Growth companies are the key to employment growth, wealth creation and the proliferation of prosperity, so obviously Arkansas needs as many growth companies as it can get. But the types of companies and how they are created can make a big difference. Fortunately, several companies are providing the roadmap that others can follow.
What type of companies do we need? Well, the short version is that we need well-funded high-tech companies that invest in research and development to create products and services that have high switching costs. That might sound like a mouthful, so allow me to elaborate and provide an example.
An empirical study by the Brookings Institution found that one of the four salient constructs that facilitate a proliferation of growth companies in a region is having a significant number of people employed in high-tech companies. So, among other things, we need more high-tech companies in Arkansas. And to get more high-tech companies, we need more spending on research and development. A study by the Milken Institute shows that spending on research and development is a key factor in the growth of real high-tech Gross Domestic Product (GDP) per capita.
High-tech companies can provide stability, especially when they have patented technology that is difficult to emulate and when their products create high customer switching costs. Customer switching costs occur whenever a customer changes a product or service it is using. They include things like the cost of removing the existing product or service, the training needed for the new product or service, the lost time (opportunity cost) associated with all of the efforts to make the change, and even the psychological and organizational stress caused by the change.
When a company sells a product that has high customer switching costs, its sales and employment levels tend to be more dependable. That stability is good for the economics of the region where the company resides. And that’s why it’s so important to promote investments in the type of research and development that leads to these highly stable high-tech companies.
The University of Arkansas serves as one of the prominent drivers of spending on research and development, both with the R&D done inside the university and the R&D done by companies that emerge from the university.
I’ve written previously about some of these companies. Arkansas-based PicaSolar, which invented a process to increase the efficiency of silicon-based solar cells, was co-founded by Seth Shumate and Douglas Hutchings when they were students at the UA. And Wolfspeed, a power electronics technology company in Fayetteville now owned by North Carolina-based Cree, originated with the dissertation research of its founder, UA alum Alex Lostetter.
BlueInGreen, which has created a disruptive technology in the water and wastewater treatment industry, is another example of an Arkansas-based company that has followed this path. Its treatment technology saves 40 to 70 percent on energy costs compared to traditional approaches, it has a much smaller footprint and it allows for a significant reduction in the amount of chemicals used in the process.
The technology was developed by two professors at the University of Arkansas who came up with it while trying to solve a different but related problem. Arkansas-based VIC Technology Venture Development, founded by former UA professor Calvin Goforth, helped them get Small Business Innovation Research (SBIR) grants to further their research and see if it could come to commercialization. VIC finds technologies that can be licensed from research universities and that have significant market potential and a high potential for a positive impact on society. Clearly, BlueInGreen fits their business model well.
With the help of VIC, BlueInGreen then spent three years raising capital. Three years. This is a company with a patented and proven technology with high customer switching costs. How many companies like this have given up and not waited three years?
On top of that, the path to profitability for these types of R&D-driven tech companies isn’t quick, so they require patience on the part of investors. The sales cycle for water and wastewater treatment technologies can be three-to-five years, especially if you are selling to municipalities. Where energy costs are high, the sales cycle is shorter because the savings is higher. The City of Fayetteville was BlueInGreen’s first customer, purchasing the technology for the Noland Wastewater plant.
Clete Brewer, BlueInGreen’s chairman and former CEO, also told me that the cleanest water in the state coming out of a wastewater plant is the water coming out of the Noland Wastewater plant in Fayetteville. It actually improves the quality of the water in the White River, which is highly unusual.
So far, BlueInGreen has 40 installations and will most likely have 30 more this year. The majority of their customers now are Fortune 100 companies. It has been eight years since they raised capital, and it should be one more year until profitability. But once a water and wastewater treatment technology is adopted, customers won’t switch for many years because of the high switching costs, which provides a competitive advantage and profitability.
Brewer, a Walton College alumnus, provided a key piece of the puzzle when he became CEO. His wife, Tammy Brewer, learned about the company from VIC board member Ramsay Ball and became one of the early investors. At the time, Clete Brewer was running Sport Clips. After he took Sport Clips public, he left and became CEO of BlueInGreen, and his business experience was critical in helping the company build a sales team and scale its growth.
Brewer has 25 years of experience leading successful startups, as well as publicly traded companies. He has led two IPOs and raised hundreds of millions of dollars in public and private financing. As president and co-owner of Sport Clips, he helped grow that chain from 42 stores to more than 675. And he was president, CEO and co-founder of Staffmark as it grew from $600,000 in sales to more than $1 billion. Now as managing partner of NewRoads Capital Partners, he’s helping identify, fund and support companies with high-growth potential – companies like BlueInGreen.
A recent Wall Street Journal article showed that Asia is quickly gaining ground on America in venture capital funding, both in terms of where the investment is coming from and where it is going. So, not only does Arkansas need more venture capital funding, so does the entire country. In Arkansas, however, we need both more investment in R&D and more seed funding for startups, more venture capital funding for new high-tech companies and more private equity funding for growth companies. The growth of the early stage funding and the funding of R&D needs to be correlated so that we don’t keep creating startups that can’t find funding.
Matthew A. Waller is the Dean of the Sam M. Walton College of Business, Sam M. Walton Leadership Chair, and Professor of Supply Chain Management. As Dean he leads the Walton College, which has over 6,000 undergraduates and about 500 graduate students. He has been an active entrepreneur most of his life. He was co-founder of a software company which had over 100 employees as well as a consulting firm. He is an inventor on the following patent: Waller, M.A. and Dulaney, E.F. System, Method and Article of Manufacture to Optimize Inventory and Merchandising Shelf Space Utilization, Patent No. US 6,341,269 B1. Date of Patent: January 22, 2002. His opinion pieces have appeared in Wall Street Journal and Financial Times. Dr. Waller is an SEC Academic Leadership Fellow. He is coauthor of The Definitive Guide to Inventory Management: Principles and Strategies for the Efficient Flow of Inventory across the Supply Chain, published by Pearson Education. He received a B.S.B.A. summa cum laude from the University of Missouri, and a M.S. and Ph.D. from The Pennsylvania State University. He is the former Co-Editor-In-Chief of Journal of Business Logistics. Matt is coauthoring a book with Kirk Thompson, Chairman of J.B. Hunt Transport Services, Inc. about strategy and how J.B. Hunt Transport Services, Inc. applied various business strategies.