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SSTI Editorial
New SACI Report Reflects Objectives of Most TBED Efforts
Many community and economic development professionals believe the report released last Tuesday should have predated the President's 2006 Budget to consolidate or eliminate 18 federal programs used by most parts of the country to support growth and well-being (see the Feb. 14 issue of the Digest). Among those targeted in the move are the Community Development Block Grants (CDBG) and the entire Economic Development Administration (EDA) slate of grant programs. What was proposed in the Administration's budget request was a smaller program called Strengthening America's Communities Initiative, or SACI for short.Few details on SACI were released with the budget request other than the new program would be administered by the Department of Commerce, providing opponents to the change with easy ammunition to fight the proposal as Congress considered next year's appropriations. As a result, the House endorsed the status quo, stating there was no authorizing legislation to support the requested funding level (see the May 30 issue of the Digest). That rationale left open the door for the Administration to present a reasoned plan for why the change was necessary.
The July 2005 report from the 17-member SACI Advisory Committee provides the Administration's plan in three components: findings based on three public hearings held in April, May and June; guiding principles for the dramatic shift in federal support and policy; and, recommendations for approaches to address the needs identified in the findings. Twenty recommendations are then grouped by three themes:
- Bringing Federal Policy Into the 21st Century - reflecting the regional component of innovation systems; requiring long-term, innovation-based strategies; coordinating workforce development with innovation strategies; and, promoting public-private partnerships and co-investment. Federal programs, policies and regulations would be reviewed for impacts on sustainability and competitiveness of regions.
- Targeting Need and Responding to Opportunity - revising eligibility and allocation criteria to reflect measures of competitiveness and need; phasing in results-oriented competitiveness to all federal grant/funding assistance within 10 years; and eliminating all entitlement grants and formula programs.
- Assuring Flexibility, Accountability, and Results - establishing a cabinet-level, inter-agency council to coordinate federal community and economic development activities; identifying best practices and reporting on results of federal investments; recognizing emerging, self-defined economic regional boundaries and harmonizing federal designations for consistency; developing robust analytical tools to allow regions to measure needs and progress; requiring and rewarding co-investment from nonfederal sources but allowing exceptions and a sliding scale for areas with high(er) distress; allowing subregional organizations to apply for funds directly so long as activities are consistent with the adopted regional strategy; creating means for sharing best practices; and partnering with educational institutions and nonprofit associations for local and regional capacity building.
Of course, the consolidation and elimination of programs deemed to duplicate or overlap other programs remains a core element of the plan, but the report recognizes significant changes to the present, entrenched CDBG/EDA system must be implemented more gradually.
In all, there appears to be little in the report that should stir opposition from state, regional and local tech-based economic development practitioners. In fact, much can be embraced. As the report discusses the need for federal economic development policy to enter a new era, the tech-based economic development (TBED) community already is working toward policies and practices improve regional innovation systems and strengthen global competitiveness.
TBED practitioners should not be complacent or smug. While more traditional economic and community development programs would experience considerable angina if the SACI recommendations were to be implemented, many existing TBED programs also are not prepared to really compete for federal funding. There is need for change or improvements on all levels of U.S. economic development policy.
An announcement this past week by Senators Joe Leiberman (D-CT) and John Ensign (R-NV) that they will be introducing legislation addressing the recommendations of the National Innovation Initiative (see the Jan. 10 issue of the Digest) suggests Congress is ready to discuss real change to federal economic development policy. Elements of NII can be found throughout the SACI report so the bill could present an opportunity for SACI proposals to advance.
Texas Puts $50M into Gene Institute
Coming off the heels of the state legislature's approval of a new Emerging Technologies Fund (see the June 13 issue of the Digest), Gov. Rick Perry announced last Saturday that Texas would provide a $50 million grant to establish the Texas Institute for Genomic Medicine (TIGM). The Emerging Tech Fund remains untouched, however, as the $50 million will be taken out of the original $295 million appropriated for the governor's discretionary Texas Enterprise Fund.The nonprofit TIGM is a collaborative effort between the Texas A&M University System and Lexicon Genetics, a private technology firm located in Woodland, Texas, north of Houston. Lexicon will receive $35 million of the grant to create two copies of its library of 350,000 mouse stem cell lines for use by TIGM to identify new drugs for combating human diseases.
One copy of the library will be housed in remodeled facilities at the Texas A&M University System Health Science Center Institute of Biosciences and Technology, and another copy will be located at a new research and commercialization facility to be built at Texas A&M in College Station. When complete, the new library is expected to be the world’s largest collection of mouse embryonic stem cells that have been engineered for the study of gene function, allowing researchers to identify those genes that offer the most promise for future drug development.
