The Government as a Venture Catalyst
Commercializing Innovation Sometimes Requires Teamwork
SOURCE: AP Photo/Craig Ruttle
U.S. Treasury Secretary Timothy Geithner walks on the rooftop of The Point Community Development Corporation in the Bronx borough of New York just before announcing $90 million in financial assistance awards for 59 Community Development Financial Institutions (CDFIs) committed to serving economically distressed communities across the nation.
A slew of Obama administration initiatives are making it easier for venture capitalists to invest private capital in technology development and manufacturing in economically distressed and underserved regions of the country. These programs are a win-win for the country, advancing innovation in priority sectors like energy and defense while simultaneously promoting job creation and economic revitalization in underserved communities hit hard by the recession.
Vibrant entrepreneurial markets such as those in and around Boston and Silicon Valley are nationally recognized for their high-octane venture capital fuel. Perhaps less well known is the degree to which the federal government has served as something of a “venture catalyst” by providing nondilutive grants, equity, contracts, and resources to high-growth startups. Some examples include:
- The Department of Defense, which supports, with research contracts, important technologies that support military (and, subsequently, commercial) applications, particularly its legendary Defense Advanced Research Projects Agency, or DARPA
- The Small Business Investment Company program, or SBIC, a more-than-50-year-old program that complements private-sector capital in support of growth companies
- The Small Business Innovation Research, or SBIR, program, a nearly 30-year-old program that provides grants to small businesses in support of federal needs for research that also have commercial corollaries
- The Department of Energy, which most recently added a Defense Department-inspired energy-centric version of DARPA called the Advanced Research Projects Agency—Energy, or ARPA-E, to its private-sector support suite for energy innovation
For decades, the federal government has partnered with the private market to advance public product or service innovation needs related to defense and energy security—and, of course, to serve its agenda for jobs, competitiveness, and economic growth. For the most part, programs from Small Business Administration (SBIR, SBIC) and defense technology spending have been well supported on both sides of the political aisle. Most of these programs are agnostic to the demographics of an applicant—whether location, gender, race, or income. Whether applying from VC-hub Boston, MA, or Biloxi, MS, individuals and companies of all variety have access to some form of federal grant, loan, or equity.
But during the last two decades, two of the past three presidents have focused particularly on underserved communities and people. The Clinton administration’s New Markets Tax Credit and New Markets Venture Capital programs (run by the Treasury and SBA, respectively) seek to fill the capital gap that exists and persists for these target places and people. The Obama administration has continued the tradition, adding new initiatives that focus on underserved people, regions, and sectors. These programs provide resources from multiple agencies to women, minorities, Native Americans, veterans, and low-income communities.
A few examples include the Small Business Administration, with both existing and new programs that support loans and mentoring for small businesses, and the Treasury’s Community Development Financial Institution, or CDFI, Fund, which supports loan and equity pools that focus on targeted rural and urban low-income communities. SBA recently announced a chair for its new Advisory Council for Underserved Communities. The Advisory Council was formed to look across SBA’s assets (and others of the government) to align similar initiatives that serve targeted low-income people and places. Even the Obama administration’s multiagency Regional Innovation Cluster push—covered in SP in February—includes specific callouts for addressing underserved in each of the SBA and EDA cluster funding initiatives.
Indeed, the Economic Development Administration by mandate has always been about addressing low-income, high-unemployment, and otherwise challenged communities in disaster zones, regions with substantial outmigration of population, or those suffering from the loss of industries. The EDA’s recently announced i6 Green competitive grant for innovative Proof of Concept Centers mirrors a number of similar Obama initiatives in that it seeks to drive the innovation ecosystem (in this case on the green economy) but does so with EDA’s emphasis on distressed regions. The program enables existing grantees from SBIR programs at the National Science Foundation, the U.S. Department of Agriculture, and the Environmental Protection Agency that are part of winning i6 Green consortia to share half of the $12 million program award. This unprecedented flexibility and multiagency approach—with a single agency leading and other agencies contributing—are emerging hallmarks of Obama’s efforts to reduce silos and to align resources at the federal level.
As I noted in February, two new $1 billion SBA capital access programs are intended to drive debenture-funded risk capital into underserved inner cities and into clean energy, respectively. While clean energy is a pretty hot area for VCs in their traditional hunting grounds of Silicon Valley and Massachusetts, it’s still very much an emerging sector in other communities. Driving more risk capital into this strategic sector will make a difference for U.S. competitiveness—especially with countries like China plowing far more government money into this strategic high-growth sector.
Providing incentives for venture capital and mezzanine investors to drive capital into underserved regions that don’t normally see private investment dollars, too, is smart strategy. Our tech-and-innovation economy cannot be just about the rich city centers like Boston or the Silicon Valley. Other metropolitan regions need to develop the patterns of innovation and entrepreneurship that drive long-term economic growth. Consistent with its democratic roots, the Obama administration attends—if not equally, then meaningfully and substantively—to the underserved rural regions of our country that need essential capital and innovation infrastructure as much or more so than their rich city brethren.
At risk of appearing self-serving, let me share with you one emerging success story that speaks to the importance and impact of public-private partnerships such as those described above. Since 2000, I have managed one of six Clinton-era venture capital funds—part of the so-called New Markets Venture Capital, or NMVC, funds licensed by SBA in 2000-2001. The NMVC program is an SBA initiative that matches 1-to-1 venture capital raised in the private sector for the purpose of directing this innovation rocket fuel in regions that lack the kinds of assets one finds in Boston. The fund I’m involved in backed nine companies, eight of which saw their first professional capital from this specialized pool, and all of which leveraged each dollar from the fund 5-to-1 with private follow-on capital.
One of the fund’s two remaining investments is Nanocomp Technologies, an advanced nanomanufacturing company that has subsequently received several DOD contracts, SBIR awards, and recently a special designation that is given to a handful of companies in the United States deemed “essential to national defense.” This designation comes with additional federal funding—which will leverage additional private capital to help get this technology to scale to solve real problems related to both national defense and commercial customers.
The product is an advanced material with game-changing structural, thermal, and electrical properties that has applications in aviation, electrical transmission, thermoelectric power generation, and commercial electronics, among others. It is among the lightest, strongest, and most electrically and thermal conductive materials known to man, and was presented in 2010 by the Office of Science and Technology Policy to President Obama as one of the three most significant nanotechnology innovations of 2010. Since I led the company’s first professional round of capital in late 2006, the company has grown from 2 to 40 staff and looks to grow to a few hundred in the next five years. With the help of the NMVC program, the company was able to locate its headquarters and manufacturing facility in an economically distressed region in New Hampshire.
While it’s early to declare this investment a victory, this emerging company funded through a public-private partnership makes a hell of a case for specialized federal programs that support innovation and entrepreneurship in underserved regions. These kind of public-private partnerships catalyze private-sector innovation to develop game-changing technologies of national priority, move private investment dollars, and create jobs in underserved regions. That’s a good thing for future U.S. economic competitiveness and broad-based prosperity.
Michael Gurau is a venture capitalist with CEI Community Ventures and is also president of Clear Innovation Partners, a company formed to catalyze and accelerate regional innovation clusters.
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