In the February 2, 2001 Issue:

Copyright State Science & Technology Institute 2002. Information in this issue of SSTI Weekly Digest was prepared under a cooperative agreement with the U.S. Department of Commerce, Economic Development Administration. Redistribution to all others interested in tech-based economic development is strongly encouraged — please cite the State Science & Technology Institute whenever portions are reproduced or redirected. Any opinions expressed in the Digest do not necessarily reflect the official position of the U.S. Department of Commerce.

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SBA Offers $187 Million for New Markets VC Programs
Two new programs from the U.S. Small Business Administration are designed to infuse new capital into economically disadvantaged rural and inner city areas and strengthen existing businesses through technical expertise and mentoring.

The New Markets Venture Capital program (NMVC) is anticipated to spur as much as $15 billion in economic development in distressed areas, while BusinessLINC 
(Learning, Investment, Networking and Collaboration) is designed to assist small firms by providing access to technical assistance, business advice, market knowledge and contracting opportunities that come from relationships with larger companies.

The NMVC program will provide $150 million in government guaranteed funds for 
investment by 15 to 20 VC companies to be selected competitively by the SBA. The venture capital companies will be community-based for-profit organizations with management that has proven track records of investing capital in small businesses for the purpose of community development. The companies must raise at least $5 million in investment capital which will be supplemented with the issuance of SBA debentures. No interest payments will be required for five years.

Existing community development venture capital companies and groups with equivalent experience may also apply for New Markets Venture Capital Company designation. The application is available on the SBA website at http://www.sba.gov/INV/venture.html

The deadline for applications is April 19, 2001.

An additional $30 million in matching funds for technical assistance grants is also available to NMVCs. The NMVC companies must obtain commitments to provide at least $1.5 million in technical assistance funding that can come from any source other than the SBA. The SBA will require each NMVC company to invest principally in smaller businesses in low income areas.

BusinessLINC is a public-private partnership that encourages large businesses to work with and mentor small business owners and entrepreneurs. Armed with $7 million in SBA funding, BusinessLINC will provide grants and cooperative agreements with new and existing coalitions, such as those run by nonprofit intermediaries and associations.

The grants will be used to plan local programs; to develop systems to match interested and capable small firms in poorer urban and rural communities with large firms; to integrate the expertise of outside business experts who can volunteer to help small firms; and to provide ongoing monitoring. BusinessLINC coalitions are already underway in Boston, Chicago, Dallas, New York City, Washington, D.C., Houston, and the Mississippi Delta.

More information on BusinessLINC can be found on SBA’s website at 
http://businesslinc.sba.gov/

Additional information on community-oriented venture capital can be obtained from the Community Development Venture Capital Alliance at http://www.cdvca.org

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Tech Talkin Govs V: The 2001 State of the State, Budget Addresses
Editor's Note: The fifth installment in our review of the Governors' inaugural addresses, state of the state addresses, and budget messages for 2001. The first four articles in the series were over the past four weeks. Those issues of the SSTI Weekly Digest and all other previous editions are available on our website: http://www.ssti.org/Digest/2001/headlines01.htm

Massachusetts
Governor Argeo Paul Cellucci, Budget Recommendations, FY 2002, January 24, 2001
http://www.state.ma.us/bb/fy2002h1/default.htm

Michigan
Governor John Engler, State of the State Address, January 31, 2001
http://www.migov.state.mi.us/

Missouri
Governor Bob Holden, State of the State Address, January 30, 2001
http://www.gov.state.mo.us/sosaddress13001.htm

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Faith-based Tech ED?
With President Bush announcing the creation of the White House Office of Faith-Based and Community Initiatives, some analysts and practitioners are pondering the implications for economic local and state development efforts.

Do faith-based organizations have a role in ED?

One doesn’t have to look too far for evidence that some faith-based groups already are actively supporting the push for local tech-based ED. The National Congress for 
Community Economic Development’s 1998 national census of community development corporations (CDCs) shows 14 percent (about 500) of all CDCs across the country identified themselves as "faith-based organizations." The NCCED provides resources and support for faith-based economic development efforts. The website is http://www.ncced.org

In fact, the 2000 Guide to Religious Community Development Investment Funds  reports that religious organizations have invested $900 million in low-income communities. While the vast majority of faith-based activities are oriented to social and health services, there are some significant exceptions.

