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byline: Richard Foster

​Pruning the branch

StellarOne’s branch at Patterson and Libbie avenues in Richmond looks more like a small hotel lobby than a banking office.

StellarOne’s branch at Patterson and Libbie avenues
in Richmond looks more like a small hotel lobby
than a banking office.

When you enter the StellarOne bank branch at the corner of Patterson and Libbie avenues in Richmond, one thing quickly becomes apparent: There are no tellers and no line.
The branch looks more like a small hotel lobby with a concierge desk, a couple of comfy chairs and a pot of coffee brewing. Alongside the paneled left wall are what appears to be a few payphones with video screens. A customer walks up to the screen and pushes a button to have a video conference with a bank professional in a secure back room. The same bank representative can aid multiple customers simultaneously without noticeable service delays and can disburse money and handle complicated deposits and transactions.

As mobile and online banking increases, foot traffic at bank branches nationally is decreasing. That development is driving some banks to experiment with the bank branch model, in some cases creating streamlined offices with employees who are trained to do more than deposit checks and disburse cash.

“I think we need to recognize that younger people do not utilize bank branches to the extent that we older people do,” says StellarOne Chairman Raymond D. Smoot Jr. “My children seldom go into a bank branch. Being able to deliver services online is important. It used to be in order to do a CD, you had to go to the bank and sit down and fill out a bunch of forms, and now an increasing number of banks are doing CDs online. I think there will continue to be branches but the number of branches in banking … will be declining as the delivery of banking services over the Internet expands.” (Charlottesville-based StellarOne plans to merge with Richmond-based Union First Market. See related story on page 59.)

This spring in Washington, D.C., Wells Fargo debuted a pilot 1,250-square-foot mini-branch with tech-friendly ATM screens. Bank employees with tablets walk around to assist customers as needed.

“It’s not the branch that’s dead; it’s the workflow and the technology that needs to be reinvigorated,” says Jonathan Velline, of Wells Fargo’s national ATM and store strategies.

The new mini-branch is virtually paperless and requires just 10 percent back-office space as opposed to the 40 percent a regular bank branch might require, Velline says. It also allowed the bank to open a new branch in an urban neighborhood where real estate is at a premium.
Typically, bank branches are about 4,000 square feet and cost about $4 million to build. As banks seek cost-cutting measures, expensive, large branches are low-hanging fruit, experts say.

Given how hard it is to increase revenues in the current operating environment and economy, “everyone is focused on costs and they’re taking a hard look at their branch structures … from the big guys all the way down to the small banks,” says BB&T Equity Research Analyst Blair Brantley.

Creating more tech-savvy branches and offering more mobile and online banking options also is important to the growing millennial customer demographic, Velline notes.

Not everyone thinks technology is crucial, however. At Martinsville-based Carter Bank & Trust, foot traffic has been growing at its 123 bank branches. That’s because Carter Bank & Trust doesn’t offer online banking or ATMs. The bank is considering online banking, but its board has been hesitant because of cyber-crime fears.

“The risk to the bank of significant monetary loss is greater than we think we ought to absorb at this time,” says Worth Harris Carter Jr., the bank’s chairman and president “The bank has continued to grow and prosper, even though we have customers who want [online banking].”

While some once said that ATMs and debit cards would also spell death for the bank branch, it’s clear that “generationally, [technology is] going to have a very, very big impact on the whole conventional [bank] branch as we know it,” says David West, senior vice president at the Richmond investment firm Davenport & Co. “Studies are showing … that the younger the person, the more technology they use, the less they feel they need to go in and visit a physical branch. While it’s not going to go away overnight by a long shot … it’s very much going to impact the types of offices and branches banks use.”

 

 

​Remember Signet and Crestar?

 

Ray Smoot will become chairman after the merger of Union First Market and StellarOne. He expects more Virginia banks to combine to better manage growing costs.

 

Ray Smoot will become chairman after the merger
of Union First Market and StellarOne.
He expects more Virginia banks to combine
 to better manage growing costs.

It’s been more than a decade since the last large Virginia bank was bought by an out-of-state company. Before then, a number of Old Dominion financial institutions had assets of more than $10 billion. Richmond, in fact, was a financial headquarters city, its downtown skyline dominated by Virginia banks such as Central Fidelity, Crestar and Signet.

Virginians were reminded of those heady days by the proposed $445.1 million, all-stock merger of Richmond-based Union First Market Bank and StellarOne Corp. of Charlottesville, announced in June. The merger, expected to be completed no later than May 2014, will create the largest community bank in Virginia, with assets of $7.1 billion, $5.8 billion in deposits, $5.2 billion in loans and 146 branch locations statewide, stretching from Southwest Virginia to Charlottesville, Richmond and Fredericksburg.

Retaining the Union First Market name, the publicly traded merged bank will remain headquartered in Richmond.


