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5
Fostering Regional Technology
Development and Entrepreneurship
M
ary Good commented during a discussion period at the confer-
ence: “I don’t believe that you’re going to get very much help
out of the federal government for a while. It’s going to be an era
where the states and regions are going to lead the federal government, not
the other way around.” Five speakers provided concrete examples of how
the states and regions are doing this. Keynote speaker Duane J. Roth, CEO
and member of the board of CONNECT, described how a quarter-century
partnership of businesses, universities, and governments transformed the
environment for business formation and job creation in San Diego. Sangtae
Kim, executive director of the Morgridge Institute for Research in Madi-
son, Wisconsin, explained the rationale behind the institute’s creation and
pointed toward its immense promise. G. Steven Burrill, CEO of the venture
capital firm Burrill & Company, discussed the role of venture capitalists in a
radically new entrepreneurial world. Frank Samuel, Jr., President of Geauga
Growth Partnership, Inc., provided a specific example of how venture
capital has been attracted to the Great Lakes region. And keynote speaker
Tommy Thompson, former governor of Wisconsin and secretary of the U.S.
Department of Health and Human Services, gave his perspectives on policy
making at the state and national levels.
CREATING REGIONAL INNOVATION ENVIRONMENTS
San Diego offers a superb example of what regions can do when they
pull together the right ingredients, said Duane Roth, in his keynote ad-
dress at the conference. CONNECT was founded in 1985 by government,
31
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32 RISING ABOVE THE GATHERING STORM
research institutions, and the private sector to aid in the commercialization
of research discoveries in and around San Diego. At the time, the region was
reeling from economic problems. The imminent end of the Cold War with
the Soviet Union was decimating defense contractors, which were major
employers in the region. And the savings and loan crisis of the 1980s hit
major banks in the region hard.
CONNECT was based on the premise that not nearly enough was be-
ing done in the San Diego region to commercialize the excellent research
being conducted there. “Nobody in San Diego understood entrepreneur-
ship, venture capital, risk, tech transfer—all the things that have to be done.
Until that happens and you educate the community, you’re just going to
keep publishing papers,” said Roth.
Duane Roth: “If you give things, you get more back in return. The col-
laboration culture is what San Diego became known for.”
Spearheaded by leaders at the companies Qualcomm and Hybritech,
the University of California, San Diego, and the San Diego Regional Eco-
nomic Development Corporation, CONNECT has had incredible success
over the past quarter century, according to Roth. It has helped start 2,000
companies, has generated about $10 billion in follow-on funding, and has
played a role in creating about 150,000 jobs in the region. It now has a staff
of 20, membership support of about $3.5 million per year, holds about 350
events annually, and coordinates 2,000 volunteers. Currently, an average
of one new company is formed daily in San Diego based on a wide array
of enabling technologies.
Formula for Success
CONNECT is based on the formula BC/VC/ED/RC/DC/CC, said Roth,
for business creation, venture capital, education, recognition and competi-
tions, Washington, DC, policy, and convergence clusters.
The organization’s most important mission is business creation. It does
not just arrange for meetings with mentors. Rather, it assigns people and
companies an entrepreneur in residence — “a former CEO who is tired of
lying on the beach reading a paper and wants to give back.” Approximately
300 entrepreneurs in residence currently are helping companies commer-
cialize their ideas.
CONNECT also connects business creators with venture capitalists
and trains them in business practices. Minicourses known as frameworks
provide a basic background in accounting, finance, intellectual property,
and other subjects that entrepreneurs need to know. “These are the kinds
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REGIONAL TECHNOLOGY DEVELOPMENT AND ENTREPRENEURSHIP
of things that we can teach at a very high level, and with this framework
scientists and engineers can figure out how those pieces go together.”
The organization accords recognition and holds competitions to pro-
mote new businesses. It also has an office in Washington, DC, to promote
policies that foster rather than discourage business formation. Business
leaders come from San Diego to Washington to meet with policy makers
and explain their needs. “In Washington, we don’t need more voices. We
need different voices,” said Roth.
Finally, convergence clusters are the means by which many technologies
become products. The idea is to encourage companies that are doing similar
things to talk with each other. Many companies tend to resist, thinking that
they need to keep their ideas private. But in San Diego, companies have
learned that “if you give things, you get more back in return,” Roth said.
“The collaboration culture is what San Diego became known for. It crosses
all boundaries.”
The idea of collaboration puts the region above individual companies.
