On April 28th, Pittsburgh hosted one of the eight Startup America roundtable sessions held around the United States. These sessions were designed to help give entrepreneurs, investors and other key stakeholders around the country an opportunity to provide input regarding how to reduce barriers faced by high-growth startups around the United States.
I was asked to participate in the plenary session panel along with several dignitaries from Washington, D.C. Since making my remarks, we’ve received a number of requests to post them on our new blog for those who were unable to attend the event. While these comments don’t represent an exhaustive list of the ideas Innovation Works has gleaned from entrepreneurs over the years, I tried to highlight a few examples of the types of recommendations that could be made to help entrepreneurs across the nation.
Below are my remarks–in-full which cover the suggestions I gave on how to commercialize innovative ideas, access top talent, and increase the access to early-stage risk capital—three ingredients I believe are essential to an economy of innovation. If you read any of this (or are brave enough to read all of it) I’d love to hear what you think of these issues.
Panel Remarks from Richard Lunak, President & CEO of Innovation Works, at the Startup America Roundtable Discussion in Pittsburgh on April 28, 2011
I’d like to thank Chatham University for hosting this event. I’d also like to commend the Obama administration for choosing Pittsburgh for this roundtable session. I think Pittsburgh is unique among the eight regions selected by the administration for these listening sessions. We are the only region to have rebuilt and diversified our economy over the last three decades and we look more like the rest of America than regions like Silicon Valley, Boston or Austin. As a result, I think a lot can be learned by studying our entrepreneurial ecosystem.
I believe the creation and development of innovative, technology companies is critically important to the long-term success of the U.S. economy. The last century has shown that innovation-driven breakthroughs from companies like Google, Intel and Microsoft fundamentally change society and become significant engines for our economy. In my experience as an entrepreneur and leader of an organization that works with hundreds of startups each year, innovation-led companies require three primary ingredients to form and become successful: innovative ideas, world-class talent and risk-capital. As a result, my three recommendations are designed to enhance those three elements of the innovation economy.
1) Commercializing Innovative Ideas: Annually, the federal government spends about $148 billion on research and development. Here locally, we have research universities and a federal laboratory that bring in about $2 billion. They have played a key role in Pittsburgh’s resurgence and are crown jewels of our technology community. However, the federal government devotes relatively little resources to ensure the commercialization of cutting-edge technologies. There is a tremendous void between taking innovative ideas from basic research to commercialization – where innovative technologies can begin to impact society and our economy in positive ways. If someone is a university researcher and they think they’ve stumbled on a novel therapeutic or advanced material, they typically can’t use the federal research funding that is earmarked for specific research purposes to take the next logical steps toward commercialization – perform market research, build proof-of-concept prototype development, or review the IP landscape. Small amounts of money (about one percent of the research funding) could be used to unlock the potential of those federally funded research dollars and ensure more rapid deployment of crucial technologies to impact our economy. Here locally, our universities, regional foundation and groups like Innovation Works have targeted these issues and have helped local universities/labs increase their spinout rate. I recommend maintaining our strong federal research budget, but adopting a policy where research institutions would have adequate funding to accelerate commercialization of research through translational research funds. These new funds would be eligible for activities such as market research, proof of concept prototype development and patent exploration. While I would prefer this new funding to be in addition to the current research budget, I recognize that new initiatives are difficult to fund in the current economic environment. Therefore, an alternative approach might be to allow research institutions to flexibly deploy up to 1 percent of their federal research budgets to accelerate deployment of technologies to market. In addition, increased incentives should be made for universities and federal laboratories to improve their performance commercializing technology through licenses and spinouts. Currently a wide performance level exists within research institutions across the U.S. – based on the resources they devote to commercialization, technology transfer policies, etc. If the rest of the country, for example, had a commercialization rate similar to Carnegie Mellon’s, –the number of spin-out