In the May 23, 2003 Issue:

Copyright State Science & Technology Institute 2003. Information in this issue of the 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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EDA Reauthorization Would Support Tech-based ED Initiatives
Congress begins consideration of the Economic Development Administration (EDA) reauthorization legislation, which continues to include several initiatives to promote tech-based economic development. With the current authorization due to expire on September 30, 2003, the new legislation would authorize EDA's operations for five more years, beginning in FY 2004 and extending to FY 2008. The Administration's proposal includes $331.03 million for assistance programs and planning grants.

Generally, EDA stresses coordination, flexibility and performance as three areas of reform in its reauthorization bill. In terms of flexibility, the bill contains mechanisms to help EDA administer the 38-year-old program and to reward performance by emphasizing job growth. The bill also seeks to ensure that federal agencies are working together on common areas. For example, EDA would be made aware of the Department of Labor's workforce development efforts in an area.

The proposed legislation also provides "authority to establish an incentive program to reward grantees that perform the best in terms of creating jobs in distressed areas of the country. In addition, the Department proposes new special impact area authority to cover those unusual circumstances that arise from time to time and result in special appropriations to meet unanticipated economic development problems."

The legislation would authorize:

The EDA reauthorization bill will be considered by the House Transportation and Infrastructure Committee and the Senate Environment and Public Works Committee. Hearings in the House on EDA reauthorization have already begun and Assistant Secretary of Commerce David Sampson is slated to testify about the bill before the House in the next few weeks.

EDA serves as a venture capital resource to meet the economic development needs of distressed communities throughout the U.S. and currently supports production and free dissemination of the SSTI Weekly Digest. More information on EDA is available at: http://www.doc.gov/eda.

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Privatization Moves Underway in Indiana, Minnesota
Within two years, Indiana's agency for promoting economic development will become a quasi public-private partnership similar in concept to the Michigan Economic Development Corporation.

While in Minnesota, an agreement that resolved the budget impasse gives the state's lead science and tech organization a 12-month timeline to fully privatize from the state's support.

Indiana's and Minnesota's are the latest moves to test the largely uncharted waters of privatized public technology-based economic development, moves that stem, in part, from governors and state legislatures trying to maintain momentum in the knowledge economy without identifying alternate revenue sources within state government.

Indiana
Legislation passed this spring will take much of the activity within the $83 million Indiana Department of Commerce, fold in a half dozen other state agencies, including the $37.5 million 21st Century Research and Technology Fund, and create the quasi-public Indiana Economic Development Corporation (IEDC) before the end of FY 2005.

The two-year time frame allows the IEDC's new 23-member executive board to develop a strategy to ensure the smoothest transition. The schedule also permits time to seek the critical-but-yet-to-be-committed private contributions. Already decided is that some components of the existing Commerce agency, including community development, energy assistance and tourism, will remain entirely within the state's executive branch and outside the authority of the new corporation.

Minnesota
Minnesota Technology, Inc. (MTI), established in 1991, maintains 17 offices throughout the state to provide companies with assistance to create more effective manufacturing processes, improve communications, increase efficiency, expand market opportunities and develop corporate growth strategies. In addition, MTI has prepared several research and policy reports for state S&T policy, publishes news and information resources, and holds Technology Awareness Forums, educating hundreds of business leaders about advanced and emerging technologies.

Governor Pawlenty's proposal, as part of his FY 2004-2005 biennial budget request to defund the program completely, met stiff opposition throughout the state and in much of the state legislature. Short on cash, with the state deficit continuing to grow, legislators have agreed to give MTI a $3 million one-time appropriation for the first year and nothing for the second year of the biennium. MTI has received roughly $5.3 million annually in the past from the state in addition to $2 million in federal matching funds for the Manufacturing Extension Partnership, according to a report in the Duluth News-Tribune.

The 12-month lead time to evolve into a private organization provides MTI the opportunity to develop a strategy to identify other funding sources and a competitive fee structure for some of its client-based services.

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The Army Launches Energy VC Fund
The Army last week announced the creation of a $25 million Venture Capital Initiative (VCI) to satisfy a critical Army technology requirement — obtaining lighter, more efficient power sources for individual soldier systems.