The new institute is expected to create 5,000 new jobs over the next decade with an average salary of $60,000, according to a press statement. One-third of the jobs will be created directly at Lexicon, reports a July 17 Houston Chronicle article, while the balance is to be spun out of university research supported by the grant.
More information is available at: http://www.tamhsc.edu/news/archives/001914.php
Appalachian Incubators Spawn Almost 1,300 Companies
Incubators provide an integral and flexible component of many communities' tech-based economic development efforts. When successful, business incubators can provide a focal point for encouraging entrepreneurship in even the smallest cities and metropolitan areas. Ample evidence is presented in the latest survey of incubators supported through the multifaceted $35 million Entrepreneurship Initiative of the Appalachian Regional Commission (ARC).Since 1978, ARC has made 108 grants totalling more than $17 million for business incubation projects. Using 2004 data gathered from 76 of the 85 known incubators in the region, the report summary yields:
- Appalachian incubators have graduated nearly 1,300 businesses.
- Nearly half of the incubators are associated closely with a university or community college.
- The incubators have helped create 38,000 jobs -- 24,500 directly within current tenants and graduate businesses and 13,500 indirectly attributable to these same firms.
- The average Appalachian incubator provides space to as many as 16 tenant companies and serves an additional 14 non-resident firms.
- Ninety-four percent of Appalachian incubators are nonprofits with 1-2 full-time equivalent staff positions.
- Nearly half of all Appalachian incubators service technology or manufacturing firms.
- At 41,000 sq. ft., the size of Appalachian incubators is consistent with the national average. However, 30 percent of ARC area incubators are very small, consisting of 15,000 sq. ft. or less.
Only 28 percent of the respondents considered themselves financially self-sufficient (i.e. when operational revenues exceed or meet operating costs). Another 20 percent rely on external contracts and operations-based revenues to consider themselves self-sustaining. The balance of 52 percent rely on subsidization that averages 53 percent of these incubators' budgets.
The report also sheds light on other key issues: 30 percent have too little leasable space available to support the overall cost of services and facilities; 57 percent charge below-market rental rates; two-thirds of the incubators require tenants to graduate/exit after a predetermined time limit is reached; and 54 percent offer no placement or relocation assistance to graduating tenants.
A Survey of Business Incubators in Appalachia was released during ARC's July 17-19 conference, "Incubating Innovation and Entrepreneurship: Supporting Business Incubation and Knowledge-Based Enterprise in Appalachia" in Charleston, W.Va. The report is available at: http://www.arc.gov/index.do?nodeId=2880
Maryland's TEDCO Tops List of Most Active for Early-stage VC
For the second year in a row, the Maryland Technology Development Corporation (TEDCO) was the most active source of early-stage or angel capital, according to the July issue of Entrepreneur magazine. The list of the top 100 funds, based on number of deals made during 2004, is based on the results of the quarterly MoneyTree survey published by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association (NVCA).Forty-six of the venture capital sources on the list are from California; 17 are from Massachusetts. Some of the well-known angel organizations, such as Tech Coast Angels, Band of Angels and the Angels Forum and the Halow Fund (all from California), were in the top firms with 7-8 deals.
To get on the list for 2004, funds had to report at least three deals, up from the two-deal minimum required last year. TEDCO made 15 deals in 2004, the same number as it had in 2003 when it also received the top spot on the list.
While several of the list's funds may have public funds in their available capital pools, several funds directly supported or administered by state or local tech-based economic development organizations and councils made the list this year. Examples include:
- 1. Maryland Technology Development Corporation (TEDCO) - The Maryland Technology Transfer Fund provides investments to companies and eligible federal labs or universities. Companies are required to provide 50 percent matching funds. Funds may be used for research and development activities intended to develop a specific technology or technology package for commercialization. Eligible companies must employ fewer than 15 people or be a spinoff of a federal laboratory or university in Maryland founded less than five years prior to application. Also, the company must be pre-venture capital financing or be pre-revenue. Currently funded companies are within the sectors of bio-therapies, devices and diagnostic tools, engineering, nanotech, network and wireless solutions, and software.
