Fuel Cell Developer Adaptive Materials Is Michigan Success Story; Maybe Too Successful

4/27/10

Something strange has been happening over at Adaptive Materials, a fuel cell developer based in Ann Arbor, MI. During the past few months, as everybody talks about how to get things moving forward in Southeast Michigan, Adaptive has been, well, actually moving forward.

A contract worth a few million from the Department of Defense here, an award worth another few million from the Air Force there, and more money to develop a product for the recreational vehicle market.

And then there’s the company’s recent resume-gathering blitz, hiring nine new engineers. That’s news in these parts (the company received an amazing 7,100 resumes for those nine plum jobs). So, I decided to find out what kind of magic is going on over at Adaptive Materials. I talked to Michelle Crumm, co-founder and chief business officer, and found out that there is no magic happening there at all. The success is the result of a decade of old-fashioned hard work and building of relationships.

Crumm also tells me that Adaptive just might be a victim of its own success now. The company made a decision 10 years ago not to seek angel or venture capital funding. She did not think it was right to use what she calls OPM (Other People’s Money) to fund a “wild and crazy idea.” A decade later, it’s no longer a wild and crazy idea. It’s a business getting ready to move from manufacturing a few hundred units to thousands. And the company could really use some non-government funding at this point. Trouble is, they’re just not wild and crazy enough to attract VC-style investors.

I’ll let Crumm explain what she means in her own words. Here’s an edited transcript of my recent talk with Crumm. Below is Part 1. We’ll run Part 2 later in the week.

Xconomy: First, let’s talk about your company, then we can broaden the conversation a little bit. Can you tell me the “elevator pitch” version of what your company does?

Michelle Crumm: Adaptive Materials started 10 years ago, and we’ve been focused on solid oxide fuel cells development. So, we’re an alternative energy development company. Our focus is portable power. In our early stage, we were primarily focused on military portable power for soldiers. Early successes in those programs, in the early 2000s, led us to getting to other power ranges—enough to power robots and airplanes.

ami50So we provide [products] to “eyes-in-the-sky.” They get more power  when they’re flying unmanned aerial vehicles and longer duration capabilities when they have robots in the field. So, to protect them from IEDs [Improvised Explosive Devices], they can send robots out. About 12 hours is our most recent demonstration. So, about 10X longer mission for a robot in the field than a battery.

X: Is that being used in the field now?

MC: We have a small number of units out in different locations throughout the world for unmanned aerial vehicles and unmanned ground vehicles.

X: From what I’ve heard, there’s more of an emphasis on small, portable robotics in Afghanistan because of the mountainous terrain.

MC: Exactly. That’s been significant, just the change between the two wars. There’s definitely a ton of enthusiasm around “eyes in the sky,” especially because of the terrain, for having unmanned aerial vehicles fly for extended durations. That has significantly given a lot of business to us in the last six months or so.

X: So, you can actually draw a direct line between the surge in Afghanistan and an increase in business for you?

250w-150x150MC: Well, portable power seemed to be the thing that everyone was interested in a few years ago when we were in Iraq, and now that we’re in Afghanistan, definitely unmanned aerial vehicles and unmanned ground vehicles because of the terrain. They’ve got more caves in Afghanistan, so sending robots into caves makes sense. Sending airplanes into the sky over mountaintops makes sense. So, yeah, I definitely think that has something to do with it.

But also we’re also an older and more mature company now. We were earlier-stage before. We made small power, about 60 watts of power, and that was great to throw in a folding backpack. We just thought the demand for 250 watts of power would be a much bigger market. And it’s more of a sweet spot for us. We’re better at it. So, when we moved up in power it was about the same time we were in Afghanistan. It’s about timing. We were already moving up in power, anyway. So, I’m not sure I’d say that one drove the other one, but they both happened at the same time.

X: Good timing. Right. Well, I’ve been speaking to a few people in the local robotics industry, and they’ve been telling me that the military market is good for now, but it’s not really sustaining. There are only so many units the military will want, and after that you need to branch off into civilian or homeland security markets. Is that something you’re thinking about, too?

