The Upside of Downturns

No one will deny that the American and global economies have been in an extended slump.  The question is what will lead us out of the doldrums?  Right now the big argument seems to be between advocates of clean energy (solar, wind, biomass) and legacy energy (especially coal, oil and natural gas).  In certain parts of the country, legacy energy is having an immediate impact, while clean energy remains for the time being a potential boon for some future economy.

Continue reading “The Upside of Downturns”

How Many Startups can University Research Support?

Utah made headlines by generating more startups in 2009 than MIT on ¼ of their budget. Interest and activity in university spinoffs continues to grow. A number of new initiatives have launched recently to promote the commercialization of university technology and more specifically the development of startup companies.

  • Texas is a building a $7 million, 20,000SF accelerator facility, the Center for Research Commercialization. The CRC will provide green and biotech startups with access to Texas State faculty and labs.
  • The Auburn Business Incubator, located on the Auburn University campus is a new incubator facility to link startups to a network of services from university and community sources.
  • Carnegie Mellon University, a perennial startup powerhouse, recently launched a new initiative, Greenlighting Startups, which leverages their ‘Five Percent, Go in Peace‘ policy to generate university startups. One new twist is the Open Field Entrepreneurs Fund (OFEF) that provides early-stage business financing to alumni who have graduated from CMU within the past five years.

University startups are one of the most visible ways in which academic innovation produces regional economic benefits. Startups, however, require more effort than licensing agreements, and it is not an appropriate strategy for commercializing every technology.

The Association of University Technology Managers (AUTM), which began in 1974 as the Society of University Patent Administrators, provides data on these startups and university technology transfer. As more universities emphasize startups or other aspects of technology commercialization, it will be important to have good benchmarks in terms of the effort required and the expected return.

[Table 1]

Institutions emphasize different aspects of the commercialization process and may prefer licenses and patents to startups. The AUTM data doesn’t tell us the strategic emphasis of the institutions, so the average for how many startups you can expect out of a given amount of research expenditure is skewed by including institutions that never attempt to create a spinoff firm. Analyzing the AUTM data from 2003 to 2009, there are 133 institutions that produce less than one startup per year (Table 1). A number of these schools have very small budgets and are not oriented towards creating startups; in fact, only 24 of the 133 (18 percent) have annual R&D budgets above $100 million.

When we look at the institutions that generate at least one or more startups per year, we see why the $100 million threshold matters (Figure 1). It does not take $98 million or $100 million of research to generate a startup, but you can’t tell which research and which technology will lead to a startup, so you need to have a lot of research activity going on in order to find those opportunities to produce a new startup. At less than $100 million in R&D, you will need to be either very lucky or very good to consistently create startups.

[Figure 1]

As the volume of research increases, institutions become more efficient. At $200 million to $400 million in R&D, institutions can expect only a modest increase in startup rates – getting one startup for every $92 million in research. The very best schools, those that produce more than 4 startups per year, are able to generate one startup for every $77 million in research. For the smaller institutions, implementing the best practices and doing everything you can to be efficient at producing startups might add one more startup every other year.

An improvement in the data collected by AUTM would be to have more specific data on research expenditures and commercial outcomes by sector so that institutions have a better idea of how they stack up. AUTM reports the number of university startups and research expenditures but it does not provide specifics on the technology sectors for those indicators. For example, it is more expensive to develop a technology and launch a startup in biotech versus a web application, but all of those numbers are mixed together in the AUTM data.

There is also a need for more and better data about the quality and performance of university startups. The AUTM data does not distinguish various qualitative factors on startup development, or their ultimate level of success. Is a legally incorporated shell company with no employees, no investment and no revenue equal to, less than or greater than three committed entrepreneurs who have invested $50,000 of their own money to develop a prototype but they haven’t legally filed for incorporation? These are questions that require more long-term study and data collection. A few universities have collected this data for economic impact studies, but the variety of methods employed make it difficult to compare performance.

I am certainly a believer in the power of university based economic development, but I also know that it is not easy to succeed with that strategy and it is not the right fit for every university. With the data currently available, we can’t accurately answer the question of how many startups a university can expect to produce from its research base. If you have thoughts on how to improve the information about university commercialization and specifically startups, let us know by email or leave a comment below.