41 (tied). Innovation Works (Pennsylvania) - The Innovation Investment Fund invests seed capital in early-stage technology companies in the Southwestern Pennsylvania region. To be considered for an investment, companies must be located in the region or relocate. They also must offer substantial potential for future growth through the development of an innovative technology, or innovative application of a technology in industries such as computer software and hardware, communications, robotics, advanced manufacturing or biotechnology. Innovation Works made four deals in 2004. http://www.innovationworks.org/html/programs/iif.jsp
41 (tied). Maryland Department of Business and Economic Development - The Challenge Investment Program provides financing for seed-stage companies. Companies are required to obtain a co-investment match or commitment of one-to-one, and have no more than 25 employees and annual sales revenues of $1 million or less. Industry group preference includes biotechnology, telecommunications and information technology. DBED made four deals in 2004. http://www.choosemaryland.org/business/financing/investment.asp
41 (tied). New Jersey Technology Council - The $80 million Venture Fund makes catalytic seed, start-up, and early-stage venture capital investments. The firm actively partners with entrepreneurs to build unique, leading-edge businesses that drive superior returns for investors and economic growth in the community. In 2003, the fund was licensed as a Small Business Investment Corporation by the Small Business Administration. NJ Tech Council made four deals in 2004. http://www.njtcvc.com/index.asp
68 (tied). Center for Innovative Technology (Virginia) The Growth Acceleration Program (GAP) helps to close the funding gap for pre-seed and seed-stage technology companies. CIT offers up to $100,000 in GAP funding to early-stage tech companies having a high potential for technology commercialization, rapid growth and downstream private equity financing. To qualify for GAP funding, companies must be located in Virginia or agree to relocate, be involved in either IT, biotechnology, communications, nanotechnology, materials or sensors and provide evidence for a one-to-one match. CIT made three deals in 2004. http://www.cit.org/gap-04.asp
The full list is available in the July issue of Entrepreneur: http://www.entrepreneur.com/listings/vc100/0,5946,,00.html
Editor's Note: The significant roles publicly supported angel and VC funds can play in certain regions may be overlooked by the equity industry. It could be, in part, because several programs do not report their deal flow to respected surveys such as MoneyTree. Did your program make three or more investments in 2004? More information on how to participate in MoneyTree is available at http://www.nvca.org/ .
Wisconsin's Bio-based Ag Industry Receives $5M
In signing the state budget last Thursday, Wisconsin Gov. Jim Doyle approved spending $5 million for two new programs supporting agricultural and forestry bio-based industrial development. Bio-based industries convert the carbohydrates in plants into fuels, polymers, fabrics, and other chemicals. Advocates for bio-based fuels industries argue every function now served by petro-chemicals also can be more simply, safely and sustainably served by bio-chemicals.As part of the governor's new biobased initiative announced in June, the two newly funded programs include:
- A $1 million grant program for agricultural businesses. These grants will help entrepreneurs develop ways to use plant and animal resources for no-waste, bio-based energy, fuels or products.
- Up to a $4 million grant program for the forestry industry. These grants will leverage federal dollars for the research, development and implementation of forestry biomass technology in Wisconsin, encouraging the use of forestry biomass as an energy source.
In June, Gov. Doyle appointed a Consortium on Biobased Industry to help guide the state's commitment to the emerging bioeconomy, including renewable fuels and energy and biobased products. The group, comprised of farmers and foresters, ethanol manufacturers, energy experts, researchers and entrepreneurs, will make its recommendations in May 2006.
More information is available at: http://www.wisgov.state.wi.us/journal_media_detail.asp?prid=1235
City Officials Disapprove Overall Handling of State and Federal Tax Issues
As a precursor to a report expected next month from the President's Commission on Tax Reform, the National League of Cities (NLC) recently issued its findings from a survey citing disapproval of how state and federal tax issues are being handled by the Administration, Congress, and state governors and legislatures. NLC outlined recommendations and called on the federal government to convene a national economic summit to address the issues.According to a research brief summarizing the report, Local Budget and Tax Policy in the U.S.: Perceptions of City Officials, 84 percent of responding city officials said the federal deficit, in particular, poses a problem for cities. The report points to several governmental challenges that are negatively impacting fiscal policy. Among those challenges are federal and state unfunded mandates, cuts or limits in federal and state support, and federal or state preemption of local authority.
The majority of city officials stated that if cuts in services are required as a result of revenue and spending pressures, they are likely to eliminate general government areas of administration and personnel, as well as cultural and leisure-related services such as parks and libraries. One in three city officials favors across-the-board cuts in city services, the brief states.