MC: Yes, but for a very different reason than you said. Naturally, they [military customers] are an important goal going forward. We would never walk away from them. In terms of numbers of units, we’ll see some spikes in that depending on what’s going on in the world. I think, long-term, they need to continue acquisition of fuel cells for unmanned aerial vehicles, fuel cells for robots. But they also need maintenance, they need training. So, it will be a very important line for us for a very long time.

We’re not projecting a dip in revenue, but we’re just not projecting huge growth in revenue. So we think that over the next five years we’ll be able to get to a sustainable business model with the military. And then what we would like to do in addition to that, in order to get our quality up and our economy to scale, we would also like to go after the commercial sector, which includes remote sensing and law enforcement, homeland security, all those kinds of things.

X: So, there’s still a lot of room for growth in military, not just in units sold, but also in training and maintenance.

MC: Yeah. Acquisition, maintenance and training. I think that one of the greatest things about a disruptive technology vs. just an improvement in existing technology, is that disruptive technology usually tends to pull in other scientists. There are probably some brilliant scientists who have developed some other innovative applications that we don’t even know about yet, that the military would love to get their hands on but they haven’t been able to commercialize it because they didn’t have the power. So, now AMI can give them the power that they need to grow their market as well. We’re already seeing a little bit of that on the applications side and some partnerships there evolving.

X: You’re not an early stage company anymore.

MC: No, we’re more like teenagers. We’re getting pimples and hitting puberty [laughs]. We have different needs. In a startup, you’re very worried about funding, you’re worried about hiring people. We’re 10 years into this and probably a little more jaded, a little more aggressive, but I definitely see that our needs have changed over 10 years. We’re in a different cycle than we were a few years ago. Our worries now are, “How do I package a product to ship” vs. “How do I develop a product that will work twice?” So, you know, it’s a much different feeling 10 years into this game.

You know, it’s the supply chain now. We’ve never cared about the supply chain as much. As long as we were able to buy what we needed, cost was not the biggest issue. It was reliability of the product. Now cost is becoming a big issue. So, developing it as far as pricing is the hot topic for 2010 for us. Our needs have really changed over that period of time. And it’s not as fun to fund second-stage companies, I think. Everybody likes to throw their dollars at the early-stage, brand-new idea, guys in the garage. So, you know, we just have different challenges.

X: Yeah, you’ve moved out of the garage and out onto the front lawn.

MC: Right. We have a lot more mortgages that I worry about at night. You know, a 48,000-square-foot facility. It’s just a bigger game.

X: Tell me a little bit about the founding, where the technology comes from.

MC: My husband [Aaron Crumm] and I, we got this idea back in 1998, ’99, 2000. If you think about what was going on then, there were a bunch of startups—provider-Internet-industry type companies.

X: Right, and we know what happened there.

MC: We were probably too cocky and confident and not knowing any better, so we decided to start the company based on Aaron’s, my husband’s, Ph.D. thesis, which was microfabrication by coextrusion, which is just a really big way to talk about the process we use to make our fuel cell technology. We also partnered with the University of Michigan, his Ph.D. adviser and some other founding partners so the three of us put together the business plan and went after funding through DARPA [Defense Advanced Research Projects Agency], which is kind of the cowboys of the Department of Defense. They fund some wild and crazy ideas. They funded our wild and crazy idea.

X: And so, 10 years later, you’re helping to support the war in Afghanistan. These contracts with the Air Force and with the Pentagon, they didn’t just happen. They must have happened over a series of years in terms of building relationships.

MC: I don’t know if you’ve ever seen a Department of Defense funding map, but it would take up an entire room just to spread this map out in front of you. No, these relationships are very entrenched with our customers. We’ve worked with them for the entire 10 years. We started with DARPA, and then branched out through all the other procurement and research and development agencies within the Department of Defense. I think, at this point, we’ve touched almost all, if not all, of them. I was just looking at a map earlier.

It’s telling, it’s retelling your story. It’s performing on all of your programs to get one baby step further. And, you know, over 10 years we’ve just been able to take enough baby steps forward that it looks like a great story right now.

Part 2 of Xconomy’s interview with Michelle Crumm of Adaptive Materials will run later this week.

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