Companies do not just create jobs and help the economy; they help other
companies. Today the San Diego region has more than 250 defense and
security companies; more than 3,000 information technology, wireless, and
software companies; more than 600 life sciences and biomedical companies;
more than 700 energy and environmental companies; and more than 600
sport innovator companies.1 Together, technology companies employ more
than 140,000 people in San Diego, with average tech salaries well above
the overall average for the region. Furthermore, new industries such as
“information dominance” (defense applications of information technol-
ogy), wireless sensors in health care, renewable forms of energy, and energy
storage have immense promise for the future.
Remaining Challenges
However, said Roth, it is important to recognize that models that have
been successful in the past are no longer working today.
First, a new financing model is needed. Fully integrated models in
which single companies made discoveries, developed products from those
discoveries, and marketed those products are obsolete. As such companies
began to focus on production, marketing, and short-term gains, research
and innovation often suffered. “Guys like me, product managers, suddenly
got into that research room, and we got to talk about the budget. We didn’t
want anything brand new. We just wanted to make our numbers.” Compet-
ing divisions within companies tended to undermine support for research
1 See CONNECT’s 2011 Annual Report at www.connect.org/about/AR2012.pdf.
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34 RISING ABOVE THE GATHERING STORM
and development. And most CEOs were no longer scientists or engineers.
As a result, many companies lost their innovation ability.
In addition, passage of the Bayh-Dole Act in 1980 made it possible
to transfer publicly funded research into commercial products. This led
to many start-up companies that were supported by venture capital and
equity sales. But relatively few of these companies succeeded over the long
term, and it has been difficult for venture capitalists and the public to pick
the successful ones. Instead, large companies have tended to buy promising
start-ups for their ideas while slashing jobs, according to Roth.
An alternate approach is to distribute the innovation process, said Roth.
Because the outcomes of basic research cannot be predicted in advance, it
needs to be funded by the federal government. This process may be inef-
ficient, but “we have to continue to fund [research], because that’s where
the ideas come from.” Product definition companies then could define the
product from the discovery to proof of concept. “That’s the hole that we
have in our system today.” By funding midstream development, venture
capitalists could fund product development in a portfolio of investments.
Furthermore, this work could be very profitable, according to Roth, even
if only some of the products being defined end up being commercialized.
In addition, much product definition and development could be “near
sourced” by drawing on resources in “the cloud.” Building extensive physi-
cal infrastructure in startup companies is “terribly inefficient,” said Roth.
By using resources in the cloud, companies could tap expertise in exactly
the areas they need to obtain the data or prototypes to advance their idea.
Also, the provision of these cloud resources will be a major new source
of employment. This is the approach wireless companies have taken, and
they have been extremely successful with it. For example, instead of build-
ing their own factories to manufacture phones, they went to factories that
already had so much experience and expertise that the wireless companies
could not hope to catch up independently. That leaves the companies free
to develop the innovations on which future prosperity will be built.
Discussion
In response to a question about manufacturing during the discussion
period, Roth described the advantages of manufacturing products in the
United States rather than in another country. Modern manufacturing jobs
are good jobs that pay well. “We can’t let any jobs drift out of this country
anymore,” he said. Also, manufacturing workers contribute to innovation
in many ways by making products better, which is a lesson many other
countries have applied in developing their high-technology manufacturing
centers.
He also elaborated on the advantages of having the head of the com-
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REGIONAL TECHNOLOGY DEVELOPMENT AND ENTREPRENEURSHIP
pany act as the product manager—someone who understands the science
and technology behind products. “Quality gets better, because that CEO
who’s making the products gets up every day and thinks about quality,
lower costs, and not having a product defect or recall.”
BRIDGING THE VALLEY OF DEATH
Sangtae Kim: The Morgridge Institute produces a “synergy between open
research for the public good and the increased value of companies that
live in the ecosystem.”
The creation of the Morgridge Institute for Research at the University
of Wisconsin-Madison, where the conference was held, was a response to
the long and risky pathway from university discoveries to commercial proj-
ects. According to Executive Director Sangtae Kim, the Morgridge Institute
was designed specifically to bridge the gap between innovation and impact.
The institute focuses on translational research in collaboration with
others who have similar interests. It has adopted an approach used by the
National Science Foundation in establishing the NSF Engineering Research
Centers, which involves three layers of knowledge. The foundation layer
consists of the scientific discoveries emerging from university research. The
integrative layer relies on a human, technological, and physical infrastruc-
ture to produce an innovation environment. And the summit layer involves
the delivery of solutions to overarching problems.