“In our strategic planning as we looked to the banks of size in Virginia, Stellar seemed to have the best combination of cultural fit and footprint,” Union First Market CEO G. William Beale says of the merger.


“I believe we will be a good fit for several reasons,” says StellarOne Chairman Raymond D. Smoot Jr. “We both have a long history of being community-based banks that, when brought together, cover much of the state. We will have a considerably larger lending capacity together as a $7 billion or so bank than we will have separately, which will permit us to serve larger companies and borrowers within Virginia, and we believe there are some efficiencies to be recognized by bringing together two banks that serve part of the same geography of the state.”


When the merger is complete, Beale will remain CEO, and Smoot will be chairman of the new, larger Union First Market board. Smoot and seven yet-to-be-identified members of the 13-member StellarOne board will join the merged board.


StellarOne investors stand to earn a dividend increase of more than 20 percent at the closing of the deal, due to Union First Market’s higher dividends, Smoot says, “and would anticipate that level of dividend would increase over time.”


The merged bank will close more than 10 bank branches, and there will also be some reductions to back office operations due to the consolidation, Beale says. “Attrition will take care of some of those, but it won’t take care of everything,” he says, acknowledging there will be some layoffs in the merger’s wake.
An implementation team made up of Union First Market and StellarOne employees is being put together “to look at areas where the two banks overlap and to determine where we would have undue overlap and also look at where we may need additional coverage,” Smoot says.


While it’s still too early to tell whether this merger will signal Virginia’s return as a banking powerhouse, Beale thinks it would be good for Virginia. “It would give Virginia companies of almost any size the opportunity to do more business with Virginia-based banks without having to go to the national players.”
There has been a wave of bank consolidations going on for several years across the nation, Smoot says. The trend is being driven by the higher costs of doing business because of burdensome, increased federal regulations and ballooning IT costs to keep banks technologically competitive with the latest developments in online and mobile banking. For instance, in March, Arlington-based Virginia Commerce Bank was acquired by Charleston, W.Va.-based United Bankshares Inc.


Smoot thinks it’s likely other Virginia banks will band together to manage costs: “The considerable increased regulatory requirements are impacting bottom lines unfavorably, which is leading banks to come together where they believe they can recognize savings in the management and administration of the organization.”


The larger, streamlined bank will be in a better position to deal with regulations and will be able to offer loans to larger corporate clients. Plus, the cost savings gained from reducing inefficiencies will mean that the bank won’t feel pressured to raise fees and rates on retail customers, Beale says.
The large Virginia banks (the last of which, Falls Church-based First Virginia Banks, was sold in 2003) also were known for their largesse within the commonwealth, contributing to various Virginia-based charities and sponsoring community and cultural events. Union First Market and StellarOne contribute about $2 million each year in sponsorships and donations, and Beale says the merged Union First Market likely will play an even larger role in community events and charities across Virginia.


Going forward, after the merger logistics are resolved, Union First Market will look at expanding into areas where neither bank had a large presence, such as Northern Virginia and Hampton Roads. “But first and foremost at this point,” Smoot says,  “we need to ensure we organize in a way to appropriately serve the area where we’re located before considering the possibility of moving into new areas.”

 

 

‘The last mile’

Until this year, Becky Birnbaum says, the Internet service at her home in rural Nelson County was so bad that “I couldn’t even download a YouTube video. … Sometimes I couldn’t even get my email to download, it was so horrible.”

An IT professional at Silverchair Learning Systems in Charlottesville, Birnbaum often was frustrated by the lack of high-speed Internet available at her home, which sits at the foot of Afton Mountain on Route 151. She had three choices: a dial-up modem through her phone connection, satellite dish or a cellular mobile broadband service. She first tried satellite but found the latency and slow upload speeds to be a problem, and then she had similar problems with the cellular broadband. “If I ever tried to work from home, it was just untenable.”

That all changed when Blue Ridge InternetWorks began offering high-speed fiber-optic Internet in some areas of Nelson County this spring. The county built a $3.1 million fiber network that is being operated by Blue Ridge InternetWorks. The network is funded through federal grants and matching local funds.

A similar $10 million network is going online this summer in Buena Vista, Lexington and Rockbridge County, funded largely by a $7 million federal stimulus grant and $2.5 million from Washington and Lee University.

“This will provide much more bandwidth and expand opportunities for [local] businesses to be able to compete at a regional and a global level,” says Brian Brown, economic development director for the City of Buena Vista. “It’s also going to open up so much for the colleges and the universities, and it will be much more reliable for the students.”

As one of the Nelson network’s first new customers, Birnbaum says her Internet connection has improved by “leaps and bounds. I can work from home now and do video streaming and teleconferencing. I might be working for myself as a consultant in a couple of months, and I can do that from home. We’re paying the same amount for 100 times the [Internet] service. It’s literally 100 times faster. It’s huge. I’ve gone from being like the person in my office with no Internet access to being the person with the best Internet access.”

