was a big relief for me,” says Oblon’s managing partner, Bradley Lytle. “It helped get a lot of the day-to-day-type things off my plate, and we collaborate very closely.”

The irony of being a law firm’s managing partner or chairman while maintaining one’s own practice, Lytle says, is that “you end up getting to be a managing partner because you did a good job, and you earn the respect of your partners and also your clients. You build a good client following, but then, to do the managing partner job, you’ve got to spend a lot of time and energy and resources looking out for the firm’s best interests,” not your own.

Lytle says his firm has cracked that problem in a variety of ways.

For one thing, Oblon’s managing partner is elected to a three-year term and receives a bonus for management work to offset the loss of billable client hours. But perhaps more important, Oblon’s leadership decided a couple of years ago that their clients would be represented by the entire firm, not individual attorneys. Lytle might act as the firm’s point person for clients such as Sony Corp., Broadcom Corp. or the Saudi government, but potentially any attorney could be called in to work on a case. That ensures a smooth continuity for clients if an attorney retires or leaves.

And that also means that his firm is more invested in bringing up its next generation of leaders, so they strive to provide younger attorneys with a variety of internal leadership roles, he adds.

That’s not uncommon at firms — less common are firms that provide formalized training and leadership programs. Nationally there’s been a debate in legal circles over which is more important to a lawyer’s development: billable hours or actual training.

Virginia firms for the most part encourage their up-and-coming attorneys to seek leadership opportunities within their firms’ committees and subcommittees as well as through the State Bar and by volunteering on the boards of charitable organizations. But few provide regular leadership training by outside consultants, as Williams Mullen does.

As for the dilemma created when managing partners must divide their time between management duties and clients, the client comes first, but so does putting out fires, Van Buren says. And dealing with simultaneous issues means law firm leaders wind up working more than other partners, even if they’re not logging the same billable hours.

“There’s no way you can bill as much as a full-time lawyer who’s not charged with management responsibility, but I’m billing about 75 percent of what a typical partner does,” Van Buren says.

“The biggest challenge is that every now and then you run into things that only the chairman of the firm can deal with, that require some delicacy or some influence in order to resolve it … Say a lawyer in the firm’s gone off the reservation … they don’t wait for you to close a big [client] deal you’re working on in order to deal with it.”

From mapping brains to modeling diseases

Two years ago, the General Assembly established the Virginia Biosciences Health Research Corp. with one major goal: To encourage cooperative biotech projects involving researchers from different Virginia universities and partner them with industry. There was just one hitch: That kind of cooperation wasn’t really happening.

Mike Grisham, CEO of the Richmond-based nonprofit corporation that’s now known as The Catalyst, recalls that when he’d tell Virginia university researchers that he had grants to offer them for collaborating with other state universities, “They would say, ‘Well, I don’t really know anyone at any of our other universities.’ … In Virginia the universities are fiercely independent. …We set out to change that culture.”

And Catalyst has made progress: In less than two years, it’s provided more than $4.4 million in seed money to a dozen collaborative bioscience research projects between universities and private companies, resulting in $10.5 million in matching funds and $22 million in additional investment.

One Virginia success story is Charlottesville-based biotech company HemoShear Therapeutics, which was spun out of research at U.Va. as a private company. HemoShear manufactures platforms that model human tissue systems and disease behaviors with the hope of developing new pharmaceutical treatments. The University of Virginia, George Mason University and HemoShear received a $450,000 matching grant from Catalyst to fund research for the National Cancer Institute that created a tumor model platform that mimics the biology of human tumors for lung cancer and pancreatic cancer.

“We’ve done a lot with that $450,000, and we’re proud of it,” says HemoShear’s co-founder and Vice President of Research and Development Brian Wamhoff. “We’ll be developing new drugs for patients with uncurable cancers. … We’re able to re-create those patients’ diseases outside of their body and develop new therapies for them. It’s almost science fiction.”

Biotech is a hot, fast-growing sector and “it can be a big driver for Virginia over the next decade,” Grisham says, noting that companies collaborating with Virginia universities range from startups and university spinoffs to global corporations such as Pfizer and AstraZeneca.

Gov. Terry McAuliffe’s administration is focused on making Virginia known as “the brain state” because of cutting-edge research by universities and private industry in the neurosciences.

For example, the Howard Hughes Medical Institute’s Janelia Research Campus in Loudoun County, which opened in 2006, is focused on pioneering neuroscience research and developing advanced imaging technologies. So is the Virginia Tech Carilion Research Institute in Roanoke, which is recruiting 5,000 volunteers for its Roanoke Brain Study, a longitudinal research project using genetics and behavior studies and neuroimaging to examine how people make decisions.

Virginia has a great advantage in biosciences because of the strength of its research universities, McAuliffe says. “To me, we’ve got the assets here. Now it’s time to take it to the next level. … We need to get more aggressive. … We now need to create a statewide entity to drive this growth in biosciences.”

In December 2014, McAuliffe announced the creation of a new Virginia Bioscience Initiative to promote and expand the state’s biosciences industry. Since then, the state has hosted a technology roundtable focused on commercializing university research, and in April the state government hosted the state’s first bioscience conference, THRiVE.

“I promise you this is going to yield long-term, sustainable results,” says McAuliffe. Biosciences jobs are high-paying and stable, he says, and will “continue to drive innovation … and will spawn entirely new industries down the road.”
“We think Virginia is extremely well placed” to be a biosciences success on many fronts, says Jeff Gallagher, CEO of Virginia BIO, the nonprofit trade association representing the life sciences industry in the commonwealth.
North Carolina and Maryland have larger, more established biosciences industries, but that’s really an asset for Virginia, Gallagher says, because it means biosciences companies here have skilled talent pools nearby.

Northern Virginia, long a bastion for IT and tech businesses, is particularly well suited for working in biosciences. “It is my belief we can become a global leader where data science meets bioscience and health,” Gallagher says. As many large Virginia research corporations such as Northrop Grumman, MITRE and Noblis have seen federal contracts dry up, they’ve been pivoting resources into biomedical and bioscience research, he notes.

Health providers such as Inova also are entering the research field. As an example, Gallagher cites, the Inova Translational Medicine Institute in Falls Church, which focused on genomic research and medical research to improve patient care, particularly in oncology.

Virginia also has a plethora of innovative bioscience startups and university researchers, and that number is constantly growing, says Gallagher, noting that his association has about 300 member companies.

Richmond-based Health Diagnostic Laboratory had been a standard bearer for bioscience in Virginia in recent years. Yet with its fall from grace amid a federal settlement of Medicaid fraud charges, there hasn’t been a single voice advocating for the industry, Gallagher says. He hopes the McAuliffe administration will change that by creating a state office or advocate devoted solely to biosciences. In the past, he says, state economic development efforts to promote entrepreneurship and innovation have been “sector agnostic.”

