Bearing damage detected using SmartSignal's product.

Evolution of a Startup

February / March 06 By: Catherine Shaffer Volume 4 Number 1

Print this Article

E-mail this Article

By the time a venture capitalist becomes involved with a new technology startup, the technology transfer event is usually complete and a licensing agreement and management team already in place. So it was a rare opportunity for CID Equity Partners of Indianapolis (now CID Capital), to be involved with an extremely compelling computer algorithm developed at Argonne National Laboratory from the earliest stages. That algorithm became SmartSignal, a small Chicago-based company that makes software targeted at minimizing or eliminating downtime for machinery and industrial operations. SmartSignal is now a thriving company, near the break-even point with annual revenue of more than $8 million.

The conception of SmartSignal occurred in the mid-eighties, when a cooling pump failed at an experimental breeder reactor run by Argonne. As a result, the Department of Energy funded Argonne to research methods for monitoring cooling pumps and predicting in advance whether they might fail. It was later discovered that the algorithms developed to monitor cooling pumps had extremely broad applications, and could be applied to virtually any type of machinery or systems to predict failure. The first patent was filed in 1989, followed by many more through the early 90s. Says Alan Thomas, director of technology and intellectual property at the University of Chicago, "We began to understand that the algorithms allowed you to get the earliest possible prediction of failure in anything mechanical. Obviously that's a much bigger market. Now at the same time, all we had was a bunch of technical papers, and some discussion of trials on nuclear plants where they very vigorously validated the algorithms and proved they could do this early warning of failure."

SmartSignal's history is marked by both serendipity and astounding bad luck. It was serendipity that brought SmartSignal and CID Equity Partners together. SmartSignal's first CEO, Gary Conkright, had previous connections with CID, and he sent the early business plan to them for comment, not expecting them to invest or become involved.

CID's Kevin Sheehan was uniquely qualified to appreciate SmartSignal's technology. "I spent most of my life running operations, running a variety of plants and distribution centers all over the world. I had all the experience you have in industrial operations, with equipment failing—€¦just when you can't afford it." There began a process of molding the raw technology into a commercially viable form. "We had to sort of build a management team. At the time, it was two guys, eight patents, and a card table. We had to do two things. Lay out a work plan, and build an organization." CID led SmartSignal's first major investment round (beyond the seed stage) on St. Patrick's day of 1999—€”famously sealing the deal later over Bushnell's at a Chicago bar.

Over the course of 18 to 20 months, a team consisting of the company founders, investors and the University of Chicago Tech and IP Office (at the time called Arch Development Corporation) worked on rewriting the technical documentation in user-friendly language and building applications and databases for commercial consumption.

One early challenge for SmartSignal was in courting the type of customer it needed. By its nature, the technology was perfect for very large companies, the type of company that cannot afford downtime and can't recover from it. These same companies tend to be conservative in the products they use and the corporate partnerships they build. A multibillion-dollar, global company is unlikely to purchase products from a tiny startup, a company with no history, that might not be there to support the product later. It took another stroke of serendipity to overcome this obstacle. SmartSignal's vice president of sales had been college roommates with a senior executive for Delta. This connection opened the door for a trial of the system wherein Delta provided a set of blinded engine operating information and SmartSignal attempted to find faults in it. The trial was a huge success, warning of failure in an engine sixteen flights earlier than Delta's current state-of-the-art system.

SmartSignal's early momentum led to another financing round led by the Stephens Group, Inc. This round closed shortly after the terror attacks of 9/11, an event with serious repercussions for a company whose primary client was an airline. The other shoe dropped when the Enron scandal broke, delivering a solid blow to its other client base, the power industry. Says Stephens' Senior Vice President K. Rick Turner, "The problem was that at the time we [invested], the top three customers were Delta, Dynegy and Calpine. You had 9/11 and airline problems and then Enron happened and Dynegy and Calpine were certainly affected by that. They had three strikes right away. They survived it because they had great technology."

The following years were economically difficult across all sectors of the economy, but particularly so for SmartSignal and its investors. Says Sheehan, "We went through a period of commercial winter. Our targeted industries struggle badly. That was bad luck. The difficult period from the middle of '01 through the latter part of '03 took more funding than I was hoping it would." The lesson from this period, if there is one, is that it took an irresistible technology to carry SmartSignal through a period of combined bad luck and generalized poor economic conditions. A company based on management talent or elegant execution of a mediocre concept would have failed. In fact, many deserving companies did fail during that time. "You always have to remind yourself of this," Sheehan says. "I don't care if you're in venture capital or the industrial world. Remember that things can go wrong that are entirely outside of your control. You need to be able to have a capability or a plan to deal with things when the company has done nothing wrong, but the world has changed. You can't predict what that's going to be."

SmartSignal is moving forward now with a new CEO, Jim Gagnard, who aims to bring the company up to profitability in fiscal —€˜06, and also expand its client base into new industries. "There are many different interesting technologies out there. It does take a tremendous amount of work and investment to convert most basic technology into a commercially usable solution. And so what you see with SmartSignal is a perfect example, certainly in the Chicago area, of turning some really interesting basic technology and a lot of money into a real commercial solution used day in and day out by a lot of different companies."

Catherine Shaffer is a freelance writer based in Ann Arbor, Mich.