In Los Angeles, for example, the First African Methodist Episcopal (A.M.E.) Church has been a catalyst for economic change in the neighborhood since 1992 when it started the FAME Renaissance – a revolving loan fund and entrepreneurial training program, among other activities.

F.A.M.E.’s biggest single community development effort came as the result of a  public-corporate partnership which helped fund the Business Resource Center,  including $3.7 million from the Walt Disney Company and the U.S. Department of Commerce’s Economic Development Administration. The program has funded more than 100 loans to minority-owned businesses for fixed assets/acquisitions, working capital for inventory and seed money for new business startups. Loans range from $2,000 to $500,000 with modest interest rates for terms of one to seven years. The center is a collaborative effort between the University of Southern California’s Business Expansion Network, Vermont-Slawson Economic Development Corporation, and the African American Unity Center.

In New Orleans, the Christian Faith Community Church is a hub of economic activity, including businesses, job training, business education, and an incubator. The church’s co-pastors, Gregg and Dedra Thomas, recently sponsored a two-day conference at Xavier University open to other church leaders looking to follow in their footsteps.

One concern raised by critics of the President’s initiative, aside from the church-state separation issue, is the potential for faith-based groups to be enticed by the availability of federal funds away from their religious missions. Others question the ability of interfaith cooperation on local development projects. An example of such a scenario could be the Niagara Falls Faith-based Collaborative. Formed in 1999, with nearly a million dollars of funding from the city and the federal Department Housing and Urban Development, the Collaborative has yet to begin any of its proposed economic development and training initiatives because of conflicts among board members from different religious groups. According to the local media, the city has frozen $420,000 in federal funds for the Collaborative as the problems move to the courts.

As with local tech-based economic development policy and implementation, a partnership among relevant stakeholders is critical for success. With the new White House office created, faith-based organizations with an interest in economic 
development may become more viable players in the field. More information on the 
President's initiative can be found at http://www.whitehouse.gov/news/reports/faithbased.pdf

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Recent Working Papers

Defining and Measuring Productivity in the New Economy
It is widely argued in the tech-based economic development community that New Economy businesses, specifically computers and information technology, account for the tremendous economic growth of the last half of the 1990s. But does the data 
support this?

A look at productivity growth may help to answer the question. Productivity growth is seen as a measure of progress: increases in productivity are often associated with improvements in the nation’s economy and society’s general welfare. William Nordhaus, Professor of Economics at Yale University, has written a series of three papers exploring the measurement of productivity and growth, with particular attention to the contributions of the New Economy sectors. In the first, Alternative Methods for Measuring Productivity Growth, Nordhaus argues the link between productivity growth and economic welfare is not clear. Traditional measures of productivity growth do not reflect improvements in the economic welfare of society. He breaks down the current economic formulae used for measuring productivity growth and closes with an alternative theoretical measure which he argues more closely serves as a productivity-welfare index.

In New Data and Output Concepts of Understanding Productivity Trends, Nordhaus  presents a new measure of industrial productivity that draws from income-side data published by the Bureau of Economic Analysis. He then develops the data set and  accounts to apply the new measure to the traditional economy and the New Economy, which is defined as industrial sectors including machinery, electric equipment, telephone and telegraph, and software (limitations of this definition are explored). A discussion follows of using the data in three output concepts which can be applied in productivity studies: gross domestic product (income-based), the business sector output concept defined by the Bureau of Labor Statistics (output based), and a third, new output measure, “well-measured output.” The third concept looks at those industry sectors that have relatively accurate measures of output: agriculture, forestry and fishing; mining; manufacturing; transportation and public utilities; wholesale trade; and retail trade.