B. Frank Gupton, chair of the Virginia Commonwealth University School of Engineering’s Department of Chemical and Life Science Engineering, is one of the state’s key innovators. He served on McAuliffe’s biosciences technology roundtable last year and recently helped form the Virginia Drug Development Consortium, a collaboration involving VCU, the University of Virginia and Virginia Tech. “We’re trying to take the innovations that are occurring at the different universities in drug discovery [and] move them down the pipeline and increase the intellectual property value of them,” he explains.

Gupton has received more than $10 million in research grants from the Bill and Melinda Gates Foundation as a principal investigator working on the foundation’s Medicines for All initiative. It is aimed at finding quicker and cheaper ways to manufacture drugs treating diseases such as AIDS, malaria and tuberculosis.

Utilizing nanotechnology, Gupton helps pharmaceutical companies develop new catalysts to create drugs more efficiently. “We’ve taken reactions that take the pharmaceutical industry about eight to 10 hours to run, and we can do them in about 10 seconds,” he says.

The nation hasn’t yet recognized Virginia as a bioscience center, “but we’re working really hard on that,” Gupton says. “Part of the problem is we’ve been working individually in pockets of excellence, but I think Governor McAuliffe has worked really hard to coalesce a lot of the university resources around his initiatives, and it’s starting to get traction.”

Revolutionizing private securities

It’s not unusual for a business to start out of a college dorm room, but most don’t need to contend with one of its co-founders preparing to go to war just as the business is starting.

Co-founders Mat Dellorso and Fred Bryant started laying the groundwork for their online private securities trading platform, WealthForge, in 2009 when both were business students at the University of Richmond. As an ROTC member, Bryant already was committed to serve four years in the Army.

After graduating in 2010, he entered the Army in preparation for a six-month tour in Afghanistan in 2011. It was virtually the same time that WealthForge was getting off the ground.

“I had limited access to email and an Afghan mobile phone” in Afghanistan, recalls Bryant, a Long Island, N.Y., native who conceived the idea for WealthForge. He won a Bronze Star for his war service.

“It made for some interesting board calls,” says Dellorso, who originally was from Boston.

Fortunately, Bryant’s father was an investor and was able to take his son’s place on the board while he was overseas. After he came back stateside, Bryant worked for WealthForge part time around his Army duties until he returned to WealthForge full time last year.

Now WealthForge has 35 employees and operates out of Paragon Office Park in Henrico County. The company has closed almost $100 million in transactions and has about 50 clients, mostly from commercial real estate development firms (and a few residential developers) but also the technology, energy, agriculture and health-care sectors. It has hosted more than $1 billion in private investment opportunities.

In early May, Bryant and Dellorso won AOL co-founder Steve Case’s Rise of the Rest business competition in Richmond. The company beat out seven other Richmond-area companies to capture a $100,000 personal equity investment from Case in a “Shark Tank”-like pitch contest held at the Gottwald Playhouse at Richmond’s CenterStage.

Each company delivered a four-minute pitch for its business model and then was questioned for three minutes by a panel of judges. They included Case, now the chairman and CEO of Revolution, a Washington, D.C.-based investment firm; Tige Savage, Revolution’s co-founder; former U.S. Chief Technology Officer Aneesh Chopra, who now is co-founder and executive vice president of Hunch Analytics in Arlington; plus Ting Xu, founder and chairman of Evergreen Enterprises; Aaron Montgomery, founder and chief operating officer of CarLotz; and Eric Edwards, chief medical officer of Kaleo, all of Richmond.

“We’re very excited by the accolade of winning the event,” says Dellorso, noting that the press they’ve received has helped raise WealthForge’s profile “with institutional and local investors” as well as potential clients. While WealthForge already had raised about $3 million in capital in previous years, Case’s investment is special because “he’s sort of an idol to me and Fred,” Dellorso says. “He took networking, the ability to communicate, from the real world to the online world with AOL.”

Case’s successful mission to get the vast majority of the nation online was “transformative,” says Dellorso, and “we’re doing something similar in a different sector. We’re getting people who complete private securities transactions in the real world to do that online. [Case’s] successes are sort of a model for Fred and I … We look forward to his help and feedback in the future.”

Dellorso refers to WealthForge as “the PayPal for processing private transactions.” WealthForge provides the technology for developers and startup companies to accept capital from investors and allows them to complete online transactions in compliance with U.S. Securities and Exchange Commission regulations without a lot of paperwork involving broker dealers and lawyers, he says.

WealthForge charges companies a base fee for access to the technology and then charges 100 basis points of the total capital raised. WealthForge also acts as a “virtual back office” and online platform for other financial firms, such as San Francisco-based Access Investors Network. It announced in late May that it will be using WealthForge’s services for its members.

In WealthForge’s Rise of the Rest pitch, Dellorso noted that the private securities business had not changed fundamentally since passage of the federal Securities Act of 1933 — until WealthForge became one of the first to take transactions online. “People can complete securities transactions with better efficiency, more transparency and better compliance online,” he says. “We give them the tools to leverage the Internet to complete their private capital raises and to invest in private securities. … In 10 years we believe almost all private securities transactions are going to happen online.”

Bryant and Dellorso “are so impressive. Their passion really shows through, and it’s really impressive what they’re building. They’re very smart; they’ve thought about every angle of this,” says Herbie Ziskend, director of the Rise of the Rest competition at Revolution, which also provides technical assistance and business advice to competition winners, such as WealthForge.

After the contest, Case said that WealthForge’s “momentum and traction” were leading factors in the panel’s decision to award the $100,000 investment to Dellorso and Bryant.

Ziskend echoes that, saying Case was pleased that “their volume was already pretty significant” and WealthForge also had proven its business model works. In particular, he says, WealthForge is primed to take advantage of equity crowdfunding by small businesses when that provision of the federal JOBS Act moves forward. (At present the SEC has delayed writing regulations to allow the practice.)

So far Case has brought his Rise of the Rest competition to 14 cities, awarding $100,000 to one local company in each location. To be considered, companies fill out extensive applications and create pitch videos. (“There’s a lot of homework before they get on the stage,” Ziskend says.) The competition aims to encourage nationwide entrepreneurship outside of traditional business centers such as New York and Silicon Valley.

Bryant and Dellorso plan to use Case’s investment to add 10 more staff members (mostly in sales and marketing) and to move into a larger office space in one of Richmond’s hot entrepreneurial districts such as Scott’s Addition or Shockoe Slip.
“We’re in growth mode,” Dellorso says.

A double bottom line

These days, doing well and doing good don’t have to be mutually exclusive concepts in the world of social entrepreneurship.

In the mid-2000s, Michael Pirron was a well-paid, but unhappy IT professional. “I was good at what I did, but I really didn’t like the clients or the people I was working for. Our values didn’t align. I also wasn’t independently wealthy, and I couldn’t afford to go work for the nonprofit world because I still had to pay my mortgage.”