Virginia ranks eighth in the nation in broadband adoption, but there are ongoing efforts to extend service into the more rural areas. High-speed Internet access is available to about 85 percent to 90 percent of Virginians, says Virginia Deputy Secretary of Technology Karen Jackson, but “the problem is that the last 10 percent are in the roughest terrain; they’re in the least populated areas.”

During the recent recession, some rural communities delayed progress on high-speed Internet projects that weren’t funded with federal stimulus money, Jackson says. During the past year, however, efforts have ramped up in localities across the state, including Frederick, Prince George and Surry counties and the Northern Neck.

Satellite Internet is available anywhere in the commonwealth, and some, such as the NOVECnet high-speed service launched last year by the Northern Virginia Electric Cooperative, are quite good, Jackson says. But customers in more rural areas may have problems with transmission latency or with the mountainous and forested terrain creating line-of-sight issues with satellites. As cellular technology improves and reaches more coverage areas, that also may prove to be a solution, Jackson says.

The ideal delivery system for high-speed Internet is to run high-capacity fiber-optic cable as in Nelson County, but that’s not always a cost-effective or practical solution.

Nelson’s network is what’s known as a “middle-mile” network: The county installed a fiber-optic backbone and then service providers run cable to customers’ homes, which is known as the “last mile.” Unfortunately, that last mile can be quite long in rural areas, and running buried fiber-optic cable can get expensive.

To hook up to the network, Nelson customers must pay an installation fee, which is amortized over five years. This has ranged from $600 to $6,000 for individual customers, says Baylor Fooks, co-owner of Blue Ridge InternetWorks, who likens installation to connecting a rural customer to an electrical co-op or public utilities. In its first two months this spring, only 20 customers had signed up. The county broadband authority also will begin offering an expanded wireless network, using the new high-speed fiber infrastructure.

“There’s still a large number of residents in Nelson County that are prohibitively far away from the backbone fiber to make this work, and the hope is that wireless [Internet service providers] or tactical deployments of DSL will solve those problems,” Fooks says.

Adds Jackson: “There’s not a soul on the planet that wouldn’t want fiber to the home. Everybody wants that, but to be able to drill through rock to lay fiber into some of these areas is just cost prohibitive, so a lot of the communities are looking at wireless solutions as a way to reach more homes [with high-speed Internet] in a more cost-effective manner.”

In the Northern Neck, the local planning district commission and local wireless Internet provider Northern Neck Wi-Fi have struggled to find federal grants or loans to upgrade the local wireless network to deliver high-speed service to rural areas, particularly along the region’s sprawling 1,200 miles of shore line.

Northern Neck Wi-Fi’s current technology delivers Internet to about 3,500 rural homes, but “we know there are people who still don’t have Internet. We have 1,000 or more on our waiting list we can’t provide with Internet right now,” says network engineer Tom Foulkes, a network engineer and one of the company’s owners. The current wireless network also can’t deliver the capacity or speeds needed to keep up with today’s multimedia Internet. “Two years ago, Netflix was a new idea, but now it’s the norm,” Foulkes says. “A lot more bandwidth is being used.”

Another problem is that his wholesale price for buying Internet access to deliver to his customers is much higher than it would be for a service provider in a densely populated, urban area because as a rural provider he has to pay additional connection fees.

For about $6 million, Foulkes estimates, he could upgrade his wireless network with a new system that could deliver high-speed Internet to about 75 percent of the Northern Neck. He could get a pilot system started for about $1.65 million. But grant money hasn’t been available for the past couple years, and the USDA already has turned down one federal loan application from Northern Neck Wi-Fi. Now Foulkes is trying to decide whether he should reapply for the federal loan — a long, complicated process fraught with red tape — or whether he should hire a grant writer to seek funds. He’s consulting the office of U.S. Sen. Mark Warner for help.

For Foulkes, high-speed Internet is a crucial issue for his community’s future. “These kids in school down here need high-speed Internet and most of their homes don’t have it,” says the father of four (whose wife is expecting their fifth child). If he can upgrade the wireless network, he plans to offer low-cost or free high-speed Internet access to poor families with school-age children. “Yes, I want to make money off of it, but I really want to help the area, and that’s my first and foremost thing to do,” he explains.

“My son is 9, and he can set up a server. I think if more children had the chance to do their homework on the Internet, they’d get better grades and be able to go further on [in their educations]. From my personal experience, high-speed Internet is very important for kids to study and to learn computers and for their futures.”

Precision farming

The Vanderhyde Dairy is proof that the U.S. Capitol isn’t the only building in our country powered by manure.

Bad jokes aside, the third-largest dairy in Virginia is also the only one in the state selling power generated by the methane gas from cow manure. Since August 2010, the Chatham dairy farm’s methane digester has been producing about 300,000 kilowatts per month — enough to power more than 100 homes. The dairy sells the electricity to Dominion Virginia Power.