Kim said that he also draws on his experience at the Parke-Davis
Research Center in the 1990s. Though the budget of the center was small
compared with other pharmaceutical R&D centers, it created some of the
most successful pharmaceuticals of the time, including Lipitor. The success
of the center, said Kim, hinged on the role of project managers. Led by
CEO Ronald Cresswell, the center made project managers into drug de-
velopment vice presidents with rank, budget authority, and power equal to
that of vice presidents in functional areas of the company, such as toxicol-
ogy or chemistry. As a product like Lipitor moved from discovery biology
through optimization, toxicology, clinical studies, and eventually to sales
and marketing, the drug development vice president followed that product
through the functional departments of the company. “Very powerful project
management teams were superimposed on top of strong functional areas
and capabilities,” said Kim.
In universities, individual professors are analogous to the vice presi-
dents of functional areas. They are rewarded for continued excellence in
their area of expertise. When they publish a paper, they typically do not
tend to pursue the idea into domains where they lack expertise. Their
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36 RISING ABOVE THE GATHERING STORM
instinct is to return to their areas of expertise and try to replicate their
success. Meanwhile, the project managers in a university setting are typi-
cally associated with the technology transfer office and have to scramble
to link discovery with the delivery of innovations. “It’s not surprising that
innovation from university campuses to product is a haphazard situation,”
said Kim.
The Morgridge Institute seeks to achieve a balance between discov-
ery and delivery, said Kim. This process is complicated by the fact that
initial ideas for innovation often do not work out. As a result, investors
often lose patience before an idea makes it across the “valley of death” to
commercialization.
The Morgridge Institute helps ideas through the valley of death in part
by working with local consortia that together represent a critical mass of
capabilities in the region. The institute can support research on alternative
pathways and better ways of achieving an end while companies focus on the
development of products and avoid diverting their capital to precompetitive
research. The result is a “synergy between open research for the public good
and the increased value of companies that live in the ecosystem.”
Kim cited an example called the Accelerators in Medicine consor-
tium, which is focused on the use of particle accelerators in medicine. No
one company has the resources to build instruments that can be used for
such purposes as proton therapy for tumors, miniaturized mass spectrom-
eters, and solid state CT scanners. Instead, a half dozen companies, the
Morgridge Institute, and the University of Wisconsin-Madison have pooled
their resources in an R&D consortium. The consortium reduces the techni-
cal risk and makes it easier for the companies to attract investment capital.
One medical isotope company, for instance, was able to raise $20 million
and significantly ramp up its scale of operation after working with the
consortium for 18 months. Furthermore, said Kim, the value of the royalty
streams to the Morgridge Institute from the sale of the medical isotope, if
the project works, would be in the many hundreds of millions of dollars.
ENTREPRENEURSHIP IN A CHANGING WORLD
Steve Burrill: “Whether we like to admit it or not, the United States is in
the process of moving into a second tier. . . . We’re moving to where we
are no longer the dominant economic engine of the world.”
The world is a very different place today than it has been for the past
several decades, said G. Steven Burrill, CEO of the venture capital firm
Burrill & Company. Burrill has played a key role in the growth of the U.S.
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REGIONAL TECHNOLOGY DEVELOPMENT AND ENTREPRENEURSHIP
biotechnology industry over the past several decades, first with Ernst &
Young, and more recently as a venture capitalist.
First, the marketplace has become flat, interconnected, and borderless.
Ten years ago, pharmaceutical sales were predominantly in the United
States, Europe, and Japan. By 2020, emerging markets are predicted to
account for over half the growth in global sales.2 “If you think about the
dominant players in the world today, they are not well-empowered in the
markets that are truly important,” Burrill said.
Second, a powerful and growing middle class has emerged in countries
that used to be largely poor. “The first thing that happens when people
come out of a lower class poverty-driven society is they want health care.
And they think health care is a right, not a privilege, so the demands on the
health care system are enormous.”
Third, new countries are coming to the fore, including the BRIC coun-
tries (Brazil, Russia, India, and China, to which Burrill added South Africa)
and the CIVET countries (Columbia, Indonesia, Vietnam, Egypt, and Tur-
key). “Whether we like to admit it or not, the United States is in the process
of moving into a second tier,” Burrill added. “It’s like Britain, a country
with a proud past but kind of a lousy economic future. . . . We’re moving
to where we are no longer the dominant economic engine of the world.”