So eight years ago Pirron founded Richmond-based Impact Makers, a company he calls “the Newman’s Own of IT consulting.” Like the food company founded by late movie star Paul Newman, Impact Makers’ ultimate goal is to give away all of its proceeds to nonprofit charities.

What started out as a kitchen-table enterprise now employs more than 100 workers. Pirron serves as CEO for the company, which is governed by a nonprofit board of directors. This year Impact Makers made the unusual move of giving away ownership of the business to two nonprofits: The Community Foundation Serving Richmond & Central Virginia and Virginia Community Capital. When the company eventually liquidates its assets, the two charities will reap the proceeds.

Also as of this year, Impact Makers has given away more than $1 million in cash contributions and pro bono work to local charities and has plans to give away more than $100 million in cash and in-kind contributions by 2024.

Like Pirron, a growing number of entrepreneurs are entering the burgeoning field of social enterprise or social entrepreneurship, eschewing more familiar models for startups.
Distilled to its simplest concept, “A social entrepreneur is someone who is committed to make a difference in the community and to be the difference in someone’s life. They’re people who lead by example,” says Bob Mooney, interim chair for the newly formed Virginia chapter of the Social Enterprise Alliance.

Make no mistake, though, Pirron says: “We are a business first. We are an IT consulting business — period. We are a for-profit business in every way.” Impact Makers has made the Inc. 500 list of the nation’s fastest-growing companies for the last three years. The company’s workers are paid at attractive, competitive market rates. “By sheer capitalist metrics, we’ve been a successful business,” he says. “Our clients do not buy our services because of our social impact mission. They buy our work because of our capabilities.”

However, Pirron says Impact Makers’ mission might influence a prospective client to choose to give its business to Impact Makers over a comparable IT company. And that also proves true for attracting workers to Impact Makers, who appreciate being able to simultaneously make a good living and support their community.

“A lot of social entrepreneurs do draw salaries, and they are for-profit organizations,” Mooney says. However, they also “do something that is meaningful for the betterment of society, whether it’s a product or a service.”

“I love the idea of using business as a force for good,” Pirron says. “I often say it was a selfish decision because I wanted to go work in the nonprofit world, but I couldn’t afford to make a living. I wanted to do well and do good at the same time.”

Teri Lovelace, senior vice president of community investments and impact manager for Christiansburg-based Virginia Community Capital, says her organization is “very fortunate to have been one of the two recipients of [Impact Makers’] truly transformational gift.” Like Impact Makers, VCC is also a social enterprise. The nonprofit foundation runs a for-profit commercial lending bank that makes loans only “to entities that are promoting social good and community projects … Everything we do is mission-related.”

Not all social enterprise ventures are for-profit, though. Some are nonprofit or even government ventures, says Christine Mahoney, who directs the Social Entrepreneurship@UVA Initiative at the University of Virginia’s Frank Batten School of Leadership and Public Policy.

What matters, Mahoney says, is that “social entrepreneurs are committed to solving a problem. They’re kind of agnostic as to the form that takes. So it could be a nonprofit with a really innovative earned income stream or it could be a for-profit social business or a hybrid in between. And just like all good entrepreneurs, they pivot along the way.”

U.Va., which is launching a minor in social entrepreneurship this fall, has several students and recent graduates who are working on social enterprise startups. Last year, for example, a group of student Peace Corps volunteers won the university’s Entrepreneurship Cup competition with a concept for eco-friendly, reusable sanitary pads to be distributed in Africa, where girls miss significant school time during menstruation. John Kluge Jr., son of the late Albemarle County billionaire, is a visiting fellow at the school, talking to students about his New York City-based nonprofit, Toilet Hackers, which promotes improved sanitation in third-world nations.

Like Impact Makers and VCC, there are 33 companies in Virginia that are classified as benefit corporations, those with a social mission in addition to the business mission. In addition to starting the Virginia chapter of the Social Enterprise Alliance, Mooney is one of the leaders of New Richmond Ventures, a venture capital company supporting innovative, social enterprise startups such as these. One such company is the for-profit Evatran, which has developed a wireless battery-charging system for electric cars in order to reduce fossil-fuel emissions and dependence on gasoline-powered cars.

Companies with a double bottom line (meaning profit isn’t the only motivator) are more attractive to the millennial workforce, Mooney says. “They’re seeking a balance between success and significance. Right from the start, they’re committed to doing something more meaningful that makes a greater difference to the community than many people of my generation did when we first got out of college.”

Other board members of the new state chapter of the Social Enterprise Alliance include former state Secretary of Commerce and Trade Jim Cheng and former state Delegate Larry Wilder, who also serves as Gov. Terry McAuliffe’s adviser for social entrepreneurism. The group will be holding educational events about social entrepreneurship and innovation at college campuses and corporations and will also be promoting opportunities for synergy between social enterprise ventures.

Says Mooney, “We’re committed to companies that are making a difference in the community as well as helping the businesses they’ve created.”

A new look

The boat was going only 10 miles per hour when it hit a sandbar, but it was enough to change Tim Dunaway’s life forever.

On Easter Sunday 1998 Dunaway was driving family members on his boat on the Pearl River Navigation Canal near his home in Louisiana’s St. Tammany Parish when it hit a submerged sandbar, smashing his face into the boat’s aluminum windshield frame. It took a 14-hour surgery and titanium rods to put his face back together.

Dunaway was able to return to his job as a registered nurse and clinical exercise physiologist, but 18 months later infection set in. Doctors had to remove his nose, leaving him permanently disfigured, disabled and despondent. He isolated himself, preferring to spend time roaming a local wildlife refuge with his German shepherd rather than dealing with people staring at him.

“I got to the point where I literally sat in the bathtub with a .357 in my hand three different times, and the only reason I didn’t pull the trigger was I didn’t want my girlfriend to come in and find me,” Dunaway remembers. “I got very depressed. I took the mirrors out of my car, out of my house, so I didn’t have to look at myself.”

Then his sister saw prosthetic specialist Robert Barron on “The Oprah Winfrey Show.” A 24-year veteran disguise master for the CIA, Barron, 73, retired in 1993 to start his own business, Ashburn-based Custom Prosthetic Designs Inc., where he makes advanced, handcrafted prosthetics for patients from around the world, helping cancer survivors, accident victims and people with birth defects.

Barron has been featured in publications such as The Washington Post and Reader’s Digest as well as various television programs ranging from the “CBS Evening News” to “The Montel Williams Show.” Some of his high-profile clients include 9/11 Pentagon attack survivor Louise Kurtz, for whom he made a pair of prosthetic silicone ears.

“Just as my disguises worked, my success today depends on realism, perfection and the ability to stand up to close scrutiny. Prosthetic devices dramatically increase the quality of life,” says Barron, a gregarious, loquacious grandfather of two, with kindly eyes, a thick mustache and a head of shaggy gray hair.