"Power and energy technologies are an opportune area for Army investment, particularly because the Army's interests parallel those fueling the commercial market," emphasized Dr. A. Michael Andrews, Army Chief Scientist.

The goal of the VCI is to jump-start promising technologies in the area of portable power and energy to lighten soldiers' loads as they operate worldwide, often in extreme environments and under austere conditions. It will focus its investment activities on innovative technology companies, including those that may not normally do business with the Army.

The VCI will be managed by a nonprofit corporation modeled on the Central Intelligence Agency's venture capital initiative and funds will be provided from basic research and applied research accounts. The Army selected OnPoint Technologies, Inc., of Maitland, Fla., to manage the VCI.

According to an article in the Daily Deal from New York City, the Army's $25 million investment will be spread over 4-5 years. The paper quotes OnPoint officials as anticipating 4-6 investments being made each year ranging between $500,000 to $1.5 million. Deals will be done in partnership with other venture capital funds, the paper says.

Other Defense, Intelligence VC Activity
The success of the CIA's own VC fund, In-Q-Tel, has captured the attention of the Navy as well as the Army. Founded in 1999 and receiving an annual $30 million injection of funds from the CIA, In-Q-Tel has reviewed more than 3,200 business plans, selecting more than 40 worthy of investment. The private nonprofit organization has 45 staff and two strategic review teams — technical and venture. More information about In-Q-Tel is available at: http://www.in-q-tel.com

The Navy has added its own twist to increasing equity investments in critical Navy technologies. The Office of Naval Research’s Commercial Technology Transition Officer has completed two “wargames,” exercises that help the Navy and Marine Corps explore opportunities for sharing technology with the commercial marketplace. The latest game was held March 11-13, 2003 in Warrenton, Virginia, with participants from government, industry, and the private venture capital community.

The principal results of the exercise indicated that brokering information and deals among government program managers, intellectual property holders, and venture capitalists offered the most promising approach to faster transition of innovative technologies to sailors and marines.

The games are part of the Commercial Technology Transition Officer’s “venture initiative,” whose goal is to examine various processes modeled after commercial practices and adapt the best ones to serve the Navy and Marine Corps’ technology needs. The lessons from the game will help the Commercial Technology Transition Officer to develop a Naval Venture Initiative that improves the transition of commercially-developed technologies to the Fleet.

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Keys to Growth Involve Discovery, Engineering and Entrepreneurship, Report Says
A 19-year veteran of the technology-based economic development field has co-authored a guide that outlines strategies for growth in the knowledge-based economy. The Keys to Growth in the New Economy:Investing in Discovery, Engineering, and Entrepreneurship draws on the experiences of John Ahlen, who has led the Arkansas Science and Technology Authority (ASTA) since 1984. The report is co-authored by Mark Diggs, Chairman and CEO of Maryland-based Ontology Works, Inc.

Drawing on Arkansas' experience, Keys to Growth serves as a technology-based economic development handbook for policy makers and community developers who are looking for an approach to economic growth that does not rely on industrial recruitment.

Technology-based economic development offers a model for growth, Ahlen and Diggs argue. They outline five specific results that emerged from ASTA's experience:

The Capital Resource Corporation, a nonprofit that promotes venture capital formation and innovation in Arkansas, published The Keys to Growth in the New Economy. The book is available at http://www.accessarkansasscience.org/.

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University Royalties Up 12% in 2001, AUTM Reports
Royalties on product sales from technology developed by Canadian and U.S. academic research institutions jumped to $845 million in 2001, up 12 percent from the previous year, according to the AUTM Licensing Survey: FY 2001. Gross licensing income received from licenses and options, however, declined from $1.26 billion in FY 2000 to only $1.071 billion in FY 2001 as 7 percent fewer new licenses and options were executed.

Prepared annually by the Association of University Technology Managers (AUTM), the survey is a comprehensive report featuring data about technology licensing activities collected from a record-high 198 U.S. and Canadian universities, teaching hospitals and research institutions.

Technology transfer of academic research is receiving considerable attention by state and local technology-based economic development officials based on the anecdotal success and profits earned at a handful of universities. Columbia University alone, for instance, earned nearly $130 million in royalties in FY 2001. Visions of licensing income ever generating substantive income relative to the total academic research portfolio should be tempered, however — the FY01 survey reveals that of 22,937 activies licenses reported, only 131 generated more than $1 million in income that year.