The methane digester is just one example of the many new technologies implemented on Virginia farms during the past few years, as the state’s farmers modernize to cut costs and increase efficiencies.

When the price of milk is low, “the margins are so slim that we use the technology to make sure there isn’t another margin we can squeeze. We have no control over what we get paid for the milk, so we have to do everything on the cost side,” says Roy Vanderhyde, whose family has operated their dairy in Virginia since 1980.

The Vanderhydes paid for the $3 million digester system with the help of matching grants from federal, state and local government agencies. They had hoped it would be a major generator of revenue in addition to providing electrical power, but the purchase price for power fell below expectations because of the drop in natural gas prices.

“It’s breaking even. We’re not making nearly the money we were hoping,” Vanderhyde says. “It’s sad because the system is so efficient. It takes 3,000 kilowatts a month to make the system work to generate 300,000. You’re not going to find renewable energy with those kinds of returns any better than that.”

If he had to do it over, Vanderhyde says, he would use the system just to power his own farm, but then he wouldn’t have been eligible for grant money. The digester does pay other dividends, however. It’s also a source of cheap bedding materials for the farm’s 2,300 cows, and it creates virtually odor-free fertilizer, which his neighbors appreciate.

The Vanderhyde Dairy has had better luck with implementing GPS technologies to help monitor its 2,000-acre crop fields, as well as robotic feeders that determine precisely how much each cow is eating to ensure that feed isn’t wasted.
“We feed 1.5 million pounds of feed per week to the cows. If you’re off by 1 percent, that can be $700 or $800 a week in feed overages, so you have to keep a close eye on that,” Vanderhyde says.

Robotic milking
Robotic milking and feeding is now a major part of operations at Ingleside Dairy Farm in Lexington, which has been in the Leech family since the 1700s.

In February 2012 the family installed the first widespread robotic milking system at a Virginia dairy. About 240 cows are milked on the farm using the automated system. Each cow wears a collar with a digital transponder. When it approaches the robotic milker, the system finds the cow’s udder and attaches the milking apparatus using a 3-D camera and laser technology.

As the cows are milked and go about their daily business, the system tracks a wealth of data, ranging from the protein and butter fat contents of each cow’s milk to how much a cow walks or chews.

“You could probably sit at the computer all day reading reports,” says Linda Leech, who runs the farm with her husband, Charlie, and their adult children, Beau and Jennifer. “It gives you so much information about every individual cow.”

The system even can predict when a cow goes into heat, letting the farmers know the optimal time for breeding the cow. The system also alerts farmers if a cow is showing signs of illness, such as eating less or producing less milk. It will automatically quarantine a suspect cow into a holding pen so the farmer doesn’t have to seek it out.

Alerts such as these can be delivered via smartphone to farmers in the field. The Leeches, however, aren’t able to take advantage of that feature, Linda Leech says, because “we don’t have very good cell service at all where the farm is located.” Reliable high-speed Internet is also a problem. She’s heard the county is working on upgrading the local communications infrastructure, but it could be another year or more before it is ready.

Since installing the system, Leech says, the dairy has had to hire far fewer workers than it did just two years ago. The business also has increased output significantly. The farm can muster the manpower to milk a cow only once or twice a day. With the robotic milker, however, the cow goes to the milker when it wants to be milked, sometimes as much as five or six times in a day. The cows quickly get used to the robotic milker and actually prefer it, Leech says, because it’s a quieter and calmer experience for the cow than being milked by humans. The cow also receives special feed pellets as a reward.

GPS in the fields
Crop-growing farms are also upgrading their technology.

Farmers are employing GPS-directed auto-steering tractors and combines to ensure that rows don’t overlap or create gaps. The technology also ensures farmers don’t plant more seed than necessary, an important cost-saving measure when corn seed can cost $250 for a bag that covers three acres.

Bobby Grisso, associate director of the Virginia Cooperative Extension Service, estimates that about 25 percent of Virginia farmers now use some form of GPS technology in their planting. The extension service’s field agents employ GPS to identify problem areas in a field or to simply locate farms in remote areas.

“Almost all these technologies have a quick payoff because most Virginia farms are irregular-shaped fields and rolling terrain that has a lot of field variation within it,” Grisso says. He notes that farmers also use a variety of technology from computers to smartphone apps to track weather changes and commodity prices.

Paul Davis, who retired in 2009 as Virginia Extension Service agent for New Kent County, helps farmers target their nitrogen fertilizer more efficiently and get bigger crop yields with the help of Green Seeker sensors. Mounted on self-propelled sprayers, the sensors, which are about the size and shape of a 12-inch ruler, read the reflection of infrared light off plant life to determine the greenness of the crops below.

The sensors use algorithms developed at Virginia Tech to determine a healthy level of green for a particular crop. With a grant from the Natural Resources Conservation Service to the local soil and water conservation district, Davis lets local farms use the technology for free on their corn and wheat crops.

