5

Fostering Regional Technology
Development and Entrepreneurship

Mary Good commented during a discussion period at the conference: “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 Madison, 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 address at the conference. CONNECT was founded in 1985 by government,



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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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33 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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35 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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37 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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39 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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41 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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