bright idea who have heard of its opera tions. A good share of these a r e of no practical value a n d often m a y b e obviously "crackpot," but each is given a hearing. Other suggestions come from t h e company's contacts in univer sities and engineering schools or in business. I n addition, AR&D does its own scouting for companies and proj ects, making sure it keeps in touch with small b u t promising firms which After 10 years of betting on the future, American might some day need financial aid. Perhaps only 1 or 2% of the ideas Research & Development finds that patience pays off it gets are worth following through. If, after thorough evaluation, a project WE CANIMOT FLOAT along indefinitely physics, specialized equipment, instru looks good, AR&D may help set up a new firm to commercialize it. O r t h e on t h e enterprise and vision of preced ments, and electronics. ing generations. In an expanding Geographic diversification is also one project may be farmed out to an affili economy, \&e must have a reasonably of its goals. Although most of its orig ate or offered to some outside company high birthrate of new undertakings." inal ventures quite naturally were lo in a position to develop and market it. To push high-voltage x-ray equip These words of Vermont Senator cated near its home grounds in N e w Ralph E. Flanders served to keynote England, AR&D in recent years h a s ex ment and particle accelerators devel the organization 10 years ago of Ameri panded its interests throughout t h e oped by Robert Van de Graaff a n d John can Research a n d Development Corp., country, particularly into t h e South T r u m p at M I T , for instance, AR&D a Boston-bred investment firm unique west. Since its first Texas investment formed High Voltage Engineering in in t h e venture capital field. AR&D's nine years ago, it has added three others 1946. Likewise, AR&D helped set u p aim: t o provide financial help to small, and now keeps a permanent representa Ionics to commercialize a method for struggling firms engaged in developing tive in the area. using electric membranes to demineralor improving products a n d processes To spread its activities even farther ize saline water worked out by Walter with a technical slant, including com from home, AR&D joined last year with Juda while on Harvard's chemistry staff. panies with chemical operations. One of its most recent ventures is other investment interests in the initial AR&D, w h i c h will pass its 10th birth financing of Transoceanic Development Electronuclear Corp., formed last year Electroday this June, looks to its future with Corp., a Canadian investment company and 100% AR&D owned. undiminished optimism. It can proudly set up to p u t money into n e w growth nuclear is not yet active a n d AR&D is boast that at least 15 of its 20-odd keeping m u m about what it has i n mind situations abroad. c u r r e n t "affiliates" (which it calls the • Picking α Winner. H o w does for its n e w baby, other than t o hint firms it hacks) are operating at a AR&D select its investments and where that it will "explore the possibility of profit. Moreover, some of its affiliates does it find promising ideas to back? doing research and manufacturing in now are seasoned enough to sell their These questions are the crux of one of the fields of physics, chemistry, mathe securities t o t h e general public. Aver the biggest problems facing its manage matics, a n d related sciences," perhaps age age of its current investments is* ments, for in the risk capital game each with an emphasis on physics. a b o u t four or five years. new situation tends to b e u n i q u e . More frequently, investments have • Chemistry's Role. A glance at AR&D gets many suggestions "over been made in going concerns with a AR&E>'s portfolio shows the importance the transom" from inventors with a record of successful operation, b u t a of its investments in chemical process firms. Pointing to the success scored by such affiliates as Ionics, Inc., Carlon Products, and Natural Gas Odorizing, American Research is well satisfied with the majority of its chemical gambles. O n e of the most successful ventures in chemistry—a group of companies b a s e d at Peabody, Mass., and headed by William Abramowitz (see box)—no longer shows up in AR&D's financial statements. Its investment in these four firms was transferred to Borden over the past couple years in exchange for Borden stock worth over $400,000. Since t h e Peabody companies are no longer a m o n g its interests, AR&D's chemical investments are relatively lower than at any time in recent years; therefore, it is now especially on the lookout for other chemical affiliates. For like any well-run investment com p a n y , AR&D does not care to p u t all its investment eggs in o n e basket; it prefers t o keep a balance between its commitments in chemistry, applied AR&D's Elf ers (left) and Doriot: an appraising eye for new scientific ventures
FINANCE
Investing on Technical Frontiers
19146
C&eN
APRIL
I 6, 1 9 5 6
