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Public-Private Collaboration Can Spur Economic Growth

March 30, 2009 - The Washington D.C. Coalition for Capital

We have all heard the bad news.

The National Venture Capital Association reports that venture investing in early stage businesses is down 71% over the last 12 months. Most venture funds are reserving their capital for existing portfolio companies. Small business lines of credit are not being renewed by banks seeking to preserve liquidity. As credit is cut further, companies are forced to consider layoffs to stay in business. The result will be a sharp decline in 2009 in the number of companies funded, and very little of the federal stimulus package is expected to make its way to small business.

Historically there has been a shortage of capital available to create and grow small businesses, and the current economic climate only exacerbates the problem.

In the midst of the storm, states have an opportunity to gain a competitive advantage through a show of commitment to economic development and their promising young companies.

In an increasingly competitive global marketplace, a distinguishing feature of successful state-level economic development programs is the support of state leadership to stimulate economic growth through programs and incentives to draw the best businesses, researchers, jobs and capital investments to a state to sustain a competitive edge through education, job creation, innovation and commercialization.

(Incidentally, our states no longer compete solely with each other; but an advancing global marketplace. Brazil, Russia, India, and China to name a few are placing a heavy emphasis on economic development and doing so successfully through significant public investment and the relatively low cost of labor).

IBM recently reported that states with effective leadership, sound management practices, collaborative working relationships, and valuable assets including universities and a favorable business climate tend to excel.

And only those states committed to creating a sustainable ‘investment infrastructure’ will prosper when times get tough. Not only can states catalyze investment, but they can put in place an ecosystem that attracts follow-on private capital, generally at a multiple of the state’s investment.

Over the last two decades the term “economic development” has been redefined. Historically, economic development focused on attracting large-scale manufacturing projects. While government efforts continue to include traditional business attraction and retention strategies, economic development today often focuses on building a diverse, sustainable economy based on high-growth service and technology-based industries.

Yet according to the U.S. Small Business Administration, 99 percent of all independent enterprises in the United States employ fewer than 500 people, and these enterprises account for more than 50 percent of all U.S. workers. Furthermore, the SBA credits small businesses with the creation of 60 to 80 percent of the net new jobs in the U.S. over the past dozen years.

Unfortunately, small businesses have not traditionally experienced the beneficial impacts of large-scale public incentives, as states have targeted these resources toward retaining and attracting larger companies. Therefore, these smaller businesses have struggled to grow and compete due to the lack of resources and assistance available to them.

While some argue that venture capital has focused largely on the two coasts -- overlooking the entrepreneurial opportunities in the country’s vast middle -- states and organizations have launched their own venture funds in an effort to stimulate innovation and increase employment:

In Mississippi, where the lack of access to capital is widely believed to inhibit local economic growth, especially in the high-tech sector, the state legislature in 2007 approved a package authorizing five new state funds to support early-stage, high-tech companies and to build an in-state market for private equity investment.

Pennsylvania’s Ben Franklin Technology Partnership has successfully facilitated publicprivate investment collaboration to drive early-stage opportunities.

The Detroit Renaissance in Michigan is leveraging the connection between innovation and entrepreneurship through a $100 million venture capital fund. By investing in venture capital firms to support their Entrepreneurship Summit Executive 12 Summary investments, rather than making direct investments in the companies, the fund helps generate an increased mass of funding for technology startups and university spin-offs.

The Texas Emerging Technology Fund provides early-stage financing and business development support to increase the likelihood of emerging firms’ long-term success in Texas. The ETF has been the most active early stage investor in the country over the past two years, one reason that Fortune magazine again ranked Texas the top place to do business in America.

The Certified Capital Company (CAPCO) program – now active in nine states – is another state economic development tool that funds small and early stage businesses to reap the benefits of job creation, expansion of the tax base, and retention of promising small businesses.

The goal of the CAPCO program is to foster the development of an in-state venture capital infrastructure to help provide the necessary funding for innovative local companies that are without the means of obtaining financing from traditional sources of capital.

Since the program’s inception in 1988, CAPCO programs have been introduced in Missouri (1997), New York, (1998), Florida (1999) and Wisconsin (1999). In recent years, Colorado (2002), Alabama (2004), Washington D.C. (2005) and Texas (2005) also have adopted programs, and several have gone on to renew their programs—some on multiple occasions—including Alabama, Louisiana, Missouri, New York, and Texas.

Any program’s full impact is measured over the long term based on direct investment into the area, the amount of additional follow-on venture capital it attracts, job creation, and a solid investment ‘ecosystem.’

We are in a race for ideas, which spur the innovation that creates the companies and the high paying jobs we need. The lifeblood of sustaining economic development and competitive advantage remains long-term access to capital for our entrepreneurs and emerging companies.

In the end, it’s a long-term strategy, in conjunction with committed state leadership and the collective will of stakeholder groups and citizens that provide a state with a competitive edge.

Craig Casselberry is a Director of the National Coalition for Capital, a non-profit organization promoting long-term access to capital for entrepreneurs and emerging companies. www.nationalcoalitionforcapital.org