SSTI Digest

In a market economy, what people are willing to pay determines something’s value. Airline tickets are a good example. For most of the major airlines, the price to purchase a seat the day of a flight seems to be some multiple of how much the airline thinks they can get away charging versus any drive to actually see the seat used.  This supply-demand principle falls apart though with valuations set for startup companies funded by equity investors, such as angels or venture capitalists.  In the risk capital business, a number of possible factors influences a startup company’s value – most tied to future markets, comparables, or dreams of big exits.  Recent research from the University of British Columbia and Stanford University suggests just how surprisingly risky – and overly optimistic – this approach is.

The Economic Development Administration is seeking applications through June 23 for the 2017 Regional Innovation Strategies program. Through SSTI’s work with Congress, a record $17 million is available this year. Along with increased funding, the notice of funding availability includes a few changes from previous years. More information will also be available in a webinar SSTI is hosting with EDA on May 22 at 3 p.m. EDT.

EDA is providing two separate funding opportunities:

SSTI continues its reporting on actions taken by state legislatures to invest in economic growth through science, technology, innovation and entrepreneurship. This week, we look at the budgets passed and signed by governors in Iowa, New York and North Dakota, finding mostly level and some increased funding for innovation programs in Iowa and New York – including free tuition at in-state colleges for qualifying residents – while North Dakota is looking at decreased funding for programs.

Iowa

Iowa recently passed a budget for FY 2018. Within the Economic Development Authority, the High Quality Jobs Fund, which provides funding for innovation programs, maintained funding of $15.9 million. However, a decrease in the authority’s available reserves leaves the innovation funding expected to decrease by two-thirds to $5.5 million in FY 2018. Two new programs, STEM scholarships and a mentoring partnership, receive $1 million and $93,000 in new funding, respectively.

The Kauffman Foundation released a new report analyzing entrepreneur development in St. Louis and Kansas City. Entrepreneurial Ecosystem Momentum and Maturity, The Important Role of Entrepreneur Development Organizations and Their Activities, by Ken Harrington, proposes a framework that names a four-step entrepreneur development process from problems and ideas to customer-funded venture that feeds into higher-stage venture development and, ultimately, economic development. Under this framework, Harrington explores how entrepreneurship is supported in each community by organizations such as KCSourceLink and BioSTL. Findings include that community-led initiatives provide the bulk of entrepreneurship activities and that most participants in these activities are in the startup stage of their idea’s development.

Every state and the District of Columbia experienced real GDP growth in the fourth quarter of 2016, according to the latest estimates released by the U.S. Bureau of Economic Analysis. The positive news means only energy-dependent Alaska, North Dakota and Wyoming saw real GDP fall over the year compared to the end of 2015. Experiencing growth of more than 5 percent between 2015 and 2016 were the District of Columbia, Nevada, Utah and Washington.

Could Jill Watson be the typical graduate assistant of the future? Watson was Georgia Tech’s first AI teaching assistant that fooled some in the computer science class into thinking the assistant they were dealing with in an online forum was human. New methods of teaching and training are being explored to handle the growing needs of filling middle-skilled jobs, according to several recently released reports. A new report from the Pew Research Center focuses on whether workers will be able to compete with artificial intelligence tools and whether capitalism itself will survive. Two other reports released last month by the National Skills Coalition stress workforce training through work-based learning policy and surveys all the states for the effectiveness of such programs, and provides policy recommendations by revisiting a November report.

On April 27, Federal Communications Commission (FCC) Chairman Ajit Pai released a Notice of Proposed Rulemaking (NPRM) that would impact net neutrality in the U.S.. The Restoring Internet Freedom act, which will be voted on at the May 18 FCC meeting, would end the utility-style regulatory approach intended to preserve net neutrality. Pai’s office contends that the FCC 2015 decision to subject internet service providers (ISPs) to Title II utility style regulations reduces the incentive for innovation in the industry and threatens the open Internet it is purported to preserve. The NPRM highlights several changes including reinstating the information service classification of broadband Internet access service and “returning to the light-touch regulatory framework.” In 2015, the FCC contended that subjecting ISPs to Title II utility style regulation was necessary to protect consumers from unfair business practices such as ISPs blocking or degrading internet traffic. 

In a recent Digest article, SSTI covered research highlighting the oversized role that offshoring multinationals had in manufacturing employment decline from 1983 to 2011. During this time, deindustrialization and manufacturing unemployment had a profound impact on community approaches to economic development. Larger metropolitan areas like Pittsburgh, PA, Roanoke, VA, and Greenville, SC, have received considerable acclaim for their ability to restructure their economies around new and innovative technologies. Less covered, however, are the smaller rural or rust belt regions that are seeking to leverage higher education, community partnerships, an increasingly skilled workforce, and innovative technologies to become more competitive in a 21st century economy.

Congress has passed a budget for FY 2017 that largely continues support for federal innovation programs and R&D investments. Among the highlights are $17 million for Regional Innovation Strategies (a $2 million increase over FY 2016), level funding of $130 million for the Hollings Manufacturing Extension Partnership and $5 million for SBA’s clusters program. In reviewing dozens of line items, offices that had received significant cuts in the White House’s skinny budget appear to receive some of the largest funding increases (such as the Appalachian Regional Commission, Community Development Block Grant and ARPA-E). However, with the exception of multi-billion dollar increases for Department of Defense R&D, many increases are rather small in terms of overall dollars. This is, at least in part, a reflection of non-defense spending caps rising by only $40 million for FY 2017, limiting the availability of new funds.

Both before and after the new administration released its budget plan, SSTI was communicating with both parties to identify how Congress would react to significant budget reductions. The message we heard was clear and consistent: Congress would continue to fund its existing priorities. The FY 2017 Omnibus shows that legislators were true to their word. Innovation policymakers and practitioners throughout the country should take a moment to appreciate this…. and then prepare to both work with agencies on program implementation and vigorously advocate for FY 2018 and beyond. While we thank Congress for its support for innovation in the FY 2017 budget, the fight for FY 2018 funding will require even more effort because of greater involvement of the Trump Administration in the budget process and lowering of spending caps. Further, the consequences of the FY 2018 budget are likely to be greater as the budget may serve as the roadmap for the next several years.

As the state budgeting process comes to a close, SSTI will report over the coming weeks on actions taken by state legislatures to invest in economic growth through science, technology, innovation and entrepreneurship. This week, we look at the budgets passed and signed by governors in Indiana, which includes new funding for an institute focused on health and life-sciences research and commercialization, and Maryland, which includes funding for the Maryland Technology Development Corporation.

Indiana

Appropriations bills approved by the Indiana legislature and signed by Gov. Eric Holcomb include funding for technology-based economic development initiatives: 

In collaboration with the Angel Capital Association and Pitchbook, the Angel Resource Institute (ARI) released its 2016 Annual Halo Report, which highlights several trends including a decrease in median pre-money valuation from 2015; an increase in the number of syndicated deals; and, data revealing the lack of angel investments in both female- and minority-led startups. ARI also found that convertible notes are becoming increasingly popular among angel investors for first-time investments in a company. In Texas, nearly 60 percent of all deals included a convertible note with many other regions/states reporting over 35 percent of deals including a convertible note.

The report includes data from 2,751 deals and over $3.5 billion invested in total rounds including co-investors. ARI, however, excluded deals with first-time investment rounds greater than $5 million to avoid skewing the data.

Valuations/deals