Finally, every country is trying to build its economy around technology,
and particularly biotechnology. “We need to be aware of that in the context
of our competitive state today. We’re no longer alone in what we’re trying
to do. Everybody’s trying to do it around us.”
Global Problems
The five biggest problems facing the world today, according to Burrill,
are:
• Global climate change and the sustainability of the planet
• Clean water
• Energy security and self-sufficiency
• Food security and production
• Health care and health care reform
In Burrill’s view, the life sciences can contribute to solving all of these
problems. He used health care as an example of the changes going on today.
The world is growing older. For example, China has more than 110 million
2 Forecast by IMS Health, as reported in Reuters, Emerging market drug sales seen
$400 bln by 2020, February 8, 2008, available at uk.reuters.com/article/2008/02/27/
uk-pharmaceuticals-emerging-idUKL2777827620080227.
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38 RISING ABOVE THE GATHERING STORM
people over the age of 65.3 This aging of the world population is creating
tremendous demands on the health care system.
In addition, Burrill sees the focus of health care today moving toward
chronic care as increasing progress is made against the diseases requiring
acute care. As a result, the health care system needs to reorient care from
hospital-based care toward wellness care where people will be sustained
over long periods of time. In the future, people will be treated personally,
predictably, and preemptively, which will dramatically change the oppor-
tunities for entrepreneurs. Health care will move from a cost-based system
to a value-based system in which it looks for opportunities to add quality
and value to life.
The integration of software and systems will drive wellness care. Rather
than going to a hospital to receive care, people will wear a “smart t-shirt”
with embedded sensors that will do all the monitoring that can be done
in an intensive-care unit. Patients will feed the results of biological sample
analyses into their cell phones before consulting with health care providers.
Such a world will give rise to an entirely new ecosystem of entrepreneurs
focused on the needs of the future, said Burrill.
Implications for Venture Capitalists
Despite the existence of technology clusters, new technologies can come
from anywhere, said Burrill. Madison, Wisconsin, for example, is a center
of biotechnology research and could become of a hotbed of commercial
applications of biotechnology.
Furthermore, capital to develop new technologies is available every-
where, not just in the established centers of technology development. Even
if venture capital is less available in the Midwest than elsewhere, the region
has strong angel investor networks, Burrill observed. He also emphasized
that venture capitalists may look at 100 to 200 deals a month and decide
to support only one. “Most entrepreneurs talk to three VCs and say, ‘Well,
the VCs aren’t interested.’ Maybe you have to talk to 100 of these guys to
find one. The tenacity necessary to ultimately find someone who’s going to
finance your company and build it is very important.”
Entrepreneurs need to be willing to fail. “In Silicon Valley, we expect
everybody to fail at least one or two times before they build a successful
company.”
Innovation has created extraordinary value, Burrill concluded. When
Genentech, which Burrill helped develop, was sold to Roche, it was valued
at $100 billion, which was more at the time than Pfizer, the biggest drug
3 Central Intelligence Agency, The World Fact Book 2011, see www.cia.gov/library/
publications/the-world-factbook/geos/ch.html.
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REGIONAL TECHNOLOGY DEVELOPMENT AND ENTREPRENEURSHIP
company in the world. “We created more value in 25 years than did some of
the biggest companies in the world.” This innovation can occur anywhere
in the world, so long as those regions are connected to the outside resources
that make innovation possible. But people and companies need to allocate
time to innovation. “You can’t just hope it happens in your spare time. You
have to make it a focus.”
ATTRACTING REGIONAL INVESTMENTS
The Ohio Third Frontier Program, which was created in 2002, “sup-
ports applied research and commercialization, entrepreneurial assistance,
early-stage capital formation, and expansion of a skilled talent pool that
can support technology-based economic growth.” It has been funded from
a variety of sources, including the state budget, tobacco settlement money,
and bonds approved by the voters. In May 2010, despite the recession,
Ohio voters overwhelmingly approved a $700 million extension of the
program.4
Frank Samuel, Jr., President of Geauga Growth Partnership, Inc., an
economic development organization just outside Cleveland, pointed to
several lessons that can be drawn from the program’s success. First, biparti-
sanship has been essential for the program to be continued over time. Ohio
governors and legislators from both parties have supported the program,
partly because from the beginning it has been described and has operated
in a bipartisan fashion.
