Column: Funding Success

Investing in innovation is one solution for our economy

Everyone loves a good innovation success story, and here in Washington we have plenty of them. There’s Boeing, Weyerhaeuser, Microsoft and Amazon, to name a few. Coming out of the "great recession" however, innovation success stories have become more challenging to find and require more effort to create.

Recently at Washington Technology Center (WTC), we heard a troubling story from one of the early-stage companies we've supported in the Vancouver area. They had well-engineered products and grew to sales of $2.8 million in 2007. In 2008, they increased staff in anticipation of a $15 million deal with a major distributor. Then the economy crashed, the distributor backed out of the deal, and capital markets that could have bridged the funding gap until new distribution channels were secured, dried up.

Last month, the company closed and 15 people lost their jobs – adding to an unemployment rate in Clark County already over 12 percent (much higher than our statewide rate of 8.5 percent). This story, duplicated across the state, is one of many tragic outcomes of the historic recession.

Almost everyone agrees that economic recovery and associated job creation must be the top priority on the state’s agenda. And who creates jobs? Businesses do. Yet how does one reconcile making investments in business growth when the state will be cutting upwards of $6 billion from health, education and social services? It’s downright painful.

However, the fact remains that only through competitive companies that create secure jobs can we develop the tax revenues to support these services. Investing in our economy is more vital now than ever. And we’re not alone in that view. Regional competition is in full swing as states position themselves for the 21st century economy.

Just last May, while facing a budget deficit of billions of dollars, voters in Ohio approved a $700 million bond issue to extend the Ohio Third Frontier program. The program, aimed at rejuvenating the state’s economy by investing in technology and innovation, overwhelmingly passed. This sends a clear-cut signal to the rest of the nation: Ohio is working to ensure the next wave of innovation-based jobs created in the U.S. is in Cincinnati or Columbus, not in Camas or Centralia.

Study after study shows young businesses (under five years) create the most jobs (two-thirds of all new jobs added in the US in 2007). As illustrated by the 15 people who are no longer employed in the state, access to capital for early-stage companies is vital.

An examination of the funding available to new companies in Washington shows that capital availability concentrates in two areas: the research and development stage (grants), and the scaling-up stage (private investment). In between these two stages exists a capital void for seed-stage companies. Without effective access to capital to bridge this void, even the best companies flounder.

Private investment is also constrained as angel capital is becoming scarce. A recent analysis by the University of New Hampshire’s Center for Venture Research shows that during the first half of 2010, only 26 percent of angel capital investments targeted seed and startup-stage companies, down from 35 percent in 2009 and 45 percent in 2008.

To address this funding gap, WTC is developing a statewide bridge fund with an initial capitalization goal of $10 million We are also working to recapitalize our existing grant programs, focusing on proof-of-concept research and commercialization. The focus is to assist new companies through the funding gap, and in doing so, position them for prospective additional investment through traditional capital markets.

In addition, WTC is actively working with partners throughout the state to reinvigorate our statewide innovation strategy, find economies of scale in the delivery of our programs and eliminate duplication.

It won’t happen overnight, but by recognizing that economic development serves a fundamental public purpose, and by investing in innovation, our state will produce many more “innovation success stories” for the next century.

Chris Coleman is the interim executive director of Washington Technology Center. He can be reached at colemanc@watechcenter.org  or 206-685-7549.

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