Bart Peterson, NLC 2nd vice president and mayor of Indianapolis, said that cities can no longer rely on the creation of sale and manufactured goods, given the changing economy. As the economy relies more on information-based technology and sales, he added, so should the ability to tax. The tax reform recommendations include:
- Design a fairer way to raise tax revenues by broadening the tax base and eliminating private-sector, special privilege tax exemptions;
- Extend sales tax to mail-order catalogs and to Internet sales;
- Eliminate the alternative minimum tax or adjust it so that it serves its original intent;
- Maintain tax-exempt status of municipal bonds to continue to attract investors in cities; and,
- Prevent the elimination of state and local tax exemptions.
City officials agree that user fees will most likely be used to raise additional revenue in the future; however, they rate local property taxes as the best overall source of local revenue. The survey and research brief are available from NLC at: http://www.nlc.org/home/
Recent Research
Insuring Patents to Fend Off Predators
Can patent insurance protect innovations from predators? Yes, particularly if innovators insure their innovation before rivals enter the market, according to Financing and the Protection of Innovators, a discussion paper by Gerard Llobet and Javier Suarez from the Centre for Economic Policy Research.According to Llobet and Suarez, patents offer limited protection if the innovators cannot demonstrate a willingness and ability to litigate patent predation. Competitors appear to avoid preying upon innovations from large companies that have litigated past patent infractions. However, rivals may view innovators without a history of legal action as easy prey unless they can demonstrate additional protection for their intellectual property.
Using game theory, Llobet and Suarez examine the likely behavior of innovators and rivals using internal financing, securing external financing via patent litigation insurance, and securing a loan to cover litigation costs. The authors test the effect of insuring before and after a rival enters the market. The authors also explore the impact of insurance deductibles, out of court settlement, an American court system, a noncompetitive credit market, and both symmetric and asymmetric information on the model.
Using their model, Llobet and Suarez determined the following:
- External financing (either insurance or loan) prior to rival entry offers the best deterrent to predation – a preferred outcome over litigation for the innovators.
- External financing might benefit a broader set of users in the U.S. where parties share the cost of litigation than in Europe where the loser pays the total cost.
- Patent litigation insurance encourages innovators to defend patents more aggressively whether secured before or after a rival appears.
- Innovators secure insurance when it covers the cost of litigation and when the premiums cost less than the potential pay-off.
- Internal financing provided innovators with the lowest willingness and effectiveness with litigation offering little deterrent to potential predation.
Llobet and Suarez note that patent insurance can be structured with positive deductibles to discourage wasteful litigation – an advantage over other forms of external financing. The authors also suggest that insurance might include infringement defense and litigation protection to ward off challenges by rivals seeking to drive competitors from the market with litigation.
The authors urge governments to keep patent insurance market-driven and nurture the private insurance market, rather than make patent insurance compulsory, as considered by the European Union. The authors note that private insurers can tailor coverage for innovators with appropriate deductibles and premiums based on the characteristics of the innovation.
The best situation occurs when laws prevent any predation of intellectual property; however, external financing provides the second-best situation for innovators, deterring predators from patent infringement.
Financing and the Protection of Innovators is available at ftp://ftp.cemfi.es/wp/05/0502.pdf. Links to the paper and morethan 1,000 additional TBED-related research reports, strategic plans and other papers are available through the TBED Resource Center, developed in partnership with the Technology Administration and SSTI: http://www.tbedresourcecenter.org/
Ronnie Bryant, president and chief operating officer for the Pittsburgh Regional Alliance, is leaving to become president and CEO of the 16-county Charlotte Regional Partnership in North Carolina.
Albert Clough is the new Commissioner of the Alaska Department of Commerce, Community and Economic Development, following the resignation of Edgar Blatchford last week.
Pat Dillon has taken a position with the Wisconsin Entrepreneurs’ Network, an initiative to support high tech, high growth companies in Wisconsin.
The new chairman for the Georgia Medical Center Authority is former State Senator Randy Hall.
Carrie Hines, presently with the Manufacturing Extension Partnership, will serve as the first executive director of the American Small Manufacturing Coalition.
The U.S. Senate has confirmed William Alan Jeffrey as the new director of the National Institute of Standards and Technology in the U.S. Department of Commerce.
The new head of the Economic Development Corporation of Kansas City is Jeffrey Kaczmarek, effective Sept. 6. Kaczmarek currently is senior vice president for community development with the Michigan Economic Development Corporation.
Former Massachusetts State Senator Peter Larkin is the senior vice president and chief operating officer for the Massachusetts Biotechnology Council.
Chris Marschner is the new president of the Maryland Business Incubation Association (MBIA).
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