“Everything has to be as realistic as you can possibly make it. In the agency those [prosthetics and] masks had to pass the closest scrutiny at six to 12 inches, and, if not, you may not make it back. Their lives were in jeopardy if that mask attracted attention in a negative way,” Barron says.

“There was a lot riding on my shoulders to make that silicone mask as realistic as possible and that’s what I put into my prosthetic devices today. … In the agency, [field operatives] depended on the realism of that disguise to keep them alive and guess what? Prosthetic devices are saving lives as well.”

Barron takes great pride in knowing “that my prosthetic devices give my patients the ability to interact on a daily basis with the public without the stares. There was one man that couldn’t go into a restaurant. They asked him not to go back because he was scaring the customers away. Isn’t that just awful?”

Barron, who doesn’t hold a medical degree, makes a range of facial prosthetics, many of which are covered by medical insurance. “These are medical necessities,” Barron says. Prices vary depending on the complexity of the item being crafted.

The disembodied ears, eyes and mouths sitting around Barron’s workshop are all eerily realistic. Barron molds or sculpts the parts from silicone, making molds from patients’ body parts and working from photos. His prosthetics include multiple translucent and opaque layers, just like real skin. He adds pores with toothpicks and hand-paints each prosthetic to match the patient’s skin tones and natural complexion and blemishes.

Barron takes pleasure in recounting the story of a patient who had to come back for a fix after his barber trimmed the hair in his new prosthetic ear.

Barron also made a prosthetic ear for Kristen Bauer, a 25-year-old nursing student from Gering, Neb., who was born with microtia, a birth deformity in which an ear doesn’t form properly. Bauer had childhood surgeries to reconstruct her right ear, but the result didn’t look like a natural human ear.

With her new ear, “you cannot tell at all,” says Bauer, who was inspired by Barron and hopes to go into a nursing field aiding people who need prosthetics. “I never wore my hair up unless I was playing sports. Now I wear my hair up. I’ll do whatever with it. It’s weird how much confidence you have now that that reconstructive surgery is covered up. People aren’t staring and saying, ‘Oh, what happened to your ear?’ and you have to go through the whole story with them. It’s nice.”

Barron was awarded the CIA’s Career Intelligence Medal in 1993. Former CIA Director R. James Woolsey Jr. said that Barron was “an extraordinary artist and master of the highly specialized craft of personal disguise. Mr. Barron’s competency and artistic skills were unmatched. He was the impetus of the advanced disguise system and the ideal by which all other disguise officers were judged.”

Barron isn’t allowed to discuss much about his work for the CIA, which took him around the world and stretched from the Vietnam War to Operation Desert Storm. He worked very closely with legendary Hollywood makeup artist and CIA contractor John Chambers, famous for his work on the original “Planet of the Apes” films.

A U.S. Marine Corps veteran who later worked at the Pentagon as an art director for naval fleet magazines, Barron was brought to the CIA’s attention after he reproduced a Pentagon parking pass so he could park closer to the building in inclement weather. The CIA recruited him into its Office of Technical Services, Graphics and Identity Transformation Group in 1968. He started out forging documents for the CIA and later moved into disguise, working on everything from crafting new identities to creating doppelgängers.

“If I wanted to make you look like a generic Russian, I could make you look like a Russian — or a Chinese or an African-American. I did all those. Or a woman. That’s what I used to do,” Barron says. “God gave me a gift, and I am using it right now to help others. He’s going through me to help those who need help.”

As for Dunaway, he ended up going on “Oprah” himself after Barron made him a prosthetic nose in 2004. “There’s no doubt in my mind that this guy is a godsend. He brought me back from being as depressed as you can get. … I’m alive now. I’ve got a little, 5-year-old girl. My whole world is turned around, and it’s all because of Bob Barron.”

Dunaway has two prosthetic noses — one each for summer and winter complexions. “It might not be exactly what God gave you, but it’s going to be really hard for anybody to figure out it ain’t yours,” he says. “When Bob does his work, you’re back to being you. All he needs is a picture. From a freckle to a blackhead or a pore in your skin, he puts back what he sees in the picture.”

Not over yet

Health Diagnostic Laboratory (HDL) Inc.’s $47 million settlement with the federal government in April ended an investigation into the blood-testing lab’s reimbursement practices, but the company and its co-founder and former CEO Tonya Mallory, are not off the hook.

Financial and legal obstacles that lie ahead could further crimp the performance of one of Richmond’s former shining stars.

The settlement agreement with the U.S. Department of Justice (DOJ) spells out financial liabilities far beyond the $47 million fine, while related whistleblower lawsuits — which prompted the investigation in the first place — open the door to legal action against Mallory.

In announcing the settlement, the DOJ unsealed civil whistleblower claims and said it would intervene with suits against two other companies and three individuals, including Mallory, for similar violations under the federal False Claims Act. This means the DOJ will file its own complaint in those actions within 120 days of the court’s order confirming the government’s decision to intervene.

Mallory, reached by Virginia Business, had no comment on the whistleblower lawsuits. Her lawyer, Christopher Hall, of Saul Ewing LLP in Philadelphia, released a statement saying, “Ms. Mallory welcomes the unsealing of the complaint and will vigorously challenge the government’s evidence in court.”

While it’s uncertain how the legal skirmishing will play out, HDL’s continuing financial liability was clearly spelled out by the settlement. It includes contingency provisions that would require the downtown Richmond lab to pay more than $47 million if its ability to pay improves five years from the April 9 settlement date.

For instance, if HDL sells its ownership interest in Biotech 8 LLC, the legal entity that owns its new headquarters building, the settlement stipulates that 75 percent of the net, after-tax proceeds would go to the federal government. If a sale does not happen within four years, HDL may meet contingent fee obligations by obtaining an appraisal of the building and paying the government 75 percent of the proceeds it would receive if the building were sold at the appraised value.

Once one of the region’s fastest-growing companies, privately held HDL has invested $100 million in new equipment and the new building in Richmond’s biotechnology park. Opened in April 2014, the 283,000-square-foot building currently is assessed at $63 million.

In the event of a merger or if HDL is sold, the government would get 10 percent of the net proceeds of a sale, merger or transfer to an entity other than a wholly owned subsidiary of HDL.

The agreement sets a settlement cap at $100 million, which includes the $47 million fine and contingent fees.

HDL’s settlement with the Department of Justice stemmed from allegations that the lab induced doctors to order blood tests by paying them a $20 fee for each test. According to data obtained by the Wall Street Journal, HDL received hundreds of millions of dollars for claims for payment submitted to federal health-care programs. HDL received $139 million from Medicare in 2012 and $157 million in 2013, the Journal reported.

HDL admitted no wrongdoing in the settlement. The company contends that the fees were an industry practice and notes that it discontinued them last summer after the federal government warned they might violate anti-kickback statutes.

In a news release on the settlement agreement with HDL and another lab, California-based Singulex Inc., the DOJ advised the court that it would sue Alabama-based BlueWave Health Care Consultants Inc. and California-based Berkeley HeartLab Inc., along with Mallory and BlueWave’s owners, Floyd C. Dent and J. Bradley Johnson.