An Investable Story: The EntrepreneurCenter, Nashville

StartUp America Partnership and communities throughout the country work to reinvent their economies there are some models that should be noted.

In this post I would like to highlight the great work of Michael Burcham and his team at the Entrepreneur Center. Over the past few months I have had the pleasure of meeting Michael and have developed an understanding of their approach to supporting entrepreneurship in Nashville. As Michael likes to tell people he is working to support entrepreneurs as they seek to create an Investable Story.

The work of the EntrepreneurCenter is showing very promising early results and generating a lot of interest and awareness in the Nashville community and beyond. The Fourth Economy team has seen lots of entrepreneurial models over the years but there is something special about the work going on at the EntrepreneurCenter.

Some of the factors critical to their success:

  • Private Sector leadership – the business skills and entrepreneurial experience of Michael and others on the team provides a ‘do by example’ process and is generating involvement by other private sector leaders.
  • Public-private partnership – as many folks are calling for these partnerships, few know how to structure them. The EntrepreneurCenter has struck a balance of each partner playing to his or her strengths and supporting the entrepreneurs.
  • Robust network mentors – business people with broad industry experience. It is an honor to be an EntrepreneurCenter mentor. There is an application process, with fee, and training that must be conducted before you begin to advise an entrepreneur. This set up has created a committed group of mentors that are often invaluable resources to the community’s entrepreneurs.
  • Tough love – Contrary to what you’ve been told there are bad ideas and often someone with an entrepreneurial spirit has one and starts a company around that idea. The EntrepreneurCenter process for support entrepreneurs allows people to come to recognize when their idea turns sour and if needed the team sounds prepared to give the tough love message.
  • Open access – the goal of the EntrepreneurCenter is to support high growth potential entrepreneurs, which are often technology driven. They provide tools and supports for all types including lifestyle entrepreneurs and are aggressively using technology tools i.e. Skype and online to make their education and guidance available to anyone who needs it.
  • People First, Space Second (or fourth) – The EntrepreneurCenter has an incubator component with their space already full after only a few months. They are not however focused on creating a larger real estate holding and would rather partner with other incubators and real estate developments in the city. Too often the real estate come to control the behavior of entrapper initiatives as you become more worried on the rent or mortgage payment and less on the quality of the services your are providing the companies themselves.
  • Art meets Entrepreneurial Science – while no one can predict the success of any particular entrepreneur’s idea there are tools, training and technique that can mitigate some of the risks. The team is working in the heart of Nashville after all so there is still an art form to what they do, but more than I have seen with many similar programs around the country, the EntrepreneurCenter team is implementing a set of services that is showing significant early success and if the trend line continues will be a model that many others should be replicating.

2011 Tennessee NEXT Conference on May 5-6, 2011.

Pittsburgh: The Entrepreneurial City (Part 2)

Rob May recently moved his startup, Backupify, to Boston. We’ve heard this story in Pittsburgh before, only this time the startup left Louisville, not Pittsburgh. We often get caught up in the “one that got away” — the idea of big city investors poaching our startups because they don’t like to travel, or small town entrepreneurs lured to the bright lights of big city opportunity.

This is not just another story of the small town losing a hard-earned startup to the big City. Actually, that is the story, but the lesson of Backupify and the insights from May are more important for the future of entrepreneurship in so-called second- and third- tier cities.

The Backupify story goes to the heart of whether you can launch a successful startup outside a major urban center. May says you can, but it’s not as easy and it sometimes depends on the type of startup. What really matters is the type of startup, how it gets financed, and what markets you play in. If you are playing in markets where your customer is the average American, and you need little capital, or can grow slowly, or can use customer capital, then you can build a company anywhere you want to be. But building companies that need a lot of capital, grow extremely quickly (and thus need a lot of employees), or are very high-tech is extremely difficult outside of major or minor startup hubs. (To see full story: Why I Moved Backupify To Boston.)

It’s difficult to track this startup-relocation theory. A few data sources track companies moving but not what happens in that preliminary space before a firm is legally incorporated. It’s clear, however, that trying to stop the churn (entry, exit, birth, and death) is a losing strategy. Dynamic, growing regions have lots of churn in terms of people and firms moving in and moving out. Bob Gradeck’s research on migration demonstrated that Pittsburgh’s population loss is attributable to our inability to attract new residents to replace those who left.

