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Nov. 8, 2004 – It seemed like a match made in small tech heaven: Zyvex Corp. and Standard MEMS Inc. in 2001 were awarded a $25 million federal grant to develop low-cost assemblers for high-volume micro- and nanoscale systems.
Less than a year later, however, Standard MEMS was on the skids, and so was the cost-sharing contract with the National Institute of Standards and Technology’s Advanced Technology Program (ATP). In the fall of 2002, Standard MEMS slashed its staff from 270 to 25 and filed for bankruptcy from which it never emerged.
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It might sound like old news today, as the resuscitated project cruises along with Zyvex and Honeywell Inc., Standard MEMS’ replacement. According to Zyvex’s Chief Executive Officer Jim Von Ehr, the Texas-based company is shipping products based on the technology the program helped to develop. But Von Ehr has tallied the cost of the failed pact with Standard MEMS: $1 million and one year of development time.
Partnership inherently is a risky proposition, given the high percentage of firms that fail. The dangers magnify during economic downturns, and emerging fields can be especially hard hit. For instance, of the 60 optical MEMS firms doing business at the turn of the 21st century, roughly two-dozen remain and about a dozen are selling products.
“(MEMS) has a great payoff, but with the time to market and costs of development, it’s a big gamble,” said Marlene Bourne, a senior analyst with Scottsdale, Ariz.-based InStat/MDR. “You’re committing to the long term. And you have to if you want to succeed. But there’s an innate risk in that.”
Von Ehr thought he’d overcome a big risk when he found Standard MEMS. In the space of a few years, the Massachusetts-based firm had bought two fabs and launched a microphotonics technology and product design center. It billed itself as a one-stop shop, and nabbed major customers like Philips Semiconductors and Kavlico.
Most importantly for Von Ehr, he had found the first facility willing to define a new process that supported assembly. Standard MEMS was alone among the candidates willing to tailor its approach to realize Zyvex’s vision of flexible, automated manufacturing at ever-decreasing sizes.
In the months that followed the announcement in October 2001, Standard MEMS had produced some parts. But by early 2002, Von Ehr said he had “inklings” that the firm was in trouble. What confirmed the suspicion, he said, was an e-mail from CEO Nicholas Ortyl saying that if Standard MEMS could not get any funding it was going to withdraw from the program. “Clearly, we had to find another partner,” Von Ehr said. “We started looking long before they totally failed.”
At first, there wasn’t a clear choice for Zyvex, given the earlier trouble finding a suitable mate. But Honeywell had just opened its fab to outside business and offered promise as a replacement. Von Ehr brought it aboard that summer, but Standard MEMS would not sign an agreement to let Honeywell in — an ATP requirement.
“We had to have an official joint venture agreement with all the companies. A deal was a deal with Standard MEMS, even though they weren’t delivering and looked like they were going to go under,” Von Ehr said.
“ATP’s concern was, what happens if Standard MEMS isn’t really gone? They couldn’t get in touch with anybody there as to what they thought of a new joint venture. After some period of time we finally persuaded them.”
That version of events is not exactly how Ortyl remembers it. He said Standard MEMS notified both Zyvex and ATP officials that his company could not continue with the program and recommended they move on. Still, he acknowledged that Standard MEMS waited for eight weeks to grant the go-ahead to Honeywell. He recognizes the paradox of holding on while letting go.
“Lots of things happened in the economy. Our customers stopped paying us, or were paying us late. The economic squeeze started to happen on Standard MEMS,” said Ortyl, now a senior manager for Blue Road Research, a Massachusetts-based fiber optics sensor developer acquired by Standard MEMS in 1999.
“It took all of management’s attention. … We had to focus on keeping body and soul together, rather than keeping the partnership going,” Ortyl said. “We tried, but the issues were so overwhelming for Standard MEMS, that was not able to happen.”
Ortyl said Standard MEMS was going through partnership problems of its own. He said one of its largest partners blocked the struggling firm from securing new financing, which he considers its final, insurmountable obstacle. “We had some problems,” he said.
“We played the hand we had the best we could. … Believe me, it wasn’t like we were holding onto a full house.”
Standard MEMS’ experience taught him that companies ought to link with those of a similar size and corporate mindset. The fresh-faced startup should weigh what it hopes to achieve by teaming up with an aged-in-wood corporation. “If a small company goes in saying, ‘Excellent, we can get absorbed and bought out,’ it works. But if it goes into it saying, ‘I want to be my own independent guy and partner with the 800-pound gorilla,’ that becomes hard. It really depends on the exit.”
For its part, Zyvex has increased its vigilance when teaming up with other companies. In subsequent ATP applications, Von Ehr has required three joint-venture companies. In case something happens to one, he said, there are still two others and therefore a legal entity ATP officials can work with.
He said Zyvex brings the same “basic business prudence” to partnerships that don’t involve the government. In its materials business, for instance, he said the company buys carbon nanotubes from several suppliers and runs its own certification and testing. He seeks to ensure the certainty of quantity and quality.
“If one were to go out of business or stop making nanotubes, it would hurt us and our suppliers, but … we have alternatives waiting in the wings that would love to take their place,” he said. “I would expect a hiccup, not a heart attack.”
Despite the heightened alert level, Von Ehr said Zyvex doesn’t want to undercut those with whom it has established strong relationships. He includes Honeywell in that camp.
“We do have to consider what happens if one of our partners goes away, but we don’t take action if we think we have a good partner,” he said. “There’s been a learning process to make these parts. Still, we know we’re dealing with a real company that’s not going to fold up and go away in the middle of the night.”