“Precision [agriculture] is really booming right now with [crop] commodity prices being high,” Davis says. “The farmers are spending money on this technology now that they’re making something. They’re upgrading not only their equipment but their technology.”

Finding no green

Kim Chaffee knows he can transform hydropower generation, but proving that claim won’t be easy.

A Glen Allen-based mechanical engineer with degrees from Harvard and University of California-Berkeley, Chaffee designed a river tidal turbine that can run in shallow waters. Unlike most turbines, which resemble fans or windmills, Chaffee’s turbine design is rectangular and rotates in two directions. “It’s much more efficient” than existing technology, says Chaffee. “You can make it span an entire river. You can generate huge amounts of power at relatively low cost with one deployment. … It truly is a revolutionary product if I can just get it produced.”

Chaffee developed a small working prototype attached to a motorized pontoon boat on Lake Anna, but estimates he needs about $500,000 to test and build a scale model. He submitted a joint application with Oak Ridge National Laboratory for grant funding from the Department of Energy but was turned down because he didn’t yet have a working model. He’s since put his startup business, Marine Renewables Technology, on hiatus, but hopes to still find investors who will back up his vision with an infusion of capital.

“Trying to raise that money privately is very difficult in this economy,” Chaffee says frankly. “There’s a lot of other things that look like they have a better payoff out there that angel investors or [venture capitalists] are going to be interested in before they’re going to be interested in something like this that’s high risk and is at a very early stage.”

Just a few years ago, green technologies and alternative energy development were touted as among the hottest investment opportunities for the coming decades. U.S. Sen. Mark Warner, a legendary venture capitalist who made his fortune in telecommunications, was quoted wistfully wishing he could get into the industry.
But since then, the conventional wisdom has changed. And, in part because of the decreasing cost of traditional energy sources such as coal and natural gas, green tech has become a much harder sell.

Chaffee’s business was among the first tenants at the Dominion Resources GreenTech Incubator in Ashland, which was intended to help startup green energy businesses get assistance by bringing their technology through the proof-of-concept phase to the marketplace.

That was in 2010. Late last year, the incubator was rechristened as the Dominion Resources Innovation Center, widening its mission to include startups across technology sectors, from biotech to information technology.

“The center’s been open for a little over three years, and as we were coming up on that anniversary, one of the things that became apparent to all of the partners was the whole sector of alternative energy has not developed as robustly … as a lot of people had expected, especially given the fact that there was a lot of hype and attention and promise four years ago around funding for green technology … green energy, etc. Even Dominion Resources, which is our principal private partner, kind of admitted that conditions had changed a bit,” says Bob Skunda, chairman of the board of the Virginia BioTechnology Research Park, which manages the center.

So what happened?

“Reality has set in,” says James B. Murray, a noted venture capital investor and general partner at Charlottesville-based Court Square Ventures. Investors follow a herd mentality. They’re all looking for a lead on what the next big thing is going to be, whether that’s biotech or alternative energy or mobile apps. After the stampede clears, the investors are looking for a return on investment, and green technology wasn’t providing it quickly enough across the sector, Murray says.

“The problem that is particularly true of green tech is that the scale of investment is so much different in many other fields that are available to venture investors,” Murray says. In mobile-apps development, for instance, a relatively small capital investment can yield a quick profit. It’s easy to quantify how much coding an app or web application will require. That’s not the case with the lab work and testing needed to bring a new energy technology to market.

“If I tell you we are going into a lab and keep working on genetic iterations of algae until we get one that when dried will grow fast and produce energy at some certain rate, there is no way to quantify how long that will take or how much work you’ll have to put into it,” Murray says.

It also comes down to cost effectiveness.

In the software field, Murray says, investors are usually looking for a product to be 10 times more valuable or one-tenth the cost of an alternative. But in the energy sector, “an incremental improvement of 5 percent is often viewed as remarkable.” And that’s not enough of a cost savings to get industry or consumers motivated to switch to a new technology.

Murray has invested in or vetted various green-energy projects, including hydro, wind and biochemical energy production. But as coal and natural gas prices have come down in recent years, the yields those technologies claimed haven’t materialized. “In all of those cases,” he says, “those deals just ended up being unable to produce energy or save energy at a cost that was comparable to the existing technology.”

Dominion Resources is seeing a similar problem with offshore wind development. Wind is the largest, sustainable unexploited power generation resource we have, says Mary Doswell, Dominion’s vice president of alternative energy, “and it was looking very good, very competitive until the natural gas prices dropped.” Now, she says, “the economics aren’t working.” (For more information on offshore wind development in Virginia, see page 32).

Engineers are laboring to crack the holy grail of making offshore wind more cost-effective than traditional energy, given the challenges of constructing and maintaining ocean wind turbines and underwater transmission cables.

There are many startups and researchers working on problems like this in fields across the energy sector, but it’s a time-consuming process, Doswell says. And investors don’t want to wait a decade or more for a technology to make it through testing and regulatory hurdles until it turns a profit.

