April 23, 2009
Texas' Competitive Edge
Emerging Technology Fund key to long term economic growth - By Craig Casselberry, Tom Kowalski and Jeff Clark

We have all heard the bad news.

The National Venture Capital Association reports that venture investing in early stage businesses is down 71% over the last 12 months, and no money was raised by Texas based venture firms in the 1st quarter of 2009. Most venture funds are reserving their capital for existing portfolio companies. Small business lines of credit are not being renewed by banks seeking to preserve liquidity. As credit is tightened, companies are forced to consider layoffs to stay in business.

Historically there has been a shortage of capital available to create and grow small businesses, and the current economic climate only exacerbates the challenge.

Over the last two decades the term "economic development" has been redefined. While government efforts continue to include traditional business attraction and retention strategies, economic development today must focus on building a diverse, sustainable economy based on high-growth service and technology-based industries.

The U.S. Small Business Administration reports that small businesses account for more than 50 percent of all U.S. workers and 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 and have therefore struggled to grow and compete due to the lack of resources available to them.

In the midst of the storm, states have an opportunity to gain a competitive advantage through a show of commitment to economic development and their promising young companies.

Texas has shown such a commitment, one reason Chief Executive Magazine recently named us the best state to do business for the 4th year in a row.

In January, Business Week made the case that states taking a regional, grassroots approach to economic development will fare best over the long term. And only those states committed to creating a sustainable 'investment infrastructure' will prosper when times get tough. Not only can states catalyze investment, but put in place a system that attracts follow on private capital - generally at a multiple of the state's investment - to ensure we keep these promising young companies and their jobs here in Texas.

Texas is four years ahead of the curve. In 2005 the Texas Emerging Technology Fund (ETF) was created and designed to take ideas from our world class research, create new companies with global impact, and accelerate the next generation technology economy in Texas.

The ETF has become a national model. The fund has grown into the most active early stage investment fund in the country and today provides the foundation for "innovation capacity" in the state to transition ideas fluidly out into the marketplace and wrap around those ideas around the management and private capital that is needed for Texas to compete in a global economy.

The program's Regional Centers of Innovation and Commercialization (RCIC) provide the statewide infrastructure. Seven RCIC's throughout the state - virtual in nature - represent the economic and technology diversity of their regions. Today over 500 seasoned experts (investors, entrepreneurs, economic developer, researchers, and industry representatives) volunteer their time in those 8 regional centers around the state to evaluate, coach, mentor and select quality investment opportunities to forward to the committee to invest in. Importantly, the RCIC's build the innovation capacity in rural areas of our state. Rural Texas has seen significant success through investments into multiple companies and universities in those regions.

The program maintains a diverse portfolio of medical devices, energy, nanoelectronics, semiconductors, pharmaceuticals, biopharmaceuticals, IT, biotechnology, robotics, nanomedicine, defense, aerospace telecommunications, and software. The portfolio is a representation of the very diverse technological and economic strengths within all regions of the state.

ETF investments such as finding a solution to obesity prevent diabetes-related amputations, and a cancer therapy treatment that selectively kills solid tumors without significantly damaging healthy tissue are examples of these kinds of breakthrough companies.

Every ETF funded company has a collaborative relationship with one or more Texas institutions of higher education. Since ETF's creation, 45 world class researchers and their teams with the experience and culture to commercialize their research have been recruited from around the world to 14 Texas public universities. Today, the fund's investment of over $74 million to recruit those teams has resulted in attracting over $139 million additional dollars from private and federal sources into those institutions.and we're still counting.

The program gives an additional 5% to the commercialization office of a university that received a research superiority award to make sure world class research makes it to market efficiently and effectively to increase the likelihood of new company formation. To date, ETF has invested in over $3,000,000 million dollars in those commercialization offices, resulting in programs like the Entrepreneur in Residence.

As evidence of the thorough examination a proposal must go through, to date, the Texas Emerging Technology Fund process has screened over 1000 company proposals and has currently invested in 79 early stage technology companies. Additionally, there are 16 proposals that have made it through the 3 stage vetting process that are being considered for investment at the leadership level for a grand total of 95 early stage technology company (equity) investments over the last three years.

While the early return on investment is excellent for Texas taxpayers, some fine tuning of the ETF program could turn it into an even more effective investment stimulus tool.

The lifeblood of sustained economic growth remains long-term access to capital for our entrepreneurs and emerging companies. The success that spurred the Chief Executive recognition would not have happened without the leadership and foresight of our elected leaders at all levels, the work of economic development officials across the state, and of course the enduring entrepreneurial spirit that makes Texas great.

The global market is not going to slow down because we face economic challenges. Texas should seize the opportunity to create a competitive edge when and where it can, and send a clear message to entrepreneurs, seasoned management, and private capital from around the world that Texas is a leader in the technology economy.

The ETF is the foundation of a long-term strategy that will position Texas as a leader in the global economy through new company formation, high paying jobs, wealth creation and commercialization of our world class research.

Texas is setting the pace. Collectively, we can make sure we stay in front and the legislature should do so by fully replenishing the Fund with a $200 million appropriation for the next two year state fiscal biennium.

Casselberry is president of the Texas Coalition for Capital. Kowalski is president of the Texas Healthcare and Bioscience Institute. Clark is Texas director for Tech America (formerly AeA).



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