This week I introduce the issue of innovation, community, markets and money. It is clear that we need to address the matter of differentiating ourselves from other states – even other countries – by simply having more early stage money for our pipeline of start-up firms.
The Council has been unequivocal in stating that first among all of the many ingredients in the Innovation Continuum is for the State to provide and sustain early stage funding for our emerging and growing technology sector.
This week’s message: Connecticut should have a fund of enough size, say $25 million, replenished annually, to support and attract the most exciting early stage companies in the world to set up shop here, and certainly to support the best of those who are already here. We should have the public sector provide the bulk of the money and set the rules, but engage the state’s venture community to manage it. The sooner we start the better.
The state supported effort we are undertaking to catalogue and assess the universe of high potential early stage firms has already uncovered over 200 of them in Connecticut in less than a few months of exploration. The “Innovation Pipeline” is a tool that we can now use to help, assess and monitor our highest potential start-up firms. If the experience of other states and countries is a guide, we will dramatically increase the success and growth of high potential companies.
The recent MoneyTree report for the second quarter plus a recent article in The Hartford Courant provide objective and subjective jumping off points for what must be one of our major public policy directions of the coming session, finding a supply of early stage funding for our best young start-up firms.
The data tells us that Connecticut venture firms invested in 63 companies between April and July of this year, but only five in the state. Twenty-five companies received Connecticut VC money in California alone. When VCs did invest in the state, of the over $100 million they placed, only one company was classified as an early stage investment, and it was for $5 million. That’s great news for SurgiQuest, Inc., an exciting firm, but we need to do more. Last week we learned that Connecticut Innovations had made their first early stage deal in years, $1 million in Environmental Energy Services. Again, great news, but we need to increase this flow.
The other lesson the stories behind the data tell us is that, no matter how much a firm may feel connected to our state by workforce, history or family, if critical early stage funding is provided by another location there is a good chance we will lose the firm. If there is an imbalance in the availability of early stage capital we are almost guaranteed to see an unhappy exodus of the very best companies in our pipeline over time.
As a business organization we are attracted to market-based solutions. So, how can we justify providing state funds to prime the pump of start-ups. A detailed study by the Connecticut Academy of Science and Engineering lays out the case. For each $1 million in funding we should be able to support the creation of six new companies with about one to three of them succeeding to the point of creating more than 100 jobs each.
Is this iron clad science? No. Economic development theory is perhaps as close to alchemy as any profession is allowed, but as a practicing “alchemist” it is clear that if other states provide more generous support, or if our own venture community feels that other states are more conducive to start-ups, we are in trouble.
The irony of a “global” economy, as we have discussed in the past, is not that a flat world makes every location equally competitive; instead it means that anyplace can compete with any other location. Thus, the responsibility of community leadership to guarantee competitive advantage for a specific geographical area is now more on the shoulders of not for profit and government sectors – since they (we) tend to represent a place, rather than the private sector, which more often now represents a global collective designed to seek out locations in which to thrive.
A well funded, well advertised early stage fund is probably something no state or region can be without in the race to land the start-ups with the best chance of creating jobs and growing our innovation based economy. This should be a priority for 2007.