need for additional capital. Typical are AR&D's investments i n Baird Associates, Tracerlab (which, however, was less than a year old when i t came to AR&D), and more recently i n Machlett Labs and Induction Motors. In all cases, though, it has been small companies, often privately owned beforehand, that AR&D has hacked; such fiims frequently run into difficulties if they turn to usual security markets for new financing. Î G o o d Management Is Essential. In picking an investment to back, American Research emphasizes competent technical and managerial ability. In addition, it prefers to put its capital to work in fields which seem t o offer unusual growth prospects and in products having unique technical characteristics and good patent protection. Probably the biggest single factor behind success or failure of new and sma' J enterprises, it has found, is managerial ability. Unfortunately, this is also just about the most difficult factor to prejudge, as AR&D has learned—in some cases, the hard way. Where its investments have not p a n n e d out, the most frequent reason has been poor management. Now, with 10 years' experience unoer its uQit, tue company iSG^s ttiat it can offer its affiliates managerial know-how as well as capital. "What we know best," vice president William Elfers says, "is what makes small technical business management tick and how to develop the financial growth of a small company." To h e l p technical management over the r o u g h spots of corporate development, AR&D usually places one or more representatives on the board of directors of each affiliate. AR&D can exert considerable control over most of its affiliates through common stock holdings. Besides providing a voice in management, common shares potentially m a y appreciate greatly in value—if the enterprise is successful. In some cases, however, AR&D has preferred t o obtain notes or bonds, for such senior securities not only have a prior call o n the affiliate's assets in case of financial troubles, but also provide AR&D w i t h a source of income from interest long before a young affiliate is able to p a y dividends. So that it can reap capital gains from future growth, AR&D generally makes sure that its investments in notes and debentures can be converted into common stock, or, at least, that they carry warrants allowing future purchase of common shares. • Getting Out. W h e n does AR&D decide to sell an investment? I n some cases it has given up its holdings, at least in part, w h e n it felt that it h a d served its function as a source of venture capital and that an affiliate could
AR&D's Major Scientific Gambles AR&D's Investment %of common equity
"Fair" value
Type of securities
84,678
$ 945,000
Common stock
15.9
Optical and electronic instruments
264,500
402,500
Common stock
31.7
Brunswick Enterprises
Shrimp products
212,287
83,334
Cameo
Oil field equipment
135,000
600,000
Common stock
25.0
Carlon Products
Plastic pipe
569,995
787,325
Notes, convertible notes, common stock
24.0
R. W. Cramer
Timing devices
496,400
549,675
Note, convertible debentures, common stock
42.2
Davies Labs
Tape recorders
187,500
187,500
Company Airborne Instruments Lab
Field Electronics
Cost
Baird Associates
Debentures
0
Diamond Oil Core bits Well Drilling
200,000
High Voltage X-ray equipment, Engineering particle accelerators Induction Motors Motors
190,000
Notes, stock option 200,000 Notes, stock option 1,947,500 Common stock
Ionics
Electric branes
mem-
449,268
1,572,539
Common stock
53.4
Jet-Heet
Heating ment
equip-
256,064
131,064
Notes, common stock
31.0
Lewis Welding
Axe welding, machinery fabrication
150,000
150,000
Convertible note
Machlett Labs
X-ray and electron tubes
660,000
810,000
Common stock
10.5
Magnecord
Tape recorders
1,000,000
800,000
Notes, convertible notes, common stock
38.7
Natural Gas Odorizing
Gas odorants
456,146
502,000
Common stock
10O
Secotan
Leather tanning
22,201
22,201
Common stock
15
63,500
15,000
Note
Debentures, 15.3 notes, preferred and common stock
Specialty Prod- Product licensing ucts Synco Resins
Resins
111,240
73,641
Tracerlab
Nuclear instruments, radioisotopes, x-ray equipment
236,927
735,061
0 0 25.7
0
0
Common stock
13.1
202,276 Common stock 3.4 Investment com202,276 pany Note: Investment data as of Dec. 31, 1955. Other AK&D investments (except for short-term notes) are American Research Management,Borden,and Electronuclear Corp.
Transoceanic
APRIL
16,
19 56
C&EN
1917
FINANCE
! Chemical Success S t o r y
in the changing world of today, sanitation plays a n increasingly important role. In home and industry, plant and office, washroom and lobby, various preparations designed to cleanse a n d deodorize are in constant and ever-expanding use. But sanitation alone, today, is not enough/ The increasingly odor-conscious public demands disinfectants, para blocks and napthalene crystals, liquid soaps, polishes and cleansers that are pleasantly scented as well. Build your sanitary products sales by giving; them a subtle, appropriate fragrance that is distinctively their own. Make it an integral part of your brand recognition. To assist you in this effort, the D&O Industrial Odorant Labs «re cat your service. Consult D&O.
Our 157th Year o f Service
DODGE &OLCOTT. INC. 180 Varick Street · New York 14, Ν. Υ. Sales Offices in Principal Cities
1918
C&EN
APRIL
16,
1956
I I 1 1 ι J I I I I I I I ! I § I I I I I § ! ι I I ] i I
!