Frank Samuel, Jr.: “If you can get financial returns, you will get jobs and
economic growth and all the social benefits that come with it.”
The second important lesson concerns the importance of having pro-
posals for the program independently evaluated. The process has been
intensely competitive, but potential grantees have known that grants were
not being made on the basis of geographic fairness or political equity.
The third lesson is the importance of persistence. “Persistence without
bipartisanship or independent evaluation would have been probably use-
less, but in our case it proved exceptionally valuable.”
4 Additional information on the Ohio Third Frontier Program is available at www.
thirdfrontier.com/ThirdFrontierCalendar/Default.aspx.
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40 RISING ABOVE THE GATHERING STORM
The Great Lakes Economic Initiative
Samuel also described his involvement in the Great Lakes Economic
Initiative, which was designed to establish a sustainable venture capital
strategy for the Great Lakes region. Before the initiative, deals were too
expensive in the region, said Samuel. As a result, companies based on dis-
coveries made in the area took shape elsewhere.
Based on interviews with people in the region conducted under the
auspices of the Brookings Institution, Samuel concluded that a $1 billion
to $2 billion family of funds could achieve several needed ends. It could
invest in the existing infrastructure of early stage venture funds. It would
also co-invest in the most successful companies in the portfolios of those
funds. And it could co-invest with a major fund from outside the region to
create a significant presence in the region.
This approach would strengthen the availability of venture funds in
every state in this region, said Samuel. It also would attract the kind of
management needed to make ideas work. The approach is premised on
financial returns, not on job creation or economic development. But job
creation and economic development would be the result. “If you can get
financial returns, you will get jobs and economic growth and all the social
benefits that come with it.”
An essential complement to the family of funds in the region is a sup-
port network of universities, technology transfer offices, research institutes,
philanthropies, state and local programs, and other entities that can support
economic growth and entrepreneurship. “They add value,” Samuel said.
“They are sufficiently searching in their criteria that the only projects that
get across their thresholds are really good and merit investment by people
who are making financial investments.”
The financial community is not constrained by geography. If the finan-
cial community believes that there is money to be made in the Midwest, it
will invest there. The challenge, said Samuel, is to figure out how to posi-
tion the Midwest as a single community, because then it will be “extremely
attractive to financial investors.”
PERSPECTIVE FROM THE STATEHOUSE
Tommy Thompson, former governor of the State of Wisconsin and
secretary of the U.S. Department of Health and Human Services, delivered a
keynote speech at the workshop. He drew on his policy-making experience
to make several observations about the goals of the workshop, particularly
in the areas of education and economic development.
Thompson reviewed the recommendations of the original Gathering
Storm report, and observed that the troubling fiscal condition of the fed-
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REGIONAL TECHNOLOGY DEVELOPMENT AND ENTREPRENEURSHIP
eral government in coming years will make it difficult to increase spending
on the K-12 education and research priorities the report identified. He
provided perspectives on the challenges the United States faces in reign-
ing in spending, on health care and the Medicare program in particular.
The difficulty of addressing these challenges is compounded by increased
polarization and gridlock in Congress. In Thompson’s view, the increased
ability of political parties to create legislative districts during redistricting
that reliably vote for one or the other party is contributing to this polariza-
tion and gridlock.
In the education area, Thompson touched on the contribution that
immigrant scientists and engineers make to U.S. innovation, an issue that
was emphasized in the original Gathering Storm report. He pointed to the
potential value of new approaches to immigration policy and education that
would allow and encourage talented foreign-born scientists and engineers
to stay in the United States after graduation and contribute to technology-
based innovation and the broader economy.
He observed that during his time as governor of Wisconsin, state
government was able to work with higher education, industry, and philan-
thropy to launch new university-based research programs that benefited the
state and local economies. Although such collaboration is more difficult in
the current environment, the Wisconsin Institutes of Discovery itself, built
through the contributions of the state of Wisconsin, the Wisconsin Alumni
Research Foundation, and John and Tashia Morgridge, stands as an encour-
aging example of what collaboration can accomplish.
Despite the serious challenges faced by the United States and by indi-
vidual states and regions in sustaining an innovative 21st-century economy,
Thompson expressed optimism that Americans will be able to come to-
gether and do what is necessary. He encouraged workshop participants to
continue to their efforts to advance the Gathering Storm goals of strength-
ening research, education and innovation.
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