One whistleblower lawsuit brought against HDL, Mallory and other defendants had been sealed since 2013. It was brought by a nursing supervisor, Kayla Webster, and Scarlett Lutz, the owner of a billing service. Both women worked for a primary-care physician in Florence, S.C. The suit is one of three that the DOJ said it would join.

The Webster/Lutz claim alleges that HDL provided financial inducements to physicians in the form of a $20-per-patient fee in exchange for referrals of patients for laboratory testing in violation of state and federal anti-kickback statutes. HDL characterized the fee as a reimbursement to doctors for the labor of processing and handling blood samples.

HDL’s sales contractor and marketing agent, BlueWave Healthcare Consultants, also is a defendant in the suit, along with its executives, Dent and Johnson. Singulex, which allegedly offered $10 for each patient referral for blood lab testing, also was named as a defendant.

Like Mallory, Dent and Johnson are former employees of Berkeley. The suit says BlueWave allegedly sold HDL’s and Singulex’s tests as a bundle to physicians. Doctors were paid a total of $30 in “processing” fees per patient.

With HDL operating in 45 states, the suit refers to “a national scheme” that it says caused damage to government health-care programs “ … and in many cases, medically unnecessary tests themselves.”

It goes on to say that “the scheme caused beneficiaries of government health-care programs and private insurance plans in California and Illinois to receive other unnecessary health care, including follow-up physician visits, follow-up testing and unnecessary medications related to the illegal referrals to HDL and Singulex.”

Under the federal False Claims Act, whistleblowers with firsthand knowledge of fraud can bring what is known as a qui tam complaint and seek as much as 15 to 25 percent of recovered funds.

Mallory resigned from HDL last September, shortly after it became public that the clinical laboratory was under federal investigation. She said she was leaving to assist her brother with a new business venture, ITS Manufacturing, located about an hour away in Crewe. The small private company manufactures precision metal parts for the automotive and defense industries.

According to HDL, she subsequently resigned from the board of directors in November and ended any advisory role with the company. “She remains a shareholder, but has no involvement in the management or operation of the company. We cannot speak on her behalf,” a company spokesman told Virginia Business.

Rachel Suddarth, an assistant professor at the University of Richmond and an expert in Medicaid and Medicare compliance and reimbursement, says it’s unclear whether federal authorities could bring civil or criminal charges against Mallory.

In a similar case, DOJ reached a $42.7 million settlement in 2012 with Dallas-based Tenet Healthcare Corp. over allegations of overbilling Medicare, and the DOJ also prosecuted individual executives. That’s rare, Suddarth says, “but it does happen when the government feels that that person has engaged in sort of individualized improper behavior.”

The DOJ’s decision to join the whistleblower suits may indicate that the government thinks that Mallory “had more than just your corporate, mistaken … I-didn’t-realize-it-was-wrong level of involvement,” she says.

The suit also points out that Mallory personally signed the reimbursement checks to physicians, but Suddarth says it’s difficult to tell if that fact has any real significance or was standard procedure at HDL.
Mallory was Virginia Business magazine’s 2013 Virginia Business Person of the Year and in 2012 was Ernst and Young’s National Entrepreneur of the year in the Emerging Company category. By that time, three years after she had HDL up and running, she was the darling of Richmond’s business community. With generous donations of $2.2 million to the Science Museum of Virginia and $4 million to the athletics department of Virginia Commonwealth University — Mallory’s alma mater — the company appeared to be a hometown homerun.

Mallory started HDL with two other co-founders, Joseph McConnell, the company’s current CEO, and Russell Warnick, its chief scientific officer, in late 2008 with what essentially was a kitchen table business plan. The company met its five-year goals in 10 months. At its peak, the fast-growing HDL was bringing in annual revenue of $800 million, including payments from private health insurers, according to the WSJ, and adding 50 new employees a month, eventually growing to more than 800 workers.

Before starting the Richmond lab, Mallory worked for Berkeley HeartLab, a clinical testing laboratory located outside of San Francisco. Mallory told Virginia Business in 2013 that Berkeley recruited her to start a second Berkeley lab in Richmond. As a senior lab manager, she commuted from Richmond to California from 2005 to 2008. When Berkeley was suddenly acquired by Celera Corp., she said the Richmond project was killed, and she left the company.

According to the whistleblower suit, she resigned from Berkeley in September 2008 and incorporated HDL that November. HDL began operations in June 2009, the suit says, and started processing blood samples in November 2009.

In January 2010, Berkeley filed a lawsuit against HDL, Mallory, Warnick — who had formerly worked with Mallory at Berkeley — and the owners of BlueWave. It sought injunctive relief and $6 million in damages, with Berkeley alleging several claims, including claims for misappropriation of trade secrets and interference with Berkeley’s client relationships. In short, Berkeley was accusing HDL of recruiting former employees and stealing the company’s business by getting doctors to switch from Berkeley to HDL when ordering blood tests. HDL denied any wrongdoing and settled the suit for about $7 million.

As a condition of the DOJ settlement announced in April, HDL will continue to be under federal scrutiny under the terms of a corporate integrity agreement.
Suddarth says that if the government “really thought this was a bad-egg company that couldn’t be saved and it was all based on fraudulent billing, they would have just shut them down.” Instead, she points out,

HDL retains its ability to receive reimbursements from Medicare, Medicaid and Tricare, a health-care insurance system for military dependents and members of the military services.
Still, there are more legal hurdles ahead. HDL faces an $84 million federal court lawsuit from Cigna, a national health insurer, over allegations of fraudulent billing. HDL has denied the allegations and asked the court to dismiss the suit. Aetna Inc., another national life insurance company based out of Hartford, Conn., also filed suit against HDL in April. The company seeks to recover “tens of millions in monetary damages” for what it alleges was a “fraudulent billing scheme” that Aetna said caused it to pay twice as much as it should have for services provided by HDL. HDL refused to comment on the latest suit, saying it does not comment on matters related to pending or threatened litigation.

A collegiate ‘Shark Tank’

A couple years ago Virginia Commonwealth University business student Calvin Peterson missed an entire semester after developing a pressure sore from sitting too long in his wheelchair without changing positions. The injury was so severe that bone protruded through his skin, requiring surgery.

“When you’re in a wheelchair, you know you’re supposed to shift every couple of hours — some doctors say every 15 minutes — but you forget. If you’re very active and busy, it completely slips your mind to remember to shift,” explains Peterson, a native New Yorker who was paralyzed from the waist down after a gunshot wound.

A graduate of VCU’s entrepreneurship program, Peterson, 31, has started a company with two fellow VCU grads, Kaitlin Taylor and Wayne Pitts. They’re in the process of filing patent papers and raising money to develop a prototype for an affordable, automated wheelchair cushion that will prevent pressure sores by periodically changing the air pressure in cells within the cushion.