In Productivity Growth and the New Economy, Nordhaus presents the findings from his application of the theoretical productivity measure defined in the first paper to the new income-side data set developed in the second paper. He concludes:

All three working papers by Nordhaus can be purchased from the National Bureau of Economic Research at http://www.nber.org

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Risk and Return of Venture Capital
Many tech-based economic development programs recognize the importance of having seed and venture capital accessible to their start up tech firms and entrepreneurs. Some practitioners, though, see a challenge in encouraging equity investment in more conservative, risk adverse regions and localities. The dot-com “correction” of last year probably did not help.

Accurate estimates of the average return on venture capital investment (VC) may help to open the purse strings of hesitant angel and seed funding sources. But what is a valid estimate of the return on individual venture capital investments?

Obtaining an answer to that question has not been easy in the past. In the new working paper, The Risk and Return of Venture Capital, John Cochrane, Professor of Finance with the Graduate School of Business of the University of Chicago, takes on the issue.

Attempts by economists in the past have been plagued by a lack of accurate data on the market value of individual VC deals between initial investment and disposition through an initial public offering (IPO), acquisition/merger, or failure. Also, complete information on individual deals is difficult to obtain because of their private or proprietary nature. The staggered nature of deals going public or failing presents additional challenges for estimating return on investment.

To overcome these problems, most past estimates of return on investment have either made assumption of interim market values to develop annualized snapshots of deals or looked at the return on whole VC portfolios rather than individual deals. Other past papers measuring VC from initial investment to IPO have been limited to working with small samples of completed deals.

Cochrane explains that a selection bias occurs by looking at return to IPO in that most IPOs will be made only when the project has achieved a good return or anticipates a successful offering. IPOs can be delayed almost indefinitely until the value of the project has risen to a satisfactory level, the company is acquired or merges, or the initial investors calls it quits. As a result, only measuring return on VC investment based on IPOs skews the results to the most profitable deals.

Cochrane’s research looks to overcome this selection bias by working with the  VentureOne 1987-2000 database of 16,852 individual financing rounds involving 7,700 companies and $114 billion of investments. The data revealed 21.7 percent of the early 17,000 financing rounds resulted in initial public offerings. Another 3.7 percent had registered their IPOs. Slightly more than 20 percent resulted in mergers or acquisitions while 8.9 percent were no longer in business due to business failure. The balance remained private.

A review of the data set by date of initial investment and date of disposition finds that the whole VC investment cycle is quickening. The entire deal process (entrance to exit) is happening about one year faster now than during the earliest cycle of 1988-1992. Interestingly, this does not necessarily translate to VC’s making more money since those deals going out of business are happening that much earlier as well – and the percentage remains relatively constant.

Without any correction for the selection bias, the net returns for firms that go public or are acquired reveals 15 percent of the deals return less than 0 (lose money) and 35 percent of the returns are less than 100 percent of the initial investment. While the average return is a staggering 698 percent, thanks to a few astounding results, the “most probably” outcome is a more modest 25 percent.

The statistical correction applied for the selection bias moderates the results dramatically. Cochrane found arithmetic average returns of approximately 53 percent compared to the 698 percent. Second, third, and fourth rounds of financing find lower arithmetic average returns as they are traditionally less risky.

Cochrane’s paper, The Risk and Return of Venture Capital, can be purchased from 
the National Bureau of Economic Research at http://www.nber.org

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Regional Roundup: Tech-based ED News from the West
There is so much happening in state and local tech-based economic development across the country that we’re adding a new Digest feature: the Regional Roundup. Our goal is to provide 1-2 sentence coverage of news stories, reports and resources demonstrating the variety of activities underway to build a stronger tech-based economy. Of course, whenever possible, we’ll include a link or contact for more information.

If you have news you think others in the field should know, add us Digest@ssti.org
to your media and newsletter distribution list.

Alaska
The Alaska High-Tech Business Council <http://www.ahtbc.org> and IT Careers Consortium have released a draft comprehensive "IT Career Pathway Model" for developing Alaska's information tech workforce. The pathway is a blueprint for generating interest in IT careers and providing key competencies to students to ready them for a long-term career in the industry.

Arizona
The Greater Flagstaff Economic Council <http://www.gfec.org> is opening a new technology incubator serve start-up tech businesses in northern Arizona. A $150,000 matching grant from the Arizona Department of Commerce will help the incubator open its doors this spring.

