Tuesday, October 6, 2009

New England states need cooperative competition

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Much has been written about the challenges for early-stage companies trying to raise money in today’s market environment. Private investors and venture funds are reducing new investments while early-stage companies in the aggregate need more money, whether to support normal early-stage losses or to address recession-linked slower sales growth.

There is no shortage of deal flow in the early-stage space. A decreased supply of capital coupled with an increased demand for capital translates to attractive negotiating dynamics for funds and individuals with liquid assets to invest, which is good news for investors. The net decrease of early-stage growth capital for companies, however, is not good for early-stage companies and, by extension for innovation (if, like me, you believe that venture capital is a catalyst for innovation).

While a handful of small-money initiatives — TechStars, Y Combinator, etc. — have formed to mentor, seed and otherwise support small-capital startups, there’s not a lot of money sloshing around in these ventures.

Capital markets aside, the economic environment has been pretty miserable for states as well. A slow economy means lower tax revenue. Short of federal programs (stay tuned) and additional, purposeful stimulus funding, each New England state will be limited in its capacity to support initiatives that would support small business and innovation. While there are exceptions (such as the Maine Technology Institute, which provides grants to pre-commercialization technology ventures in the state, and Vermont’s $2.15 million seed-capital fund), this is not good news for entrepreneurship, innovation and — given small business’s impact on the economy — job growth.

While the Kauffman Foundation has correctly asserted that VC funding plays a relatively small role in small businesses nationally, it does play a much more prominent role in spurring innovative and technology growth businesses. (Research by Josh Lerner at Harvard Business School and the University of Chicago’s Luigi Zingales shows that venture investments cause significant increases in patent filings. Lerner’s research showed that venture capital could be as much as 10 times as effective in stimulating patents as a dollar of corporate R&D.) So, the national lack of early-stage capital is a problem and, particularly in the absence of federal and state funding and programs, does not bode well for innovation.

This economic problem is compounded by each state’s natural focus on what’s happening and could be happening within its borders. Every state, including the success story that is represented inside of the I-495 beltway, works hard to attract talent, capital and resources to its cities and counties. As a six-state region, New England’s economy is still smaller than that of California. Given this, how much more could each state, and the region at large, benefit from greater collaboration in technology and innovation development if more initiatives that looked at life from a multistate perspective?

Where there are plenty of examples of inside-the-borders innovation, there are far fewer initiatives that present a multistate or New England-wide scope, as the public policy group the New England Council, or the trade organization the New England Clean Energy Council does. NECEC ties in the private sector (investors, small and large businesses), the public sector, nongovernment organizations (related technology and energy councils) and education. Linking common interests across state borders for the benefit of each state and collectively for the New England region is essential in today’s capital-constrained environment.

So, how do we get past the natural parochial approach of each state so that they can each look after their own interests (attract the best companies in growth sectors to create employment and state GDP) and leverage the economies of scale that a six-state “block” might offer? To each state, co-opetition is the key:

1. Recognize that you will always be conflicted between focusing on your own interests over and above those of your neighboring states. You can do that and do something that helps the region and each state within the region.

2. Recognize the benefit you get from other states today. You have residents that commute out of state to get their paycheck but return home to spend their money. Sure, you’d love to have them find jobs in state. However, that’s not going to happen universally, so put some of your economic-development energy on optimizing for the region.

3. Leverage the economic power you have across states to make the most of your limited economic development and innovation dollars and potentially federal dollars. Given the certainty of less innovation in today’s economic climate, you, your neighbors and your residents will be glad you did.



 

Michael Gurau is the managing general partner of Clear Venture Partners, a New England venture capital fund-in-formation. You can reach him at mg@clearvcs.com.me