The trio developed the idea to enter VCU’s Venture Creation Competition last year and won the $4,000 grand prize for undergrads.

Universities across the country are turning students into entrepreneurs through competitions that require participants to pitch their product or business to a panel of judges. Many of the contests offer cash prizes that students can then invest into a startup business.

In fact, entrepreneurship competitions are so popular that the state government has announced plans to host its first Governor’s Business Plan competition, with $1 million in prizes. Overseen by the Office of the Secretary of Commerce and Trade, the contest begins this spring, and finalists will be announced in the summer. It aims to encourage innovation in the fields of agriculture, bio-life sciences, cybersecurity, energy and social entrepreneurship.

On the university level, most entrepreneurship contests have students pitch their ideas to a panel of judges, akin to ABC’s popular “Shark Tank” TV show. The contests tend to be multidisciplinary and open to all students, undergraduate and graduate.
“Entrepreneurship is a team sport, and it connects across all disciplines,” says Ken Kahn, director of VCU’s da Vinci Center for innovation in product design and development. Developing any company takes people with a variety of skills, such as technology, marketing, engineering and graphic design. “It’s very much a group effort to bring an idea forward,” Kahn says of the entrepreneurship competitions.

Many of the university contests award cash prizes to students, but not all universities think that’s the best approach.

For instance, Virginia Tech’s Global Entrepreneurship Challenge Semifinals awards scholarship money. “The prizes … are not seed-fund money,” says Jim Flowers, executive director of VT KnowledgeWorks, which runs the contest. “It is not our purpose to create businesses out of that contest. It is to give students education in entrepreneurial behaviors and techniques … If you cast the thing as a startup contest, students tend to drop out of school and start the business. So is the point to cause that or is the point to keep them in school and learn some entrepreneurship skills so that later they can apply those in a more aggressive and effective way?”

The team that wins Virginia Tech’s student entrepreneurship contest does go on to compete in the university’s Global Entrepreneurship Challenge, which awards $40,000 in cash prizes and is open to university students worldwide. However, in the competition’s five-year history, none of the hometown teams from Virginia Tech has won the global challenge.

Joseph Linzon, 21, a senior at the University of Virginia’s McIntire School of Commerce, acknowledges that he briefly considered taking a leave of absence from school to work on his startup company, PowerSole.

A Toronto native, Linzon took second place in U.Va.’s 2011 Entrepreneurship Cup (or E-Cup) contest, winning $10,000 for his idea for PowerSole, a shoe that powers an electrical battery from the wearer’s kinetic energy. He used the money to file for initial patents. PowerSole later won U.Va.’s Galant Challenge, which connects startups with investors. That contest led to PowerSole gaining $200,000 in equity investment, as well as finding a professional to help run the company so that Linzon could focus on finishing his degree.

With PowerSole, a wearer can build enough battery power to fully charge a cellphone or GPS device after wearing the shoes for about six hours. Linzon was inspired to create PowerSole after volunteering in Peru in 2010. “I saw how society was affected by not having access to electricity. I found an individual whose business depended every day on his cell phone, but the [electrical] infrastructure was so poor he couldn’t depend on it.”

Now Linzon is seeking a company to license his product. He hopes that PowerSole will operate on the same model as Internet retailer TOMS, which donates a pair of shoes to the needy for every pair of shoes it sells.

Linzon credits the E-Cup and Galant contests with sparking his love for entrepreneurship. He’s also now a partner in a startup restaurant, Roots Natural Kitchen, in Charlottesville.

Success at an entrepreneurship competition also helped shape the future for Tumi Oredein. Oredein, 28, won VCU’s Venture Creation Competition in 2013 with an idea for a dry-erase wristband for children called SKRIBS. That led Oredein to win Wal-Mart’s 2013 Get on the Shelf competition. He later sold the licensing right for SKRIBS to a Richmond company.

Now Oredein works as assistant manager of product development for Toys R Us, overseeing global product development for the toy retailer’s Bruin line of toys for infants and preschoolers. “It’s the same thing I did with SKRIBS, just on a lot higher level,” he explains. “Every season we have like 15 or so new products we have to develop or source or figure out how to bring to market.”

A graduate of U.Va.’s mechanical engineering program, Oredein earned a master’s degree in entrepreneurship from VCU in 2014. Before attending VCU and entering the entrepreneurship competition, “I had no real background in product development,” Oredein says. “I was just doing research in biomechanical fields. I had no business sense. I had no ideas about invention and other types of innovation … Without the experience of winning the competition … I wouldn’t have been looked at by Toys R Us.”

Betting big on local TV

Back in the early 1990s when Dennis Wharton was a reporter for Variety covering cable and broadcast television legislation on Capitol Hill, some Federal Communications Commission officials and analysts were predicting that cable TV would soon ring the death knell for local network affiliate stations.

“And here we are 31 years later with a robust and healthy local TV business,” says Wharton, now executive vice president of the Washington, D.C.-based National Association of Broadcasters, the trade industry association for U.S. television and radio broadcasters. “The demise of local affiliates has been written many, many times and the business has probably had one of the best years it’s ever had.”

Richmond-based Media General and McLean-based Gannett are betting big on local TV, joining the ranks of Tribune Co. and other companies in divesting or spinning off their newspaper and print media holdings in favor of owning local network affiliate television stations.

December Media General completed a $1.6 billion merger with Austin, Texas-based LIN Media, creating a new Media General with 71 television stations reaching 24 percent of American households. (Media General owned just 18 stations in mid-2013, before combining with Nashville-based Young Broadcasting.) In late December, Media General became the largest owner of affiliates for the CW Network.

Gannett, which owns 46 television stations and reaches about 30 percent of the U.S. population, is the nation’s top owner of CBS and NBC affiliates. Itannounced last August that it planned to spin off its print media holdings into a new, separate company. Gannett acquired 20 stations from Dallas-based Belos Corp. in 2013 for $1.5 billion and last year purchased six more stations for $215 million from Dallas-based London Broadcasting Company.

Gannett had $1.4 billion in third-quarter 2014 revenues, a 15 percent increase over the prior year. Media General similarly saw a 21 percent increase in net operating revenue over the same time period.

Despite increasing advertising revenues for broadcast and network television, however, some media analysts say that the cord-cutting movement and fast-changing technologies for how we watch video content could one day endanger local television affiliates in the same way that the Internet harmed the newspaper industry.

Consumers now view network TV content across multiple platforms, including mobile phones, tablets, video game consoles and streaming media players. Some viewers, particularly millennials, purchase network television shows on an a la carte basis through services such as Apple’s iTunes Store and Wal-Mart’s VUDU, circumventing local TV stations altogether. (Congress has also seen some unsuccessful pushes to unbundle cable packages, allowing consumers to purchase channels a la carte, but the latest such effort by U.S. Sen. John McCain, R-Ariz., stalled in committee.)

