The Silicon Valley’s Real Old School Incubator

These days, it seems like there’s a new incubator for just about every pair of 19-year-olds working on a mobile-payment startup.
But long before there was a Y Combinator or a 500 Startups, there was SRI International: the old school, non-profit research and development organization that’s had a hand in the creation of everything from Disneyland (s dis) to the Internet. Started by Stanford University in 1946 as a way to drum up enterprise in the sleepy Bay Area, SRI is best known for churning out a smorgasbord of inventions like Technicolor (for which it won an Academy Award in 1959), to the first computer mouse, created there in 1968.
The 2,400-employee organization celebrates its 65th birthday this year. Today, the federal government is the organization’s bread and butter, accounting for 70 percent of the $500 million in revenue from sponsored research SRI brings in annually. The Department of Defense is the company’s biggest client by far.
But while research contracts keep the electricity turned on and the robots powered up, the revenue doesn’t provide for extras like an endowment fund. Nor does it allow for the type of financial compensation a team of top-shelf scientists, business development specialists and executives could make in private industry.
That’s what SRI Ventures and the in-house incubator is for.
Over the last 20 years, SRI has been spinning off major bio-tech, Internet technology and advanced material companies created by its own researchers, who then must decide if they will stay at SRI and keep creating or head for the new venture and an opportunity for riches.
The Menlo Park, Calif.-headquartered company has created more than 50 spin-off ventures based on breakthrough technologies developed within its laboratories. Three of the ventures — Intuitive Surgical (s IRSG), Nuance Communications (s NUAN) and Orchid Cellmark (s ORCH) — are now public companies with a total market-cap value of more than $20 billion.
More recently, a government contract to develop an intuitive, automated personal assistant program for military personnel resulted in a huge deal with Apple (s AAPL): Last April, SRI sold online personal assistant app Suri to Apple for an undisclosed sum that “made us very happy, very very happy,” said Norman Winarsky, VP at SRI Ventures.
This monetization model was a result of the 1980 Patent and Trademark Law Amendments Act (otherwise known as the Bayh–Dole Act), which gave universities and non-profits intellectual property rights for commercial applications resulted from government grants.
In 1993, the Sarnoff Corporation, (previously an SRI subsidiary and now fully part of SRI) began a ventures strategy. An iris recognition company called Sensar was the first official spin off company. Within two years, all of SRI had adopted the venture strategy.
Researchers who work on projects are encouraged to think about the commercial applications of their projects and to approach the SRI Ventures board with their ideas. The company incubates its spin-off ventures within its own facilities to provide seed money, work space, infrastructure support and business-development resources that include early access to white-shoe VC firms that have invested in multiple SRI enterprises and will weigh in early on the commercialization potential.
“We want to distinguish ourselves from academic institutions. We are not here to educate people,”  said  Winarsky. “It’s an unnatural act for an academic institution to bring together diverse solutions to market opportunities and integrate them into something that can be delivered into the marketplace, and for us its a natural act.”
When a venture spins off or a product is licensed, 66 percent of the funds go to an SRI endowment fund, which was an empty bank account 15 years ago. The remaining 34 percent goes to SRI staff. The biggest chunk goes to the team that worked on it, while  7 to 8 percent goes to senior staff “that suffered the five years of effort they had to put in” and 4 percent goes to all employees in a profit-sharing deal, Winarsky said. He credits this model with preserving SRI:

I personally believe SRI would have been hollowed by by Google (s goog), Apple and everybody else you can image for its great researchers. But as a result of having spinoff strategy for royalty and equity — by the way that’s vested so we keep the golden handcuffs on them for three to four years — by having spinoff strategy we can offer stock even though we are a company that’s non-profit and has no stock.  An employee has to decide: Do you want to stay here and do great research and keep your equity and royalty or do you want to leave and keep all your eggs in that basket?”

Materials research laboratory director Angel Sanjurji has been faced with that choice more times than most. A 30-year veteran at SRI, he’s been involved in at least five spinoff ventures to date. And while some of his co-workers have chosen to go the entrepreneurial route, Sanjurji says he will be staying put.
“Here you really have the freedom to do research and implement your own ideas. Basically, you’re only budgeted by your imagination,” he said. “I think at SRI, we have the best of the both worlds. You may not make as much money as you could on the outside, but at the same time, you are not taking that risk. And for me, at the end of the day, everyone that stays has the same driving force. They want to develop new things.”