“It’s very frustrating,” Doswell says. “We’re seeing a lot of companies that have great technologies but to have that ability to hang on, so to speak, is difficult and investors don’t have the patience to hang on.”

In many ways, the sector itself is switching gears, acknowledging the hurdles of cheaper traditional power sources and the reluctance of consumers to change their power-guzzling habits.

Dominion, for example, has developed a proprietary software product called Edge that monitors voltage bandwidth and can improve power grid efficiencies by about 3 percent. It’s licensing the product to other power companies. “There is a whole lot more we can be doing to optimize and control the grid, and that’s where a lot of new technology seems to be focused,” Doswell says.

At Dominion Resources Innovation Center, the current crop of green-tech entrepreneurs and researchers associated with the center seem to be looking less at novel sources of power generation and more at methods of making present power systems more cost-effective, says the center’s “entrepreneur in residence,” William Daughtrey.

One company, Intelligent Service Panel, run by electronic engineer and inventor Holly Chen of Palmyra, is developing a smart electric panel that will improve household power consumption. Another firm, Green Vision Energy, is developing systems to use algae to eliminate carbon dioxide output from coal-burning power plants.

Electric Force Motors is creating high-voltage, energy-efficient motors for use in hybrid vehicles and industrial assembly-line conveyor belts. Through a proprietary process, his motor eliminates the need to use rare-earth elements monopolized by China, says owner Weston Johnson, an electrical engineer. It also eliminates the need for gearboxes, making it a cheaper alternative to traditional motors.

The best selling point may be that it’s not creating an entirely new technology. He’s just developing a better motor. Consequently, he says, “I don’t believe we have the same technical risk as other emerging green technologies do.” 

Tapping the web

Alice Ning had a million-dollar idea: high-tech winter gloves that you didn’t have to take off in order to use your smartphone. There was just one problem: Other people had the same idea and brought it to market before she could patent it.
So the Washington, D.C.-based entrepreneur modified her idea. She decided to create touchscreen-friendly stickers that could be adhered to the fingertips of normal gloves. “I wanted to think of a way to reduce the waste and find something that could adapt to every glove on the market,” says Ning, who calls her invention TapCaps.

Ning needed a relatively small amount of capital — about $15,000 — to develop a working prototype. That amount wasn’t large enough to interest most venture capital investors, so Ning took her idea public on crowdfunding website Kickstarter. She raised her goal in just 22 days and is now working on her prototype.

Crowd funding “is an excellent way to be able to reach a number of different people, test out the market for an idea and quickly fund it,” says Ning, who was invited to speak at a series of statewide panels hosted by U.S. Sen.Mark War­­­­ner in fall 2012 to encourage crowd-funding. Warner says crowdfunding “is potentially an enormously powerful tool for people raising money not just in Northern Virginia or Richmond but in Southside Virginia or Southwest Virginia, where there’s not a natural angel [investor] network.” Entrepreneurs “suddenly have a much broader universe of potential investors if you can promote this over the Internet. It offers a great, great opportunity as much in rural areas as it does in quote-unquote high-tech areas.”

Crowdfunding harnesses the power of the Internet to bring together large groups of people to fund a project or idea. Sites like Kickstarter employ a sliding rewards-for-donations model similar to a public radio pledge drive. Your return on investment might range from a T-shirt or sticker for a $25 donation to a private performance by a band or naming rights for a large donation.

However, last April, Congress passed the 2012 federal JOBS Act, which makes it legal for entrepreneurs to raise investment capital and sell shares and securities to the public via crowdfunding.

“We now said, ‘We’re going to move beyond this not-for-profit and social-do-good model and use this tool for plain old equity fundraising,” Warner says. “If I was 23 again, this would be an area I would love to go into, because I think it offers enormous potential.”

It’s important, the senator says, because it will offer new lines of available equity for startups, and studies show that startup ventures have been responsible for the majority of net new jobs in America in the last 25 years.

When President Obama signed the legislation, he said, “For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”

But you can’t invest just yet. Congress delayed implementation of the law until the Securities and Exchange Commission can develop regulations and guidelines for crowdfunding investments, and the SEC missed the December 2012 deadline. Now some industry analysts worry that it could take as long as 2014 until the SEC hands down crowdfunding regulations.

In the meantime, startup businesses are cropping up in anticipation of the new regulations coming online, and entrepreneurs and investors are watching closely. Warner’s statewide panels brought together a variety of investment and tech experts to share ideas and discuss possible roadblocks to crowdfunding investments.

One of the obstacles to be addressed by the SEC regulations is how to protect investors. “The concern, rightfully so,” Warner says, “is how do we make sure people are not scamming little old ladies … The idea that you can raise equity capital for a company online is an enormously powerful tool, but it’s also an area that could be ripe for scam artists.”

