"Take Two" is an ongoing series about first-time business owners over 50 by Angus Loten, a small-business reporter for the Wall Street Journal.
Bill Schultz was a successful orthopedic surgery equipment salesman when his lower back starting giving out -- the result of years of poor posture, he says. Looking to avoid surgery, the 50-year-old Californian searched for alternatives and stumbled upon a posture-correcting shirt that immediately relieved his pain. Shultz bought the idea and launched Alignmed, a Santa Ana-based "corrective apparel" maker. That was five years ago. Since then, Schultz has poured more than $2 million of his own money to fund the company's R&D and clinical trials -- and another $400,000 for patent protections. Now, Schultz says it's time to bring his high-tech clothing to the market. "Every year was a loss and the entire investment could have been lost. That's the chance you take," says Schultz.
For small ventures like Alignmed that are based on an innovative new product, the costly and lengthy process of product development can be a major hurdle. A recent report by the National Science Foundation found that revenue-producing firms with no more than five to two dozen employees collectively spent $3 billion on R&D in 2008, a proportionately higher share of revenue than large, resource-rich corporations. Research and development staff account for more than 10% of all small business employees, twice the number at medium and large businesses, the report found. How do they pay for all this, especially at a time when bank credit is tight and investing is down? After tapping personal savings, a study by Intuit, the Mountain View, Calif.-based financial management firm, found that many small-business owners turn to government agencies, universities and research firms as key sources of R&D funding for smaller firms, while many private business incubators offer shared, low-cost support.
Yet the economic downturn has taken a toll on many of these sources, too. Amid wrangling over budget cuts, federal lawmakers earlier this year failed to reauthorize the government's main support program for small innovative ventures, instead pushing back a deadline to September. The Small Business Innovation Research program provides more than $2 billion a year in grants to help entrepreneurs through the R&D stage. But a long-standing issue of including venture-backed companies in the program has lawmakers divided, with many saying entrepreneurs with private-sector funding shouldn't need additional support at taxpayers' expense. According to Vivek Wadhwa, the director of research at Duke University's Center for Entrepreneurship and Research Commercialization, less than 5% of venture capital goes into early-stage companies developing innovative products. In today's uncertain market, he says, most investors won't back a company until it already has working products and a proven business model.
That leaves many innovative-product entrepreneurs like Schultz to fend for themselves. Despite the obstacles, Schultz says he was convinced the posture-correcting shirt was a sure bet from the first time he tried it on. Having witnessed nearly 10,000 back surgeries in his career, Schultz says he sought an alternative. On the advice of a friend, he went to a chiropractor in Newport Beach, Calif., who had developed a makeshift support shirt for patients recovering from shoulder surgery. He says his back pain eased within minutes of wearing the shirt, which had Velcro bands sewn into the front that pulled his shoulders back. "It was life changing," says Schultz, who immediately bought the patent.
Later, Schultz sold his equipment sales firm for start-up capital. But rather than putting these funds into mass production, Schultz instead invested them into a series of lengthy test and trials to provide "actual proof that the garment worked," he says. According to the Journal of Clinical Research Best Practices, even a modest device study costs upwards of $1 million. Schultz brought his garment to researchers at the Steadman Philippon Research Institute in Vail, Colo., as well as the Lexington Clinic in Kentucky and the Kerlan Jobe Sports Medicine Clinic in Los Angeles. Each round of tests provided more and more clinical evidence -- much of it double-checked by a third-party review board -- that the shirt measurably corrected posture and strengthened muscles.
Apart from large R&D costs, Bob Ashfield, a SCORE counselor based in Houston, says entrepreneurs looking to launch an innovative product often spend too long perfecting it and miss their chance in the market. "Depending on the product you can always make minor adjustments once it's out," Ashfield says. Marketing efforts can be launched before a product is finalized, helping to build a customer base ahead of its release, he adds. Schultz says the lengthy trials are worth every penny. He's now compiling the data for marketing ammunition against rival therapeutic garment makers whose claims, he says, aren't backed up by research. "We're the first that can say it works, and saying it doesn't is like saying eyeglasses don't work. We have the studies to prove it," Schultz says.
Word of mouth is spreading fast among physical therapists and pro sports trainers. Last year, the company sold $2 million worth of tops and bottoms. The Kansas City Royals have been using the garments since spring training, as well as players on the L.A. Dodgers, the Chicago Bears and the Pittsburgh Steelers. That kind of traction has helped Schultz bypass the so-called valley of death -- a period between costly test trials and full-scale production when a start-up is tapped of its initial funding yet hasn't achieved a commercial track record to impress new investors. The company plans to start selling the garments online using a proprietary 3-D fitting application by November.
Schultz admits the five-year process wasn't easy: "You have to be passionate about this kind of work and have complete confidence. The clinical studies gave me that confidence."
Write to Angus Loten at email@example.com