The Brookings Institution recently published a white paper titled, “Turning up the Heat: How Venture Capital Can Help Fuel the Economic Transformation of the Great Lakes Region.” In it, Author Frank Samuel, former Science and Technology Advisor to the Governor of Ohio, tackles a problem that has plagued the Great Lakes region for decades – how to transform a former manufacturing mecca into a 21st-century knowledge-based economy. Samuel identifies the following negative trends ailing the Great Lakes region*:
· out-migration of young, educated workers;
· failure to replace manufacturing job losses with new growth industries;
· metropolitan areas that are unable to attract people and businesses
Additionally, Samuel highlights a sad disparity: despite the fact the region contributes 40% of Venture Capital dollars nationwide, produces 31.4% of US patents on annual basis, and receives 35% of NIH grants, only 13.8% of US Venture Capital is invested in the Great Lakes region. This disproportion is insufficient for a region seeking to re-invent itself; absent significant investments, it will be difficult to compete in changing times.
Samuel recommends a “Great Lakes venture capital superfund” as a partial solution to this problem. This $1-2 billion dollar “fund of funds” would invest in Great Lakes-based venture capital firms, placing investment decisions in the hands of regional funds. While not suggesting such a measure as a panacea, Samuel states that it would “help the region grow, and retain, the new businesses and jobs it needs to ensure a more prosperous and secure future.”
Samuel was kind enough to offer his insights in an interview with TECHdotMN, which we will publish over the course of multiple parts. Our angle was to assess the local impact from the proposed Great Lakes 21st Century Fund. Responses have been shortened and summarized.
Zach Robins (“ZR”): In your study, you revealed that Minnesota (unlike neighboring states) has created a sustained critical mass of startup companies via the life sciences. How can Minnesota leverage this strength to compete on a grander scale -perhaps in other sectors?
Frank Samuel (“FS”): “The successes of Medtronic, St. Jude and Control Data (to name a few) have created a self-confidence in the Twin Cities to do VC investing. Consequently, numerous companies have spawned from these successful enterprises. Early stage companies require the most care and attention. To continue this success, what the Twin Cities needs is simply more experienced investors to bring capital to companies that will make a big difference in our economy.
Right now these companies need to go outside of Minnesota for later stage growth capital. The Great Lakes region (currently) doesn’t have all the capital to see enough companies through all the stages of growth and exit.
Seeking funds outside of the region can be healthy. However, there is an opportunity via the Great Lakes 21st Century Fund, to support thriving companies throughout many stages of development and most importantly keep these companies in the region. It is a common phenomenon, that if you must leave the region to gain financing, you’ll end up moving the company.”
ZR: How can Minnesota lead such a charge in raising the Great Lakes 21st Century Fund?
FS: “The community can pay special attention to large institutional funds (state pensions, endowments, high-net worth individuals) to convince them to make a contribution to the fund of funds. These investors have large asset bases and must invest to achieve their desired return. The current tendency for these investors is to look for liquidity (due to recent losses) and steer away from venture capital investing, since it is a longer-term investment. We are seeking to create a situation where these investors can once again support startup companies and those strategically located within the region.
Minnesota has a great economic track record and a diversified economy. The Twin Cities in particular, have not suffered as much as the rest of the region. Perhaps this relative strength can be used at the state government level to incentivize investors to participate in the fund of funds concept.
The state can help via its bonding authority by issuing bonds to spur R&D (research and development) into sources such as the Mayo Clinic and University of Minnesota. Every effort should be made to increase output from research labs. These institutions are powerhouses in biomedical and eventually assist in the creation of enterprises created from their technological innovations. Yet, a stronger link must exist to transfer technologies from research institutions to private companies.
Additionally, the state could get pensions and endowments involved in the discussion by directly bringing these parties to the table.
Lastly, by enacting state tax credits for angel investors, Minnesota could encourage more development, breeding future success.”
To be continued…