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| HomeResearchInitiativeSteering CommitteeLinks | Grow Me State Initiative: (download PDF version)
Forward The research Report released on October 25th, 2007,by Dr. Mark Parry of University of Missouri, Kansas City Bloch School of Business and Public Administration, entitled “Missouri’s Need for Risk Capital: An Assessment and Recommendations”, identifies some startling facts about Missouri’s research capacities, Missouri’s entrepreneurship levels, and Missouri’s ability to attract external risk capital. We were pleased to serve the Bloch School and Dr. Parry, where he is the Kauffman/Missouri Endowed Chair of Entrepreneurial Leadership, as his Steering Committee, providing input to their research and examples for them to examine. And when the final Bloch School Report was done, we were pleased with the unbiased and unvarnished academic review to help us determine our statewide competitiveness. The Bloch School’s Report has led this Steering Committee to the conclusion, that as a State, we must develop a capital formation strategy and aggressively pursue its objectives. In addition, there are particular Seed Stage funding gaps that we can and should immediately address. Eureka – “I found it”. Our scientific researchers are performing well. In numerous fields - like animal health, IT, biologics, plant science, nanotechnology, genomics, advanced manufacturing, etc. - Missouri researchers are winning competitive grants, curing disease, alleviating pain, creating alternative energies and increasing crop yields to feed the world. As a State, Missouri consistently ranks 12th in NIH grants and either 15th or 16th in academic R&D. This demonstrates the impressive research performance of our academic institutions. We support continued investment into research and research capacity at our public universities. Vendo – “I sold it”. But further down the pipeline, when the research is to be translated into products, and products into businesses, the Bloch School Report reveals Missouri has critical pinch points that have prohibited us from seeing the benefits. For research to have value, to improve people’s lives and bring an ROI to the State, it must be deployed through effective technology commercialization and new company formation - and their corresponding high-wage job growth and wealth creation. The Block School Report spotlights our under-developed capacity to turn our outstanding research into tangible value: life improving products and wealth creation.
Also described was a Kauffman Foundation report, The 2007 State New Economy Index, which provides a focused perspective on variations in state entrepreneurial resources and activities. It ranks Missouri 35th, down from 28th in 2002. Our relational decline is attributed partially to our reduced “innovation capacity” (Patents, High-Tech Jobs, Scientists and Engineers, Patents, Industry Investment in R&D, and Venture Capital). Just as most employment growth in Missouri moved from agriculture to manufacturing industries, it must evolve toward entrepreneurial and knowledge-based industries, in which the keys to success lie “in the extent to which knowledge, technology, and innovation are embedded in products and services. More Evidence. The Bloch School Report also references Missouri’s grade (D) on two dimensions: Competitiveness of Existing Businesses (Missouri ranked 40th) and Entrepreneurial Energy (Missouri ranked 26th), from the 2007 Development Report Card for the States, prepared by the Corporation for Enterprise Development (CFED). The Report Card grades the 50 states on Economic Vitality. The Bloch School Report also brought out one startling finding which was contrary to what we would expect, based on the success of the NEW ENTERPRISE CREATION ACT (‘FY2002) to create Prolog Ventures and other recent capital formation activities in Missouri. There has been a downward relative trend of venture investment into Missouri’s entrepreneurial firms over the past six years, despite the dramatic increase of formal Early- Stage venture capital formation (physically located in Missouri) during the same period.