Careful studies of firm relocations in the region are few and far between, but a few comparisons can help to show whether our region is suffering from a startup drain. In percentage terms, Pittsburgh trails cities like Austin, Boston, and even Cleveland on the relocation balance sheet, but mighty startup capital San Jose is suffering from an even more severe startup drain. While the latest data show Pittsburgh is losing jobs from companies leaving the area, this amounts to only 13 out of every 10,000 jobs. Pittsburgh lost 13,910 jobs from firms moving out and added 12,128 jobs from firms moving into the region, resulting in a net loss of only 1,782 jobs from these relocations. See graph below.

One might conclude that smaller regions can only be startup hubs for small-market players and lifestyle firms that provide a comfortable living for the founders but never grow significantly. Startup guru Andy Grove, former CEO of Intel, says too much emphasis is put on startups when what we really need are companies that can transition from prototype to mass production. The scaling process is broken, in part, because the U.S. offshores so much production.

Consequently, smaller regions face a double-barreled threat. Even if you manage to keep the startup, you may lose the production jobs that provide employment for more people. This reality is another classic chicken and egg problem, except that it is a little easier to figure out. If we don’t keep the startups, we have little chance of winning the production jobs. Relocation is not the major culprit for direct job losses, but it could play a big role in foregone supply chains jobs.

Is there little hope for smaller regions, forever doomed to fall farther and farther behind? Not exactly. Look at once small cow-town like Austin or swampy backwater Raleigh-Durham, now major players. In fact, regions have always been able to leapfrog established competitors, whenever those competitors are too inwardly focused or too tightly bound by aging technology and outdated structures. These aren’t easy, of course and they take time.

The Pittsburgh region is becoming more innovative and more entrepreneurial. Entrepreneurs will say we don’t have enough risk capital, while investors complain we don’t have enough good deals to fund. Both agree on this: we need a deeper pool of talented entrepreneurs and executives.

In the 1990s, venture investment in the Pittsburgh region didn’t top $100 million until 1998-1999, approaching $900 million in 2000 before falling back to Earth. Excluding the single boom year of 2000, venture investment has averaged nearly $200 million annually over the past decade.

During the 1990s there were 379 new firms for every dollar of annual venture investment; now there are only 27 firms competing for each dollar. Excluding the boom years of 1999 and 2000, we average slightly fewer startups today than we did in the early 1990s and the average annual investment today is twice the level it was in the 1990s. By these measures, access to capital has improved dramatically but the complaints about the lack of capital haven’t abated. See graph below.

Does size really matter?

Research on cities, growth, and innovation have shown that larger cities have distinct advantages. Researchers at the Santa Fe Institute reveal a direct correlation between city size and innovation; larger cities are more innovative, even on a per capita basis. Part of the advantage larger cities have is more creative and innovative people. If this advantage were based on size alone, large organizations would always be more innovative, but that is not the case. More is not always better except that you have a greater chance of having more smart people from which to choose, who get smarter because they are networked with other smart people with whom they can share their ideas and make better.

What might appear to be an advantage associated with size is really an advantage associated with connectivity. Steven Johnson describes how the combination of different people and ideas is important not just for individual products and companies, but for cities and regions as well. An environment that fosters connecting people and ideas expands the potential for increasingly powerful combinations. An innovation that may have been a failure or only mildly successful in one application can be transformative when applied differently. Johnson uses the analogy of spare parts — the more spare parts (ideas) you can gather, the greater the ability to create useful ideas and products.

Even if a region is small it can increase its capacity for growth if the environment is conducive to new combinations. It’s also important to have a diversity of spare parts and ideas. Richard Florida had it right when he talked about tolerance and creativity but was sidetracked by the proxies he used to measure tolerance, diversity, and openness. Openness to experiments and new possibilities is essential. Environments that block new combinations will stifle innovation. If we put our economy in a box, it will surely suffocate.

The next installment will explore the ecosystem for innovation and entrepreneurship in the region. Tim Hindes is helping develop a visualization of the variety of spare parts we have in the region and how they fit together.