Kickstarter operates on an honor system, trusting that those who are raising money will follow through. The site warns potential investors to use their “Internet street smarts” if something doesn’t seem right.

One protection built into the law, Warner points out, is that ordinary people with annual incomes less than $200,000 will be limited to investing $5,000 in a crowdfunding enterprise. Wealthy qualified investors will be limited to $100,000.
However, some say it’s worth the risk to democratize investment opportunities to everyday people rather than just the privileged wealthy.

“People say that it’s going to be riskier, that there’s going to be more fraud, that people are going to be taken advantage of, and I guess I say, ‘Compared to what? Compared to having money in Lehman Brothers? Having money in Enron? Having money in WorldCom?’” asks Ben Miller, co-founder of Fundrise, a Washington, D.C.-based web portal that raises crowdfunding investment equity to rehab local commercial real estate properties. (Fundrise circumvents the crowdfunding law by raising money as Regulation A and Regulation D offerings under the SEC, which Miller says is a much more time-consuming and expensive process than the new streamlined crowdfunding regulations are expected to be.)

“It’s going to be bumpy,” Miller says, “but it’s the direction we should be pushed — pushing power down to the people. That’s what the Internet has done: pushed power back down to the people through social media … It would make sense to basically deregulate a little bit and see what happens and adjust the system to allow for innovation.”

Among other protections, it’s expected that the SEC will require crowdfunding equity-raising portals to vet entrepreneurs, and that process might fall to intermediary services.

Alexandria-based CrowdCheck hopes to fill that space. The company’s CEO and founder, Sara Hanks, is a former Wall Street securities lawyer who also has worked for the SEC. Hanks started CrowdCheck in early 2012, anticipating the passage of the new crowdfunding legislation.

CrowdCheck helps entrepreneurs prepare discovery and due diligence materials to create a “report that gives the investor everything that they need to know to make an informed investment decision.” This vetting process would also protect entrepreneurs and equity-raising portals by making sure they comply with the upcoming SEC regulations.

While they don’t know everything the SEC will decide, “We know what’s in the statute, and we are able to make some very informed guesses about what the rules might look like and, second, we know what good due diligence looks like,” Hanks says. “We know what information needs to be looked into in order to make an informed investment decision.”

Opening up equity fundraising to crowdfunding investment also means that “more startups will survive to the level where sophisticated investors will get to see them,” she says. “There are some companies that never get to that stage because they never get beyond family and friends because they just can’t raise enough money to survive.”

Still, equity crowdfunding may not be the best vehicle for every business or startup, particularly for very small businesses. CrowdCheck, for instance, expects that most of its clients will probably be startups seeking $200,000 to $400,000 in capital, and it expects fees to be in the range of less than 1 percent of the equity raised. For smaller businesses, the rewards-for-donation system may still make better sense.

A group of four University of Virginia students founded rewards-for-donations crowdfunding portal Seed-ville in 2012 to help Charlottesville small businesses raise capital.

“It’s focused very much on investing in local small businesses,” says co-founder Jessica Lee, 19, a sophomore at U.Va. “We’re not planning on moving into equity [fundraising] right now. That is a potential, but it’s just a lot of extra regulations.”

Seed-ville’s first client, organic doughnut bakery Carpe Donut, sought to raise $15,000 to start a food truck franchise in New York City. Donors received gifts such as free doughnuts and coffee. While Carpe Donut raised only $1,000 toward its goal, owner Matt Rohdie is encouraged and plans to try crowdfunding again.

A former social worker, Rohdie says that crowdfunding taught him that his loyal customer base is “an asset on your balance sheet. In the business world, it’s an asset you want to periodically take advant-age of,” he says, “the goodwill you have in the community.”

Bridging the ‘Valley of Death’

As president of Virginia Tech Intellectual Properties, one of Mark Coburn’s primary jobs is helping inventions created at the university reach the marketplace. It’s a mission he takes seriously — after all, he owes his daughter’s life to medical technology developed from university research.

When his daughter Emily, now 8, was born, she was placed in the neonatal intensive care unit because too much fluid was building up in her lungs, and she was struggling to breathe. Her doctors told Coburn not to worry; they were using a cutting-edge lung surfactant technology pioneered at the University of Rochester, where Coburn was then working.

“It was kind of a defining moment in my career in terms of how tech transfer works,” Coburn says.  “If it didn’t work …” His voice trails off.

At some schools, operations devoted to monetizing university research “can be viewed as money grubbers, but really our effort is to try to get the technologies out to benefit society,” Coburn says. “That doesn’t happen without a university dedicated to transferring technologies to the marketplace. It doesn’t happen by itself. Without us, a lot of technologies would just sit on the sidelines.”

Virginia’s research universities increasingly are working with the biotechnology industry to come up with ways to shepherd young biotech companies across the so-called “valley of death” — the gap between the development of a new technology and its successful commercialization.