from our nation’s universities would more than triple. My next recommendation is to add commercialization criteria to the evaluation of federal applied research proposals (not basic research) based on a research institution’s track record for commercialization. This would not supplant the current peer review process, but enhance it by adding additional evaluation criteria to the review process. I think this would incentivize the adoption of more liberal technology transfer policies and get institutions to devote more resources toward their commercialization efforts. The result would be a greater leverage of the U.S. investment in knowledge creation by ensuring deployment of those technologies. Lastly, it has been our experience that when universities do license technology to entrepreneurs, the startups are often prevented from using university equipment and facilities that were purchased through government research contracts and tax-exempt bonds because of IRS Revenue Procedure 97-14. This revenue test prevents the proceeds from government research contracts and tax-exempt bonds from being used for the benefit of for-profit businesses. As a result, when technology is licensed to a startup, this regulation can stand in the way of those entrepreneurs using university equipment (wet lab space, electron microscopes, etc.) which is sometimes essential for the development of their products. In order to address this problem, I recommend establishing a grace period that allows startups to access critical university assets for a period of time (maybe 3-5 years) after licensing technologies so they can get their company off the ground. This would help entrepreneurs greatly reduce their startup costs and lead to lower commercialization barriers.
2) Access to Top Talent: Entrepreneurial organizations must have a high-quality, skilled workforce to thrive. Studies have shown that the U.S. education system lags well behind other countries, particularly in the areas of math and science. Nearly ¼ of U.S. high school students do not graduate in 4 years or drop out all together. The U.S. ranks 29th in the percentage of citizens age 24 with degrees in math and science. U.S. universities graduate more foreign born graduate students receiving doctorates in math, computer science and engineering than U.S. students. Equally important is research by Viveck Wadhwa that shows that 25% of the engineering/technology companies founded between 1995 and 2005 had immigrant founders – which were very highly educated in math and science. These technology companies employ 450,000 workers and generate more than $52 billion in revenues. Indeed, Innovation Works frequently works with startups with foreign-born founders who struggle to get U.S. visas – typically because the founders own a significant percentage of their company’s equity and it appears that they are self-sponsoring their own visas. Recognizing these factors, I believe the U.S. adopt more competitive immigration policies and allow high-potential immigrant workers to more easily join the U.S. workforce. In many cases, our university system and government research dollars helps to train and develop this large, educated workforce that is entrepreneurially inclined – only to see those workers leave the U.S. I support the startup visa legislation originally proposed by Senators John Kerry and Richard Lugar. This legislation would help to improve U.S. competitiveness by helping us to retain the world’s best entrepreneurs. For more information on this initiative, go to www.startupvisa.com.
3) Increased Access to Early-Stage, Risk Capital: Over the last 15-20 years, early-stage investors have continually become more risk averse and have focused on later stage investments. Today, most investors have drifted downstream — often seeking to reduce their risk by investing only after a company has launched their products and secured their first customers. While it is completely understandable that investors would choose to operate only in phases that they perceive to have an optimal risk/reward tradeoff, this shift in the seed and early-stage investment landscape has created a wide gap, sometimes referred to as the “valley of death” for technology entrepreneurs. In addition, venture capital has increasingly become a costal phenomenon with California and Massachusetts now garnering more than 60% of the nation’s venture capital – up from less than 50% in 1995. In Pittsburgh, Innovation Works has effectively utilized economic development funds from the Commonwealth of Pennsylvania to help address this “valley of death” but, we have limited resources. Our fund has shown that small amounts of upfront seed investments enable innovative companies to build their businesses on a solid foundation, and reduce risk in order to attract funding from a more risk-averse, later-stage group of investors; like VCs, angels and corporate investors. Unfortunately, the demand for Innovation Works’ investment capital now far exceeds the supply. So what can the federal government do to improve the situation? They can look towards several federal programs that have shown success in the past and replicate effective state-level programs to address these funding gaps. Here are some prime examples: