The Financing Needs of Early-stage Firms

Dr. Wessner urged a greater focus on small businesses, which make multiple contributions to a region. They create jobs, new products, increase market competition, generate taxable wealth, create welfare-enhancing technologies, and, over time, transform the composition of the economy. Equally important, they have the potential to become the “new big businesses.” A key impediment to the growth of small innovative businesses, however, is the ‘Valley of Death,’ the popular term for the phase of development where firms do not yet have sufficient revenue to grow on their own but lack the revenues demanded by VC investors. “It’s hard to attract VC funding,” said Dr. Wessner, “because new ideas are new, and no one can know what they will ultimately be worth.” He recalled that the Larry Page and Sergy Brin of Google had difficulty raising early-stage funding because no one could foresee the value of their particular search engine. “It’s not always clear at first,” he said. “You need that capital to get across the valley and demonstrate value.”

Dr. Wessner recommended several government mechanisms designed to help small, early-stage firms, beginning with the Small Business Innovation Research (SBIR) program. “Not enough people in Ohio know about this $3 billion annual program. It is very competitive; only about 20 percent of companies are selected in the first round. But it provides you with an initial $150,000, which brings validation and opportunity to explore.” A key feature of SBIR is that it is a set-aside from existing research budgets, rather than a program with annual budget fluctuations. He suggested that other Federal programs, notably the Technology Innovation Program, and the Manufacturing Extension Program at the National Institute for Standards and Technology (NIST), and the various initiatives of the Economic Development Administration (Department of Commerce), would all be useful in providing support for Ohio’s innovation strategy.

Dr. Wessner concluded with the suggestion that Ohio could best accelerate its drive for innovation through local leadership—especially support for infrastructure, matching R&D grants. For example, “Phase Zero” grants by the state can help small Ohio firms apply for federal SBIR funding. The state can also offer bridging money for firms that are making the transition from SBIR Phase I to Phase II. These and other initiatives are underway in a number of other states, he said, as a way to encourage new businesses and promote regional growth. Other states are also taking steps to ensure that taxes are applied intelligently, and that regulations are not “worse than the tax structure.” In short, Dr. Wessner concluded that the region and the state can do much more to make northeast Ohio attractive to companies and better prepared to compete globally.

“The question is,” Dr. Wessner said in summary, “will we make the necessary investments in research and universities, and will we help our small companies compete? Our companies are one of our principal assets. We need to preserve the ones we have, and we need to grow new ones. Quite literally, the

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