In the March 26, 2007 Issue:

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Venture-backed Companies Make Formidable Impact on Economy
A little money has gone a long way, when you consider the initial size of venture capital investments each year, the $2.1 trillion in revenues captured in 2005, and the nearly 23,000 venture-backed companies that have received investments. In fact, 16.6 percent of the 2005 U.S. gross domestic product (GDP) was directly attributable to the $2.1 trillion in revenues received by venture-backed U.S. companies, while the $23 billion of VC invested in 2005 only equaled 0.2 percent of GDP.
 
Those figures are reported in Venture Impact: The Economic Importance of Venture Capital Backed Companies to the U.S., prepared by Global Insight and the National Venture Capital Association. In fact, the third edition of the Venture Impact report concludes that venture-backed companies outperform other firms in job creation, revenue growth and overall contribution to state economies.
 
The report states employment at companies that received investment from venture capital firms grew three times more quickly than their non-venture-backed counterparts between 2003 and 2005. With 10 million employees, venture-backed companies account for 9 percent of U.S. private sector employment.
 
With much of the health of the nation's economy hinging on the relatively small venture industry, the groups recommend that federal and state governments pursue policies that support the venture industry, such as increasing funding for basic R&D.
 
Companies backed by venture capital investments are becoming more important to economic growth. Between 2003 and 2005, employment at venture-backed companies grew at an annual rate of 4.1 percent, compared to just 1.3 percent for the U.S. economy as a whole. Venture investment is particularly important in the software, and computers and peripherals industries, where nearly 90 percent of all jobs are within venture-backed companies. California, Texas, Pennsylvania, Massachusetts and Georgia lead the nation in venture-backed employment. Pennsylvania, in particular, has experienced rapid growth during the last few years. Between 2003 and 2005, employment in venture-backed Pennsylvania firms grew almost 15 percent a year.
 
Venture Impact: The Economic Importance of Venture Capital Backed Companies to the U.S. Economy is available at: http://www.nvca.org/pdf/NVCA_VentureCapital07.pdf

Links to this report and more than 4,500 additional TBED-related research reports, strategic plans and other papers also can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.
 
More Public Sector Programs Eager to Lend VC Hand
Access to equity capital is one of the fundamental elements for successful TBED, but with more reports similar to the one above for the success of venture-backed companies, more state programs and national governments are chipping in funds to support their local VC market. Two of the most recent new initiatives come from Virginia and the government of New Zealand.
 
GAP BioLife Fund
Virginia's Center for Innovative Technology (CIT) has created a new fund to support early-stage life science businesses, which will be partially funded by a grant from Johnson & Johnson. The grant provides $250,000 to the BioLife Fund, which will be matched by CIT. CIT's new fund will focus its investments on seed stage companies commercializing life science technologies developed in Virginia's universities and federal laboratories.
 
The fund is an outgrowth of the state's Growth Acceleration Program, which has invested in 17 companies during its three-year existence. CIT found that about one-third of companies seeking assistance from the original program were biotech firms, which often faced a difficult time securing capital. Many venture firms are wary of investing in the life sciences because of the longer timeline to generate a return on their investment, according to a Washington Post article on the new fund. In addition to state equity investment, CIT will offer biotech entrepreneurs business guidance and the possibility of future investment by Johnson & Johnson.
 
Read the press release at: http://www.cit.org/pdfs/press_release/07-03-15-CIT_launches_life_sci_GAP_fund.pdf
 
New Zealand Innovation Fund
The New Zealand Venture Investment Fund (NZVIF), a government fund focusing on early-stage venture investments, has committed $14.45 million to Pioneer Capital Partners' New Zealand Innovation Fund. The private fund will invest between $80 million and $100 million over the next five years in export-focused information technology and manufacture and design companies, according to the New Zealand Herald. Late, in 2006, the New Zealand government dedicated $70 million in additional funding to the NZVIF to invest in early-stage companies through domestic venture capital firms. The Innovation Fund is the sixth such fund established through the country's Venture Capital Program and will be soliciting additional proposals later this year. The government hopes that by investing in venture capital firms with international connections, the program will help the country capitalize on its high-tech innovations by quickly moving into global markets.
 
Read the press release at: http://www.nzvif.com/documents/Press%20Release%20-%20Pioneer%20-%2021%20March%2007.pdf

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Cities Pursue Innovative Strategies to Grow Clean Technology Businesses
As renewable energy and environmental technologies emerge as some of the promising industries for high-tech economic development, more cities are seeking new ways to boost clean technology research and businesses. Austin, San Jose, Berkeley, Pasadena and Boston have been singled out for their efforts to promote cleantech industries by SustainLane Government, a nonprofit Internet-based organization that provides current practices and news about municipal sustainability. These cities have all found novel approaches to assisting start-ups and commercializing research in one of the fastest-growing industries for venture capital investment.
 
SustainLane defines cleantech industries as those involving energy generation, management and efficiency, wind and air related technologies, advanced transportation, and green building technologies. The group's concept of an ideal model for cleantech development combines three elements:

Austin is credited by SustainLane for its six years of support for the Clean Energy Incubator (CEI) and the outreach efforts of the city's electric utility. CEI is one of the nation's leading incubators for energy start-ups and is a founding member of the National Alliance of Clean Energy Incubators. During its six years of operation, CEI has hosted more than 18 energy start-ups and held many events to promote awareness of cleantech in the region. Austin Energy, the municipal electric utility, also has been actively involved in assisting clean and renewable energy start-ups. Last month, the group reached an agreement that would open up the utility's power grid as a testing ground for new technologies, including solar, biogas and wind projects.
 
California is well represented with three cities on the list. San Jose has managed to leverage its success in building the country's most successful venture capital market into a string of clean energy successes, particularly in solar power. The city's Environmental Business Cluster incubator has collaborated with many regional partners, including the city's government, utilities and universities to support early-stage companies and technologies. The list recognizes Berkeley and Pasadena for their successful collaborations with local universities and federal laboratories, including UC Berkeley's growing bioscience research program, and CalTech's Entretech virtual incubator.
 
In addition to several lists of top sustainability achievers, SustainLane also maintains a directory where practitioners can upload and exchange policy ideas from their city or state government. The directory includes a section on economic development with descriptions of regional initiatives ranging from Seattle's Climate Action City-Business Partnership to Mecklenburg County's (N.C.) approach to assembling an environmental policy team.
 
Visit SustainLane Government at http://www.sustainlane.us/. Registration is required for access to the policy directory.

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The Science & Psychology of Innovation
Browsing the business section of a bookstore may yield dozens of titles purporting to explain the process of innovation. This newsletter and most others serving the nation’s policymakers and science and technology communities have covered reports calling for a national innovation strategy. Unfortunately, most meetings on the subject have to begin by developing a working definition of the term innovation that most can accept. The use or overuse of the word, particularly in calls for needing more of it or business books on how to do it, threatens to reduce innovation to a meaningless buzzword that loses hope of having any real value.
 
Fortunately, slightly removed from political circles, there are those interested in understanding the basis of innovation and discovery with a scientific grounding. The National Science Foundation (NSF) recently released the proceedings of an August 2006 workshop exploring what is known about how innovation and discovery occurs on the individual and team level. The panelists' conclusion? Not much, particularly related to understanding engineering and design.
 
After hearing the state-of-the-art on understanding innovation and discovery from three perspectives - that of cognitive scientists, social psychologists and engineers - the 24 workshop participants developed an outline of several topics of research to cultivate an interdisciplinary “psychological science” of individual and team innovation and discovery and laid out expectations for improved understanding of the issue over a 20-year time span. NSF will use the list to guide future investments in research on the topic. The workshop recommended NSF support:

For those curious, the workshop began by developing a common language regarding creativity and innovation. Innovation, participants decided, is a subset of creativity that “involves the creation of a new idea, but also involves its implementation, adoption and transfer. Innovation and discovery transform insight and technology into novel products, processes, and services that create value for stakeholders and society. Innovations and discoveries are the tangible outcomes.”
 
The report on the August 2006 workshop proceedings into “The Scientific Basis of Individual and Team Innovation and Discovery” is available as a PDF at: http://www.nsf.gov/pubs/2007/nsf0725/nsf0725.pdf
 
Copies of the individual presentations are available at: http://www.lrdc.pitt.edu/schunn/innov2006/talks/schedule.htm
 
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The Bright and Dark Sides of IT
Information technology (IT) permeates almost all aspects of the economy and is what really drives economic growth, according to a report released this month by the Information Technology and Innovation Foundation (ITIF). The report’s authors, Robert Atkinson and Andrew McKay, believe the diffusion of information technology increases worker productivity 3-5 times more than non-IT capital. In Digital Prosperity: Understanding the Economic Benefits of the Information Technology Revolution, they collect and synthesize various reports citing the influence of IT, separated into five key measures: productivity, employment, efficiency of markets, quality of goods and services, and the innovation of new products and services.
 
Atkinson and McKay offer guiding principles for policymakers to help sustain IT-based growth, including:

The report considers the expectation that the IT industry itself would be the source of many new jobs, but upon closer examination, Atkinson and McKay note the industry hit its peak around 2000 with 3.4 percent of total private sector employment. By 2006, that percentage had stabilized to around 2.7 percent, and the number of jobs in the IT industry is currently growing slower than the rate of the overall economy. The numbers will remain low because productivity affects the IT industry as well – more output with fewer workers.
 
Besides limited expected growth in the information technology sector, in the coming years many types of service occupations, including positions enabled by information technology, may be susceptible to offshoring. Atkinson further explores this topic in a separate study published through the Brookings Institution, The Implications of Service Offshoring for Metropolitan Economies. This report, coauthored with Howard Wail from Brookings, discusses a model that predicts the number of job losses due to service offshoring between 2004 and 2015 for many of the country’s metropolitan areas.
 
The authors conclude that, in general, the loss of service jobs due to offshoring will be relatively modest, with metro areas having populations of a million or more losing on average 2.4 percent of their service jobs. This offshoring percentage decreases as the size of the metro area decreases, such that regions having less than 250,000 people are predicted to lose on average 1.7 percent of their service positions. But each separate metropolitan area has its own unique vulnerability to service jobs moving outside of the U.S., which is dependent on a variety of factors economic development professionals should understand for their region. Factors include the number of jobs requiring information technology and routine work, positions that do not require personal contact, productivity gains vs. wage savings in each area, the availability of the necessary skills outside of the country, and cultural, institutional and legal roadblocks.
 
Thus, communities with larger shares of positions such as computer programmers, software engineers, data-entry technicians, and telemarketers will be more susceptible to offshoring. But this information should be placed in context for, in the future - as was the case in the past - some types of jobs will grow and others will decline. For example, in 2004, 29 million jobs were eliminated due to business closings and retraction, but 31 million jobs were created because of expansion and business growth. The report concludes with policy recommendations for the federal government and individual states and regions to pursue, including:

Digital Prosperity: Understanding the Economic Benefits of the Information Technology Revolution can be downloaded as a PDF through the ITIF website: http://www.itif.org/files/digital_prosperity.pdf
 
The Implications of Service Offshoring for Metropolitan Economies contains service offshoring predictions for 254 metropolitan regions throughout the U.S. and can be accessed at:
http://www.brookings.edu/metro/pubs/20070131_offshoring.htm

Links to these reports and more than 4,500 additional TBED-related research reports, strategic plans and other papers also can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.
 
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Useful Stats
2004 Federal R&D Obligations to Universities and Colleges by State
The federal government distributed $23.8 billion in R&D obligations to universities and colleges in fiscal year 2004 — a 4.4 percent increase from the FY 2003 total of $22.8 billion, according to new National Science Foundation (NSF) data. In its report, Federal Science and Engineering Support to Universities, Colleges, and Nonprofit Institutions: Fiscal Year 2004, NSF details all categories of direct federal science and engineering support to institutions of higher education in the U.S.
 
Single-year snapshots can be misleading, so SSTI has prepared a table using the NSF data that shows the state rankings for total federal academic R&D obligations and percent change over the five-year period of 2000-2004. Nationally, federal R&D obligations grew by 37.7 percent over the period but some states saw much larger changes. Among these states, Hawaii showed the largest increase in federal R&D obligations at 108.3 percent, followed by Nebraska (85.2 percent), North Dakota (81.5 percent), Tennessee (73.9 percent) and Kentucky (60.9 percent).
 
In total dollar amount, California led the nation with $3.46 billion in federal R&D obligations in 2004. Along with California, five other states received more than $1 billion in federal R&D obligations: New York, Pennsylvania, Maryland, Texas and Massachusetts.
 
SSTI's table is available at: http://www.ssti.org/Digest/Tables/032607t.htm
 
Federal Science and Engineering Support to Universities, Colleges, and Nonprofit Institutions: Fiscal Year 2004 is available at: http://www.nsf.gov/statistics/nsf07316/

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People

Eric Cromwell announced he is resigning as director of technology development for the State of Tennessee.

Frank Dinucci announced he will step down in April 2007 as president of Connecticut Innovations.

C. Robert Eaton is resigning as president of MdBio, effective March 31, 2007, to pursue other opportunities in the private sector.

Bill Goetz, chief of staff in the North Dakota Office of the Governor, has been selected to be chancellor of the North Dakota University System, beginning July 1, 2007.

Oleg Kaganovich will resign as CEO of the Sacramento Area Regional Technology Alliance (SARTA) in June 2007, but remain a member of SARTA's board of directors.

Robert Santy is the new president and CEO of CERC, the Connecticut Economic Resource Center Inc., filling the position left vacant due to the retirement of Marty Hunt.

Peter Scott was named the director of Kettering University's new Fuel Cell and Advanced Technology Incubator.

The New York Biotechnology Association has named Nathan Tinker its executive director, replacing Karin Duncker, who resigned in 2006.

The Center for Economic Growth has selected F. Michael Tucker as its new president and CEO. Tucker replaces Kelly Lovell, who left the position in December to become president and CEO of International Business Development Group.

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