View Part 1 in this series.

This article originally appeared in PopCity on 01.26.11.

Pittsburgh: The Entrepreneurial City (Part 1)

The short answer? Entrepreneurs.  A recent study by the Kauffman Foundation found that the rate of business startups is very stable from year to year, varying between 3% to 6%.  Entrepreneurship is resilient to both economic booms and busts which is good news for policymakers interested in a sustainable growth strategy that doesn’t suffer from cyclical downturns.

What does this mean for Pittsburgh?  We have tremendous research enterprises – both in our universities and a growing base of innovative firms.  The City of Pittsburgh – led by Oakland – is the region’s seedbed of innovation, accounting for more than one-third of the patents, more than two-thirds of the SBIR awards in the region, and three-fourths of the venture investment.

But to rely on entrepreneurship to drive growth in the region, we have some work to do.  Pennsylvania competes for last place among states for new business creation. The Pittsburgh region ranks in the bottom fifth of the nation’s metropolitan areas on the same indicators.  We have produced some notable entrepreneurial successes, but on the whole, we are the tip of the tail of entrepreneurship.

Why?

It’s not taxes.  Massachusetts and California both had higher taxes than we did and still grew faster. A true entrepreneur is a change-maker driven to overcome obstacles.  They don’t look at the wall and say, “If it were two feet lower, I might try to climb it.’  Similarly, an entrepreneur with a disruptive business opportunity is not likely to be scared away by the tax rates.

In a study on why places have different levels of entrepreneurship,  Edward Glaeser and William Kerr found that the number of smaller suppliers and pool of qualified workers. within an industry can promote the creation of new firms in that industry. In response to the crisis of the 1980s, our mantra was diversification.  Our success in diversifying the economy has now hurt us in this area of creating enough depth for new industries to prosper.

IT as Bright Spot

One success in our region is the information technology sector.  It’s taken more than twenty years, but we have developed a talent pool of technical and management talent with varying experience levels. Three regional startups: Transarc, FORE Systems and Carnegie Group – have spawned a dozen startup firms that are seeding future generations of entrepreneurs.

For the first time since its start in 1983, Innovation Works has more good deals than they can fund.  We can now say that we are approaching a critical mass of second and third generation entrepreneurs and we may be only a few years from seeing that the tangible economic impact.

We have often explained our lagging entrepreneurship as a cultural residue of our industrial past, blaming the old steel mentality and being adverse to risk.  A 2002 study found that firms in the region were less likely to share information than in other regions.  But this may be fading, due to three trends:

  1. Regional entrepreneurs have progressed on the learning curve, creating not just 2nd and 3rd generation entrepreneurs but a whole new crop of innovators like Joshua Dziabiak of ShowClix – one of Inc.com’s top 30 under 30 Entrepreneurs.
  2. Mainstreaming of entrepreneurial achievement—think Microsoft, Apple, Google, Facebook and even the movie, The Social Network–has improved understanding of how we benefit from local startups like FORE Systems, Spinnaker and FreeMarkets even as they fade away.
  3. The return of Boomerang Entrepreneurs.  We lamented every time a firm was recruited away in the 1990s but we are seeing those entrepreneurs return, bringing with them the expertise and networks from other regions. One example: Nick Manolis who went to Boston with Internet Securities but has now returned as CEO of TrueCommerce, an Innovation Works portfolio company.

Moving forward, we must avoid the temptation to pick the “one approach that works best.”  The reality is, you have to do a lot of things well. One of the strengths of Pittsburgh is that we have not put all of our eggs in one basket. The failed efforts to consolidate economic development has left us with a dynamic and flexible eco-system akin to a cloud-sourcing network for entrepreneurial support.

The notion of a One Stop, One Size Fits All approach is not suited to the diverse needs of a vibrant entrepreneurial climate.  It takes some effort to navigate, but the resources in Pittsburgh allow an entrepreneur to select the services and programs that best fit their needs.

While there is no silver bullet to promoting growth or entrepreneurship, whichever path you choose you have to be able to do many things well to enjoy sustainable growth and prosperity.

 

 


This article originally appeared in PopCity on 11.03.10.