Nonetheless, university tech transfer can play an important role on local economic development. At least 494 new companies were formed in FY01 based on academic research — 84 percent of them in the state or province of the academic institution where the technology was created. The survey also found that since 1980, a total of at least 3,870 new businesses have been created; 2,159 were still in operation as of FY01.

AUTM also found universities more often taking equity positions with their start-ups, increasing from 56 percent of all new business creations in FY00 to 70 percent in FY01. Sixty-seven percent of new licenses and options were negotiated with newly formed or existing small firms. Start-ups received exclusive rights in 91 percent of their agreements with academic institutions.

The prospect for greater revenues for university tech transfer efforts remains. In FY01 alone, 95 reporting institutions identified at least 358 new commercial products that were introduced to the marketplace under license agreement with commercial partners, several of which are highlighted in the survey. And, according to respondents, more than 1,500 new products have been introduced to the marketplace since 1998. Additionally, the number of invention disclosures reported and the number of U.S. patents applications filed rose 4 and 6.9 percent, respectively.

The May 22, 2003 online edition of the Chronicle of Higher Education identifies the top 10 institutions based on FY01 royalty income as including:

The Executive Summary for the AUTM Licensing Survey: FY 2001 is available for free download on the AUTM website (institutional rankings are not included in the executive summary). The full report is available for purchase by the public for $180. More information is available at http://www.autm.net.

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Does VC Hurt Chances of IPO Success?
Initial public offerings (IPOs), the darlings of the dot-com boom, would be put on the endangered species list if they were a plant or animal — based on how few have been seen in the past year. Investor sentiment toward IPOs has been almost as negative since the bubble burst as the IT hype was positive before. But is the aversion to IPOs warranted? Have IPOs really become more risky than they were in years past?

Stavros Peristiani of the Federal Reserve Bank of New York takes on the issue in his recent report, Evaluating the Riskiness of Initial Public Offerings: 1980-2000, and concludes yes, IPOs are more risky, but the blame cannot fully lie with the information and telecommunication technology explosion. Also, and perhaps more surprising for the tech-based economic development community, Peristani's models suggest "companies taken public by top-tier underwriters or funded by venture capital exhibit higher relative volatility and a lower likelihood of survival."

Peristani employs two approaches to investigate the post-issue riskiness of IPOs for the 1980-2000 period. First, he compares the stock price volatility for issuing and nonissuing firms. Second, he uses a qualitative model to estimate the likelihood that new issues will survive in the aftermarket. Both methodologies show the riskiness of IPO shares relative to the shares of a nonissuing peer group has increased roughly 30 percent in the 1990s.

Although the proliferation of Internet companies in this period helps account for the increased risk, Perisani's empirical analysis reveals a more gradual shift in risk that cannot be fully explained by the high-tech bubble. The study found Internet-related IPOs are five times more likely to be delisted than are non-Internet issuing firms and can account for a substantial portion of the increased risk found during the late 1990s. But not all of the increased overall risk can be attributed to the growth on these tech offerings, the report states, since a growth in risk was discernable in the early 1990s, before the Internet's impact was felt.

Some of the other possible explanations Peristani identifies for the increased riskiness of IPOs include: a deterioration in the make up of firms going public (such as, with the average age of four years, the relative youth of the firms compared to the average age of companies in earlier IPOs being seven years), agency conflicts and misaligned incentive structures in investment banking and for sell-side analysts; industrial deregulation; and, information asymmetries between the issuer and investor, particular with the advent of Internet-based trading for individual investors.

Regarding the decreased survivability of IPOs with venture capital backing, Peristani's model stands in sharp contrast to the widely cited work of researchers like Paul Gompers and Joshua Lerner (see Short-term America Revisited? Boom & Bust in the Venture Capital Industry and the Impact on Innovation). It is, Peristani points out, consistent with research done on the agency conflicts thesis, which argues strong incentives exist for underwriters to undervalue IPOs at the time of offering to dramatically increase the IPOs value quickly. Peristani also finds "the odds of delisting for venture-funded firms are around 1.47 higher than the odds of non-venture backed firms."

The full 56-page article is available at: http://www.newyorkfed.org/rmaghome/staff_rp/2003/sr167.html

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