University divisions, such as Virginia Tech Intellectual Properties or the University of Virginia’s U.Va. Innovation, work closely with investors and corporations to foster practical applications for university research (a field known as translational science). Universities may license in-house research to existing corporations or encourage the spinoff of profitable startup ventures. They also offer business development assistance to faculty or student researchers, helping them learn about how to market their creations and think more entrepreneurially.

The federal Bayh-Dole Act, passed in 1980, allows universities to market and financially benefit from university research developed with federal grant money. Typically, as an incentive, universities will grant a share of the profits, from 30 percent to 50 percent, to the researcher who develops the technology. The researcher’s department also receives a share of the profits, as does the university itself.

“In the past, universities saw their role as creating science and publishing it and teaching it,” says Mark Crowell, executive director of U.Va. Innovation. “We’re now embracing our responsibility and our opportunity to broaden our innovation assets, both for societal benefit and for economic development benefit.”

Like U.Va. and Tech, Virginia Commonwealth University also is focused on capitalizing on its in-house research. At VCU, that means recruiting bioscience-minded CEOs and angel investors to create startup companies. At present, the VCU Office of Tech Transfer is seeking to spin off two companies — one would market a new rapid test for strokes; the other would market a new surgical mesh that mimics the fibers in the human body.

As VCU seeks to bring these startups to market, it’s important “not to put on onerous terms that will kill the business,” says Ivelina Metcheva, executive director of the VCU Office of Tech Transfer. “We try to be business friendly … We don’t ask for cash up front. We ask for equity in the company in lieu of licensing fees or annual minimums. We work with them to help preserve cash and use it for the right purposes. Usually we get some share of royalties on net sales and a percentage of any sublicensing deals they do in the future.”

Thinking about the marketplace also means that universities are more focused on practical applications. When U.Va. Innovation considers projects to aid with grant money, “We’re no longer picking projects because it’s good science,” says Crowell. “We’re picking projects that are good science and fit a market need.”

U.Va. was one of a handful of universities in the nation over the last decade that received $15 million from the nonprofit Wallace H. Coulter Foundation to establish a Coulter Translational Research Partnership. With this funding, U.Va. Innovation has offered grants of less than $100,000 to help research projects at the university bridge the valley of death. “It takes a basic discovery and helps get it ready for market — building a prototype, running an animal trial — whatever it takes to address the questions that commercial partners or investors would ask,” Crowell explains.

One of the startups that benefited from U.Va.’s Coulter funding is Charlottesville-based HemoShear. It uses human cell cultures and blood-flow forces in petri dishes to produce biological replicas of blood vessel systems and diseases for use in drug testing and discovery. The technology was developed by three U.Va. researchers who are partners in the company.

Founded in 2008, HemoShear is “fast approaching profitability,” says HemoShear CEO Jim Powers. It has raised more than $13 million in capital from investors and has received more than $5 million in research grants.

HemoShear used a Coulter grant to conduct a proof-of-concept experiment, studying the effects of the cholesterol drug Lipitor in HemoShear’s replicated human system.

Pharmaceutical companies are using HemoShear technologies to make faster and more accurate judgments about the efficacy and safety of drugs before proceeding to human trials.  “Traditional cell cultures and animal models don’t do a good job in mimicking the human system,” Powers says. “There’s a clear need for better predictive systems in the laboratory that will accurately predict the human response to a drug.”

Fledgling bioscience endeavors also must navigate regulatory hurdles and find adequate lab and manufacturing facilities.

“Many companies get discouraged when they find out how extensive the process is, getting ready for commercialization. You have pre-clinical trials, you have mechanical trials, you have clinical trials, you have regulatory aspects to take care of,” says Erik Gatenholm, CEO of BC Genesis.

Gatenholm, 23, graduated from Virginia Tech in 2012 with a degree in business management. He and his father, Paul, a former Tech material sciences engineering professor, started BC Genesis in 2008 to market his father’s inventions, including new manufacturing methods for bacterial cellulose that can be fashioned into medical products such as biosynthetic surgical mesh, sutures and replacement knee menisci. Their goal is to prepare the company so that it can be acquired by or merged with a larger corporation.

Increasingly larger pharmaceutical and medical companies are expecting startups to take on the financial burdens of passing regulatory hurdles and manufacturing prototypes. “In today’s market, no company is going to buy you out just hearing about your ideas. It’s going to take a lot of studies and positive and strong data to make the case,” Gatenholm says.
He advocates creating a detailed commercialization plan, networking with others who have been through the process and being creative in pursuing grants and funding. BC Genesis started in a lab space at the Virginia Tech Corporate Research Center. It’s now constructing a full-scale manufacturing laboratory in Floyd County with the help of a $700,000 grant from the Virginia Tobacco Indemnification and Community Revitalization Commission, secured with help from local economic development officials. BC Genesis also received two $600,000 National Science Foundation grants.
“Don’t be discouraged. It pays off,” Gatenholm says. “Just believe in your product.”