Creating Entrepreneurial Infrastructures

August / September 2004 By: Tom Dickerson Volume 2 Number 4

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One of the most remarkable developments of the 1990s is the change in the geographic locale of technology-oriented entrepreneurial health care/biotech companies from Boston/Route 128 and Palo Alto/Silicon Valley to the "other 48 states." What caused this expansion to "the other 48 states?" More important, what were the common elements that characterized the growth in entrepreneurial environments in these states? Finally, what steps did specific locales take to successfully develop such an environment?

Before the enactment of the 1980 Bayh-Dole Act, intellectual property developed under federal grants belonged to the federal government, which meant as a practical matter there was little incentive for scientists to attempt to commercialize their technologies. With the passage of Bayh-Dole, scientists, and their university employers acquired the rights and responsibilities, along with the financial incentive, to attempt to bring promising technologies to market.

Yet progress in such commercialization, particularly via a startup rather than the granting of a license, was slow in coming (except in Silicon Valley and Boston). The barriers were both psychological and institutional, and included:

—€ Traditional self-perception of academics as "ivory tower" researchers
—€ The greater familiarity of university technology transfer offices with the licensing of technologies rather than the creation of companies
—€ The lack of a clear set of established policies enabling faculty to become active in companies
—€ The lack of an appropriate local infrastructure of advisors to provide the expertise necessary to create and sustain new companies
—€ The lack of locally based experienced entrepreneurs

DEVELOPING THE "VIRTUOUS CYCLE"

During the 1990s, the development of centers of entrepreneurial ferment in the other 48 states began to accelerate. Since 1994, my firm, for example, has been involved in seeking opportunities for investment in seed and early stage companies in such areas, and, accordingly, we have had an opportunity to observe the development of several such locales.

In our experience, the development of an entrepreneurial environment requires the creation of a "virtuous cycle" among three elements: commercializable research, capital, and entrepreneurs. The critical point is that each of these elements grows in relation to the others, encouraged by the simultaneous growth of the other two.

It also appears to be driven by two additional catalysts. One is an institution or group of individuals that serves to bridge the "capital gap," the financial and managerial gap between the concept stage of a startup and the significantly later stage in that startup's life when it can command professional funding.
The other is the development of pervasive communication throughout the community that the growth of local entrepreneurial activity is important and exciting.

To render technology resulting from research amenable to commercialization, the internal expertise needed to do a startup deal rather than a license needs to be acquired. Simultaneously, the institution needs to develop policies with regard to the ability of faculty to become consultants, officers, directors or shareholders of companies which are commercializing university research.
Finally, the university needs to establish cultural acceptance of the notion that entrepreneurial activities are respected roles for its faculty.

Capital

In the area of capital, the virtuous cycle often begins for the individual scientist with government grants, which enable a technology to be developed to the point where commercial applications become evident. This is followed by initial funding by friends and family and subsequently by locally based individual "angel" investors, local venture capital fund(s) and finally by nationally oriented funds or regional funds.

Entrepreneurs

Entrepreneurs are sought with the skill set deemed appropriate to bring the company only to a next stage of development, with the intention of then "exchanging" the entrepreneur for another one, with a skill set more appropriate to the evolutionary stage to which the company has advanced. This can happen several times over the life of a company, prior to its going public or being sold.

ddressing the Capital Gap

The elements outlined above are not sufficient by themselves to effectively develop the entrepreneurial environment. Two other issues must be addressed. The first is the "capital gap," i.e., the period from the initial creation of a company to the point where it obtains the first round of professional venture capital. This period is one of great fragility. Yet for a locale to achieve its goal of successfully creating an entrepreneurial environment, it must get at least a few companies to surmount the "capital gap." Successful companies are the most telling indicator of success in the drive to develop an entrepreneurial environment.

The second issue is that of establishing, and then effectively communicating, the locale's commitment to the development of the entrepreneurial environment. The development of a visible sense that the community as a whole deems such development important to its very future is no less key because it is intangible. Repeated clear expression of commitment from all sectors of the community is not only a prerequisite to the successful development of the entrepreneurial environment, but its strong presence will offset significant shortcomings in the virtuous cycle.

How, then, have specific communities addressed these challenges?

THE EXPERIENCES OF MICHIGAN, OKLAHOMA AND NEW MEXICO

Each of these states, in all of which our firm has been active, has addressed the issues cited above in ways that reflect their existing entrepreneurial assets, their history, and their particular political and business infrastructures. The examples set forth below can serve as instructive starting points for other locales seeking to develop their entrepreneurial environments.