Still others have eschewed cable subscriptions in favor of less expensive content providers such as Netflix, Hulu and Amazon Prime, all of which now boast original programming. (In fact this year, for the first time, none of the four major networks won a Golden Globe for television programming, but Amazon and Netflix did.) CBS now offers a dedicated app making its programming available for a fee without requiring a cable TV subscription and HBO’s HBO Go service will also be available as a standalone streaming service starting in April. (A recent survey by Dallas-based international marketing firm Parks Associates found that a projected 7 million cable subscribers would drop cable entirely in favor of the HBO streaming service.) And, upping the ante, DISH Network has released a $20 per month streaming-only service called Sling TV that offers a basic package of 12 channels, including ESPN, CNN, TNT, HGTV, The Food Network and The Disney Channel. (But Sling TV doesn’t include any network TV or local affiliate programming.)

In the short term, local television station ownership is a strong, sensible investment, says cable industry consultant Howard Homonoff. But what television-viewing technology will look like 25 years from now is “literally unknowable,” he says. And while online and alternate-platform viewing “especially by young people are certainly potentially great threats, I would view it still as an evolutionary rather than a revolutionary process” in terms of how changing technology will impact local TV affiliates.

“America¹s love affair with TV is stronger than ever, especially at the local level, yet consumers' media viewing habits are rapidly evolving due to technological advances,” says Media General's President and CEO Vincent Sadusky says. “Media General is a technology-driven company and we are focused on staying ahead of the curve by evaluating and investing in the latest technologies. Our goal is to produce the highest quality and quantity of unique local content and be consumers' and advertisers' number one choice on all screens.”

Gregory Fairchild, an associate professor in the University of Virginia’s Darden School of Business, says, “The challenge for media providers … is neither their technologies nor their business models have caught up to what the consumer would like to have. It makes it very hard to predict which models will be the models that will work going forward.”

Standalone streaming services such as HBO GO, DISH’s Sling TV and CBS All Access are game changers and are harbingers of greater innovations to come in content delivery, Fairchild says.

Affiliate owners need to be on the lookout for online services that might emerge to supplant the local news business in the same way that sites such as eBay, Craigslist, Monster.com and Match.com stole away the newspaper industry’s revenue stream for classified ads and personal ads, he says.

As for local affiliates being the sole suppliers of network content, CBS All Access already threatens that model, though the Supreme Court’s ruling last year against online video provider Aereo prohibits online broadcasting of network TV shows by third parties without the consent of the television networks. Fairchild points out, however, that after Napster was put out of business for making copyrighted music available for free, Apple stepped into the void and rewrote the entire industry model for music sales and pricing. Similar online delivery of network television content, he says, could mean that local affiliates will have less bargaining power with network television content providers in the future if more and more consumers seek content from alternative sources.

Last summer, CBS pulled its network affiliation from WISH-TV in Indianapolis and switched to rival station WTTV after a dispute over how much of a share the network would get from the retransmission fees WISH receives from cable providers. Media General was already in negotiations to buy WISH’s parent company, LIN Media, and dropped its buying price by more than $100 million in part due to the CBS dispute.

Nevertheless, for the next several years at least, all the speculation may be much ado about nothing.

For one thing, those cable retransmission fees remain a growing, stable and important revenue stream for network affiliates. Though the law allowing retransmission fee was passed in 1992, stations didn’t start demanding the fees from cable providers until the mid-2000s.

Advertising still makes up the lion’s share of earnings for local TV stations, but the retransmission fees now make up about 20 to 25 percent of the stations’ revenues, a figure that continues to increase, says Justin Nielson, a senior research analyst with SNL Kagan. (Battles between cable providers and networks over these retransmission fees have resulted in high-profile showdowns and channel “blackouts.”)

Gannett’s retransmission fees jumped 67 percent last year, Gannett CEO Gracia Martore noted in September at Goldman Sachs’ Communacopia conference, though she added that there still remains a gap between the value of the content provided by network affiliates and the amount cable providers are willing to pay for it.

Also, points out Nielson, the SNL Kagan analyst, local stations are awaiting a cash bonanza in 2016 when the FCC will allow stations to auction unused spectrum bandwidth to wireless telecommunications providers.

Political advertising remains a major revenue stream for local stations. In an October earnings call, Martore said that “for the foreseeable future [politicians] will continue to be highly dependent on broadcast television to get elected.”
Furthermore, people who watch TV shows the traditional way, on a television and during the timeslots when the shows air, remain the dominant demographic for viewership. In 2014, the average American viewer watched 4 hours and 32 minutes of live television daily, according to Nielsen ratings data. That was down just slightly from 4 hours and 44 minutes in 2013. (Time-shifted DVR viewing largely made up the difference, Nielsen concluded.) Broadcast network television viewership ratings also consistently dwarf competing content from cable networks.

TV shows and live sporting events, awards shows, musicals and reality competitions are driving factors keeping timeslot network television viewership strong, Wharton says. Cord cutters usually can’t purchase television shows online until at least a day or two after the shows have aired, and that can make you feel alienated around the office water cooler, he says.

And in poorer areas where residents generally can’t afford a monthly cable subscription, HD antennas drive viewership of local affiliates as well as the affiliates’ additional digital broadcast channels, which can include content such as the popular African-American network Bounce TV, Wharton adds.

Additionally, social media has been a huge boon for live television viewership. “Twitter is probably one of the greatest inventions for live, local network broadcasters because of the amount of conversation and dialogue that’s going on during shows, whether it’s snarky comments during the Emmy Awards or the Grammys or just TV shows like ‘The Good Wife’,” Wharton says.

Also, he adds, locally generated news and weather reports remain a vital service to viewers that online-only distributors can’t offer. “Compelling content will always rule the day and there is demand. Particularly in a weather or emergency situation, there’s no substitute for local broadcasting.” For instance, when Buffalo, N.Y., was hit by a major snowstorm last November, local news viewership rose to the level of NFL football game ratings. (Gannett and Media General both own stations in that market.)

At least for the near future, local network affiliates aren’t going anywhere.

“We feel really good about the way each of our businesses is positioned amid today's increasingly digital media landscape,” Martore said in September. “Clearly our publishing and broadcasting businesses are buttressed by strong digital strategies. The needs and preferences of our readers and viewers may be changing, but we have used that dynamic to our advantage as we have developed and continue to develop new and innovative ways to reach them.”
Says Homonoff: “Media companies … have to continue to aggressively invest in their online and mobile presence [but] even though there are different platforms to get local media, people still know the names of their local media providers and people still care about the local news and events in their own communities and the local broadcaster has to continue to be the key player in that local media marketplace and that’s a business I think has growth potential.”

These walls do talk

Sitting in his cubicle in his Chesterfield County office, David Crosby can monitor the real-time energy usage of nine office buildings as far away as Pennsylvania and Florida, not to mention the one he’s sitting in.