Overcoming a h a n d i c a p resulting from childhood polio, William Abramowitz set up his own chemical firm in Peabody, Mass., w i t h $6000 borrowed from a friend in 1939, four years after h e was g r a d u a t e d from M I T . H e started with a w o o d e n barrel a n d a "Lightnin" agitator. Abramowitz was interested in d e veloping and producing resin emulsions. H e w a s joined by Jack Lichman, six months later b y Ashworth Stull, a n d three years later by Sidney Baum; these four spearheaded t h e growth of the company. W o r l d W a r I I n e e d s gave t h e fledgling firm, American Resinous Chemicals, a potent shot in the arm w h e n resin emulsions became vital i n extending the country's supplies of r u b b e r latex. Its basic business of polymerizing monomers for industrial u s e grew t o include production of a variety of elastomers a n d resins for the a d h e sive, paint, textile, leather, and other industries. In 1950, the group, needing funds to b u y o u t its original backer, t u r n e d to American Research to b o r r o w
,
,
stand alone. At other times, as w a s in p a r t the case with t h e Peabody com panies, it has sold out w h e n its o w n Hmited financial resources a n d those of its associates h a v e b e e n outdistanced by an affiliate's needs. AR&D may decide t h a t an invest ment is going nowhere a n d market its holdings, although first it will usually make a deterrnined effort to right a n unprofitable situation b y bringing i n n e w m a n a g e m e n t or supplying m o r e capital. Like other investment firms, t h o u g h , AR&D's business objective is, q u i t e frankly, profits. Its operations are gov erned not by philanthropy b u t b y a careful analysis of profit-making situa tions. And w h e n it believes t h a t con ditions a r e financially advantageous, it will u n l o a d a n y of its commitments. t G e t t i n g α S t a r t . Although private funds such as are backed b y Rockefel ler, Whitney, and Rosenwald m o n e y also help fill t h e need for risk capital, American Research is t h e only p u b licly o w n e d investment firm operating exclusively in the venture capital field. Senator Flanders, then president of t h e Federal Reserve Bank -of Boston, fig ured prominently in organizing the firm in 1946 a n d served as its first president. Also active in getting it started were t h e late Karl Compton of M I T and dean D .
$236,000 on 6% notes, w i t h a stock option t h r o w n in. By this t i m e Abramowitz was h e a d of t h r e e related firms: American Resinous Chemicals, American Polymer, and American Coating Chemicals. L a t e r American Monomer, Monomer-Polymer, and Resiac w e r e a d d e d to the fist. American Research a n d Development a d v a n c e d $ 3 0 0 , 0 0 0 m o r e and American Resinous m a n a g e m e n t was placed in charge of Snyder Chemical, an AR&D affiliate w h o s e operation previously had been unsatisfactory. As t h e companies e x p a n d e d toward combined sales of $8 million, their capital requirements finally reached a level w h e r e AR&D c o u l d no longer provide funds from its own resources. Floating a p u b l i c issue meant giving a w a y too m u c h stock. S o t h a t t h e Abramowitz firms would n o t suffer from lack of a d d i tional capacity, they were sold, a t a profit, to Borden—American Polymer i n 1953 and the others last y e a r . All, that is, except Snyder, w h i c h a s Synco Resins and with n e w m a n a g e rnent coritiiiu.es a s a m e m b e r o£ the AR&D s t a b l e .
I j I 1 I I I | I I | I I I I I I I I I I I I I I I 1 3 J ι S ι
Κ. D a v i d of Harvard's school of busi ness administration, as well a s many leading m e m b e r s of Boston financial circles. W h e n F l a n d e r s took his seat in t h e Senate, h e was replaced a s presi dent by Gen. Georges F . Doriot, w h o has b e e n professor of i n d u s t r i a l man agement at H a r v a r d since 1929 and served a s director of t h e mihtary plan ning division of t h e Quartermaster Corps d u r i n g the war. From its start AR&D w a n t e d to act as a funnel b y w h i c h large institutional investors could supply funds for n e w and untried ventures. W h e n it first offered stock for sale it tried t o sell at least 509fc to institutions. It last sold shares publicly i n 1950, raising i t s total capital t o $7.5 million. Today i t s 300,000 o u t s t a n d i n g shares are o w n e d b y about 1800 stockholders, including 15 institutional a n d corporate investors, a n d a r e fairly actively traded on t h e over-the-counter market. Among the largest shareowners today are Massachusetts Investors T r u s t ( t h e country^s largest m u t u a l f u n d ) , J o h n Hancock Life Insurance C o . ( i n whose building AR&D is h e a d q u a r t e r e d ) , and State M u t u a l Life Assurance C o . AJR&ID's initial investments w e r e Circo Products, Tracerlab, a n d H i g h Voltage Engineering, all three of which are still in its portfolio. High Voltage
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