Research and the Technology Transfer Office

The role of the tech transfer office and the scope of its activities have varied in response to the existence of other organizations in the state or locale which perform functions that dovetail effectively with the tech transfer office's core function. Thus, at the University of Michigan, the tech transfer office since the mid 1990s has created a separate group of executives who focus exclusively on startup opportunities. In Oklahoma, a publicly funded institution, the Oklahoma Technology Commercialization Center (OTCC), performs this function, leaving the tech transfer office to focus on its traditional licensing task. The University of New Mexico follows the "research foundation" model, which exists in a number of other states. A separate research foundation, controlled by the university, is charged with taking technologies from the university in collaboration with the tech transfer office.

The Development of Capital Sources

In each of these locales, the development of capital resources has followed a similar path. All of the universities provide guidance to startups regarding grant funding, and all have active angel investors who operate either individually or in groups, and in some cases meet periodically in a formal setting as a "band of angels." Oklahoma has taken this notion one step further by creating a state tax investment credit to encourage such angel investing.

Beyond angel groups, the encouragement of capital sources differs by state, but each has several programs. Beginning in 2000, Michigan allocated $50 million per year for the next 20 years from the tobacco settlement to develop Michigan as a premier life sciences research and commercialization center.

In a variation on this theme, the New Mexico State Investment Council has invested over $200 million of its approximately $10 billion land grant and severance tax funds in a dozen local, regional and national venture funds who commit to investing, or causing others to invest a similar amount in New Mexico-based companies.

In Oklahoma, several programs have been key. The Technology Business Finance Program matches, on a 2:1 basis, up to the first $75,000 raised privately by a startup, thus providing up to $150,000 per company. In addition, local institutions have funded two seed-stage funds aggregating $11 million for investment in health care. Finally, the Oklahoma Capital Investment Board has provided over $50 million in investment to multiple venture capital funds who undertake an obligation to actively seek investments in the state.

Attracting and Developing Entrepreneurs

This has been the most challenging aspect of developing the entrepreneurial infrastructure. In all three states, there have developed extensive programs of support and assistance to startups in general, and to entrepreneurs in particular. All three states have developed research parks and incubators providing basic infrastructure to startups. Similarly, all three have developed extensive year-round calendars of seminars, workshops, conferences and courses to help nascent entrepreneurs understand the basics of business.

Other activities intended to attract or educate entrepreneurs include a wide variety of business plan competitions, subsidies of executive searches, seminars and courses taught by the local business schools or by other state institutions.

That Capital Gap

The area where the three states have shown the greatest variation—€”and, one might add, creativity—€”is in their approaches to dealing with the capital gap. They range from direct state government sponsorship to entirely private initiatives.
Thus, in Oklahoma, the Oklahoma Technology Commercialization Center was funded by the state legislature at the suggestion of local entrepreneurial interests. On the other hand, completely private initiatives appear equally effective. In Michigan, for example, a private group performs a similar function, assisting new companies in developing their business model (and a business plan), and in obtaining the first round of angel funding for them, in exchange for a stock interest in the company.

The New Mexico analogy to these programs is the combination of the university's research foundation, the Science and Technology Corporation, the Lockheed Martin/NNSA-funded Technology Ventures Corporation, and, most recently, a private group headed by a former Sandia researcher who saw the need to address the capital gap issue.

Finally, each locale has used varied approaches to shape public enthusiasm for the goal of developing the entrepreneurial environment. In Michigan, the state set as its objective to become a leader in biotechnology development as part of its overall economic development program, and charged the Michigan Economic Development Commission with the task of implementing this program.

In Oklahoma, the communication effort is led by the OTCC, which publishes a state-oriented entrepreneurial magazine and sponsors the annual health care/biotechnology conference.

Finally, in New Mexico, this role is played not just by TVC, but also by the state, in the form of publicity surrounding the State Investment Council grants, as well as by the state political administration.

The development of entrepreneurial environments in locales across the United States appears to proceed on similar paths, with variations in the precise course of development dependent on the particulars of a state's history, its political and economic infrastructure, and the particular entrepreneurial assets in the state. The elements of commercializable research, capital and entrepreneurs appear to develop in a synergistic "virtuous cycle," complemented by techniques to deal with the capital gap, and held together by the visible expression, in the media and elsewhere, of the substantial, tangible commitment of the entire community to achieve the goal of successful incubation of startup entities.

The author thanks Karen Studer-Rabeler and Kenneth Nisbet of the University of Michigan Technology Transfer Office, John Warner of Technology Ventures Corporation, William Hagstrom, Oklahoma City and Bill Grissom of the Oklahoma Technology Commercialization Center for their assistance.

Tom Dickerson is a principal in the Connecticut-based venture capital firm of Tullis-Dickerson. The full version of this article originally appeared in BioLaw & Business, Volume 6, Number 4, 2003.