Crosby is an asset manager for Allegiancy, a Richmond-based commercial real estate management company overseeing more than $300 million in assets. Within the next year Allegiancy plans to spread energy monitoring to all office buildings in its portfolio.

“It sends me email alerts when it goes over certain thresholds,” Crosby explains as he switches the dashboard from displaying kilowatts per hour to kilowatts per day. It also shows the outdoor temperature at each building. In its headquarters building alone, Crosby says, the system has helped Allegiancy make adjustments that cut the power bill from $225,000 per year to $180,000 per year since the system, which cost around $12,000, was installed in 2012.

Built by Richmond-based Net Metering Inc., the energy monitoring system used by Allegiancy is one example of ways commercial property developers, owners and managers are creating a new generation of intelligent buildings designed to save money, improve safety and security, and produce a better overall experience for tenants and visitors.

“What we’re trying to do is take the real estate business and drag it into the present,” says Allegiancy CEO Stevens M. Sadler. “In the real estate business, particularly in the asset management business, we see companies that operate on pencil and paper technology. They rely on sticky notes and the human brain to get things done.”

Last year Allegiancy installed the Net Metering system in a building in Durham, N.C. Immediately the staff in the Richmond office began seeing regular spikes in the building’s energy consumption. Sadler was planning on visiting the building in a couple weeks so he made a note to investigate the spike while he was there. “I was walking through the building with an engineer … [and] we could hear this compressor bang. It would cycle on, shut down, cycle on, shut down … Everything else was normal.”

The engineer told him that he was aware of the problem but said that particular compressor just needed time to warm up. Sadler, however, hired another HVAC engineer who found a burnt contact in the compressor. The compressor was only about five years old. If the problem had gone on much longer, the unit would have been a complete loss, necessitating a $10,000 replacement. Instead, the repair was much less expensive.

Having a “synthetic presence” in buildings in other states means “I can now solve a problem in Charleston [S.C] almost as quickly as I can solve a problem in Richmond, and that’s a big deal,” says Sadler. For one thing, it means that he doesn’t have to have highly skilled staff on the payroll in each building. For another, by optimizing energy and HVAC usage, Allegiancy can extend the life of expensive equipment such as compressors by additional years, he says.

Allegiancy is using cloud computing and online dashboards for tracking project management and to communicate operating expenses and real-time energy usage statistics to building owners. It’s also using analytics on a database of tenant complaints in order to identify bigger problems and patterns in building operations.

Getting real-time energy statistics can be the difference between fixing a problem in two days versus 90 days, Sadler says. For companies not keeping track of energy usage patterns in real time, they won’t learn there’s a problem until at least a month later when they’ve gotten a higher energy bill. And by that point, they’re well into a second month of higher bills.

Monitoring energy consumption is the first goal for most real estate companies that are creating smart buildings, says Gina Anselmo, energy program engineer in the integrative design services group for Forest City Enterprises. “You have to start somewhere, and we want to start where we can save the most money,” Anselmo says. “There’s a lot of opportunity in having insights on how your business is using energy on an hourly basis. You can get a lot of savings right off the bat just in terms of getting your schedule … optimized as quickly as possible … We want to get smarter about how we’re managing our load.”

A $9 billion real estate management and development firm based in Cleveland, Forest City’s portfolio includes Short Pump Town Center mall in Henrico County, the mixed-use, renovated Tobacco Row warehouses in Richmond, and The Yards, a 5.5-million-square-foot, mixed-use project currently under development in Washington, D.C.

Forest City plans to begin installing energy monitoring systems in its buildings this year, Anselmo says; however, “the long-term vision of intelligent buildings … is integration.” The industry goal, she says, is to work toward a “single pane of glass,” a platform that has the ability not only to control and automate multiple systems such as lighting, security, HVAC, elevators, water and energy usage, but also to get those systems working in concert with one another.

“In the world we live in today, where there’s the cloud, where there’s big data, there’s so much that’s possible,” says Kelly Romano. She’s president of Intelligent Buildings Technologies, a division of the United Technologies Corp., a $62 billion Hartford, Conn.-based conglomerate specializing in aerospace and commercial building systems, including HVAC, elevators, and fire and security.

Romano’s group recently worked on a project at the Shanghai International Finance Centre in China, twin towers that are about 850 feet tall. Using a system based on algorithms, it was able to optimize several building system components and get them working together. It wound up reducing energy consumption by 27 percent, a savings of about $2 million per year.

“These systems in commercial buildings used to operate independently of each other,” Romano says. “If you take all of the systems in a building and start to connect them, there’s a lot that can happen that can make the building more efficient and reduce operating costs. That’s a real driver for the owner and developer, but it makes it better for the tenants as well … Tenant experience is becoming more and more important.”

Romano envisions a day not long from now when a building will identify occupants by credentials on their smart phones, summoning an elevator and taking them directly to their floor, turning on their office lights and air conditioning when the occupants enter and automatically turning off the lights when they leave a room.

An industry leader in intelligent building systems is New York City-based Rudin Management Co., which manages 15 million square feet of commercial and residential buildings in New York.

Working with Columbia University’s Center for Computational Learning Systems and Selex ES, a division of Italian aerospace and mechanical controls contractor Finmeccanica, Rudin developed its own proprietary system called Di-BOSS, or Digital Building Operating System.

Instead of just monitoring energy, it links all major building systems, including heating and cooling, elevators, water and energy consumption, building management systems, fire safety, security and occupancy tracking. Selex ES is marketing the system for Rudin worldwide, and Rudin also is launching a similar product aimed at residential buildings.

Rudin launched Di-BOSS in its own buildings in June 2013, and it’s now installed in eight buildings that total about 6 million square feet. The company plans to push it out to the rest of its portfolio over the next year. Rudin staff can access the Di-BOSS system with their computers or via iPhones and iPad mini tablets.

“In the first year of operation, Di-BOSS saved 345 Park Avenue just under a million dollars, roughly 50 cents a foot … and that was through the worst winter New York has had in a decade,” says Executive Vice President John J. Gilbert III. The system cost about $750,000 to install in the 345 Park Avenue building, which houses the headquarters of the National Football League and pharmaceutical firm Bristol-Myers Squibb.

Using Di-BOSS, Rudin’s operators have been able to optimize the times for starting and stopping HVAC systems, shortening the buildings’ operating days and increasing savings. The system’s greatest value, however, says Gilbert, is its ability to collect and store large amounts of data on how the buildings operate, so that Rudin can perform analytics and create opportunities for greater efficiencies and future savings.

“I used to say that we were a real estate company that dabbles in technology, but slowly and surely we’re becoming a technology company that happens to own a lot of real estate,” Gilbert says. “That’s a lesson for a lot of industries. When you really analyze data … it doesn’t matter if you’re a police department or a real estate company, if you’re able to create algorithms, and you’re able to see patterns of activity that are valuable to your bottom line, then why wouldn’t you be looking at that data? That is in fact the value proposition.”

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byline: Richard Foster