May 2009
Public-Private Collaboration Can Spur Economic Growth
By Kenny Gallagher, President & CEO, Class One Orthodontics

In an increasingly competitive global marketplace and a challenging economic climate, a distinguishing feature of successful state-level economic development programs is the support of state leadership to stimulate economic growth through programs and incentives to attract businesses, researchers, jobs and capital investment to maintain a strong competitive position.

IBM recently reported that states with effective leadership, sound management practices, collaborative working relationships, and valuable assets including universities and a favorable business climate tend to lead in education, job creation, innovation and commercialization.

(Incidentally, our states no longer compete solely with each other; but an advancing global marketplace. Brazil, Russia, India, and China to name a few are placing a heavy emphasis on economic development and doing so successfully through significant public investment and the relatively low cost of labor).

States committed to a sustainable ‘investment infrastructure’ will prosper when times get tough. Not only can states catalyze investment, but put in place an ecosystem that attracts follow on private capital, generally at a multiple of the state’s investment.

Over the last two decades the term “economic development” has been redefined. Historically, economic development focused on attracting large-scale manufacturing projects. While government efforts continue to include traditional business attraction and retention strategies, economic development today often focuses on building a diverse, sustainable economy based on high-growth service and technology-based industries.

Yet according to the U.S. Small Business Administration, 99 percent of all independent enterprises in the United States employ fewer than 500 people, and these enterprises account for more than 50 percent of all U.S. workers. Furthermore, the SBA credits small businesses with the creation of 60 to 80 percent of the net new jobs in the U.S. over the past dozen years.

Unfortunately, small businesses have not traditionally experienced the beneficial impacts of large-scale public incentives, as states have targeted these resources toward retaining and attracting larger companies. Therefore, these smaller businesses have struggled to grow and compete due to the lack of resources and assistance available to them.

While some argue that venture capital has focused largely on the two coasts, overlooking the entrepreneurial opportunities in the country’s vast middle, some states have launched their own venture funds in an effort to stimulate innovation and increase employment:

The Certified Capital Company (CAPCO) program – now active in nine states – is a state economic development tool that funds small and early stage businesses to reap the benefits of job creation, expansion of the tax base, and retention of promising companies.

The goal of the CAPCO program is to foster the development of an in-state venture capital infrastructure to help provide the necessary funding for innovative local companies that are without the means of obtaining financing from traditional sources of capital.

Since the program’s inception in 1988, CAPCO programs have been introduced in Missouri (1997), New York, (1998), Florida (1999) and Wisconsin (1999) passed their own versions. In recent years, Colorado (2002), Alabama (2004), Washington D.C. (2005) and Texas (2005) also have adopted programs, and several have gone on to renew their programs—some on multiple occasions—including Alabama, Louisiana, Missouri, New York, and Texas.

Nationally, total CAPCO investments have totaled more than $1 billion and attracted follow on investment of $6 billion into portfolio companies through 2008, meaning for each dollar of CAPCO funding, another $6 is invested in these companies from other sources. To date, a total of 21,000 direct jobs have been created or retained, a number that is expected to grow significantly as these companies mature and attract additional investment.

Any program’s full impact is measured over the long term based on direct investment into the area, the amount of additional follow-on venture capital it attracts, job creation, and a solid investment ‘ecosystem.’

The lifeblood of sustaining economic development and competitive advantage remains long-term access to capital for our entrepreneurs and emerging companies.

Particularly in this economy, public-private collaboration can provide the foundation for long term economic success.

Kenny Gallagher is President and CEO of Class One Orthodontics, a 40 employee Orthodontic technology development company and creator of the SeLECT Defense Technology. Class One Orthodontics is based in Lubbock, Texas and was a recipient of CAPCO funding.



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