California
The Press Enterprise of Riverside, California reports the Loma Linda City Council voted unanimously to use $220,000 to help launch the Brown Center for Innovation– a technology learning center created by the George & Marta Brown Foundation. The center, with an estimated total cost of $25 million, is being created to honor the work of the late U.S. Rep. George E. Brown, Jr.

South Orange County Community College District has plans to convert a 70,000 sq. ft. helicopter hanger at the former Tustin Marine Base into the hub of a 100-acre Applied Technology & Education Park. With $3.5 million in state and federal grants and $10 million in industrial contributions, the hangar would become the Digital Innovation Center for the Arts, Science, and Technology, or DIE-CAST for short. 
http://www.socccd.cc.ca.us/atep/currentplan.htm

Colorado
A new regional technology council, the Convergence Corridor Grassroots Initiative <http://www.grassrootsinitiative.com>, has been launched to help turn Metro Denver into a high-tech hub. Organizers include the many area tech businesses, the Colorado State Office of Technology and Innovation, and Metro Denver Network, a coalition of local economic development organizations.

Hawaii
HB 175 and companion bill SB 648 include 11 new tax incentives to support high technology firms, research and development, and information technology investments. The bills have support from Governor Ben Cayetano. A summary of the proposed incentives can be found at http://www.hawaiiventures.com/HB175.html

Idaho
The Council of State Governments awarded the State of Idaho its Eagle eGovernment Leadership Award, declaring http://www.accessidaho.org the best all-around state government website from a field of 200 applicants.

Montana
The first hearing has been held by the Montana House Taxation Committee on HB 244, which would create endowed research professorships in technology and biotechnology at the University of Montana-Missoula and Montana State University-Bozeman. The bill text says the goal is to provide long-term economic development through research and intellectual property development. See: 
http://data.opi.state.mt.us/bills/2001/Billhtml/HB0244.htm

Nevada
A new technology incubator project for downtown Las Vegas has hit a snag, according to the 1/4/01 edition of the Las Vegas Review-Journal. Missing a January 1 deadline for land purchase may jeopardize the heavily discounted sale price, which was tied to tax credits that expired with the end of 2000. The incubator is a project of the Las Vegas Downtown Redevelopment Group http://www.ci.las-vegas.nv.us/downtown.html

New Mexico
New Mexico State University is creating a Physical Sciences Institute with a strong ED and commercialization emphasis. The Board of Regents has given NMSU $250,000 for start up costs. See http://www.nmsu.edu/~ucomm/Releases/psi.html

Oregon
The Oregon Internet Commission released its final report in December calling for the state "to make a substantial investment in education, aggressively promote the 
development of statewide essential broadband access, commit to first-class electronic government, and provide the necessary business and legal infrastructure . . . to ensure that electronic commerce can grow and prosper in Oregon." The report is available at http://www.econ.state.or.us/icom/index.htm

On a sad note, after 35 years, the Willamette Science & Technology Center <http://www.wistec.org>, a children’s museum for math, science, innovation and creativity is closing.

Utah
Governor Mike Leavitt has appointed several working task forces for the new Utah Silicon Valley Alliance, an unincorporated association designed to bring high tech jobs and venture capital investments to the state. Rod Linton, Director of the Utah Office of Technology Development, is serving as Executive Director of the new Alliance. More information is available at http://www.dced.state.ut.us/silicon/index.html

Washington
The Oregonian reports that the Columbia River Economic Development Council <http://www.credc.org> and the Washington Technology Center  <http://www.watechcenter.org> have signed a memorandum of understanding to  encourage southwest Washington businesses to pursue high tech projects. 

Wyoming
A $1 million donation to the University of Wyoming from Solomon Trujillo, former CEO of telecom giant U.S.West, will be used to endow the Trujillo Center for e.Business. Beginning in June the university will offer a Masters in Science in e-business, one of the first such programs in the nation, according to the university press office: http://uwadmnweb.uwyo.edu/news/2001/january/uwnews24.htm

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