Granted, venture capital is only a means toward the ends - higher wage jobs, better quality of life and wealth creation. But the steep rate of decline in the investments made into Missouri companies, while Early-Stage venture capital availability increased (amount under management located in Missouri) is the red flag of a critical problem. The problem is that Missouri is not growing enough new technology start-ups and not maturing existing ones to the next level of growth. Research Bearing Fruit – just out of reach. Currently, not from the Bloch School Report, but from our experiences, we know that there is a shortage of investor-ready deals presented to the three angel groups organized to invest in Missouri start-ups: Arch Angels (St. Louis), Centennial Investors (Columbia) & Prairie Angels (Kansas City). Further, we know that at the University of Missouri’s Technology Transfer Office in Columbia, there is a backlog of hundreds of patents which have not seen commercialization efforts (130 new ones this year), and 500 more disclosures are in need of market research, business advisors, and pre-seed capital. At Washington University in Saint Louis, after nearly 5 years of continuous NIH research funding averaging over $300 million annually, which suggests, according to Association of University Technology Managers that the innovative technology should have spun out to create at least 10-14 new start-ups, instead of the four start-ups since 2002. What this Committee purports is that it is time to organize ourselves and our resources to seize the opportunities this existing research strength has afforded us. Understanding the Challenges: Capital and Dealflow. The type of equity capital available matters. Later-Stage venture capital (the larger amounts invested into more mature companies for expansion) is still thin in Missouri, and consequently we are at risk of losing our stable, larger equity-backed companies to the coasts where larger funds are located. Some progress through current private sector initiatives like Vectis II, and the next generation funds of Prolog, Ascension, RiverVest and Oakwood, are helping to provide some deeper pockets for the later rounds of established companies, and have also increased capital for Early Stage companies, particularly in the Life Science industry. But it’s the Pre-Seed, Seed Stages and Start-up Stages where the Bloch School Report shows a critical need. The Report shows this is where the benchmark, technological-similar state governments are making investments, and it also shows that Missouri is not. The Role of the State – to be determined. One particularly interesting statistic was the Report’s analysis of two groups of peer states, by which Missouri could benchmark its investment ratios for technology-based economic development. Given Missouri’s lack of emphasis on technology-based economic development, we might expect that Missouri spent less on capital formation programs in 2006 than any of its neighbors. But exactly how much lower, in the final comparison of State investment per capita, was surprising. By the report’s estimates, the states geographically surrounding Missouri spend an average of $2.79 per person (this figure is a weighted average, computed by dividing the total capital commitment by the total states’ population). A similar analysis of the seven technologically-similar, but non-adjacent states produced per capita formation expenditure of $2.94. In 2006, if you counted the Incubator Tax Credit, Missouri spent 10 cents per person.
Investing the Minimum. Using the per capita expenditure rate of Tech-Similar States, and multiplying it against the population of Missouri used in the Bloch School Report (5.84 million), an annual investment of $17.2 million would represent the average capital formation commitment of the benchmark states. Grow Me State Recommendations
In conclusion, we believe that the recommendations that comprise our Grow Me State Initiative, once implemented, would greatly mitigate the challenges restraining our talent and technology from developing into innovative, start-up companies. This investment we make must be minimally sustained at this $17.25 million amount each year (0.00207% of the $8.3 billion FY’09 Missouri General Revenue Budget). We believe further that investment into these programs, at a first year cost at the average per capita level spent by our benchmarking states, will begin to shape Missouri’s knowledge-based, future economy. Sincerely, Grow Me State Initiative Steering Committee Material Support for Legislative Recommendations: Material Support for Grow Me State Angel Investor Tax Credit Material Support for the Missouri Technology Corporation’s Recommended Funding Material Support for Grow Me State “Proof of Concept” Technology Business Finance Program (TBFP) Material Support for Grow Me State “Seed Capital” Technology Business Finance Program (TBFP) Material Support for Grow Me State Pension Initiative Material Support for Grow Me State Angel Investor Tax Credit The Missouri Angel Tax Credit would create a 25 percent tax credit for accredited investors and certain partnerships (including angel investment pools if all are accredited investors) that invest cash or cash equivalents at an arm’s length in a qualified small business (as defined by the Small Business Act). An angel investment pool is a group of investors who come together to pursue common investments. To qualify for the tax credit, an investor would have to hold onto the investment for at least three years. The maximum amount eligible for the credit is $50,000 per investment and a total of $100,000 per qualified individual investor. We propose a $5,000,000 cap for FY’09, and then utilize an MTC Investment Committee to evaluate if that is an appropriate annual cap. According to the Center for Venture Research, 227,000 angel investors provided more than $23 billion for new ventures in 2005, the year for which the most recent data are available, creating 198,000 new jobs, or 4 new jobs per angel investment. Twenty-one states currently offer some sort of income tax credit to encourage such private investments in early stage businesses, ranging from 25% to 50%. • The Angel Tax Credit was developed to fill a gap in current equity funding. Generally, venture capitalists invest a minimum of $6 to $7 million in mature companies. Venture capitalists have become more risk adverse and tend to limit their investments to certain high growth sectors of the economy, such as life sciences and software. • By contrast, angel investors take more risks and invest locally or regionally. However, the maximum amount invested by angel investors typically is between $500,000 and $1 million. Thus, there is currently a substantial gap in equity funding between angel investors and venture capitalists. • This bill addresses the equity gap by encouraging current accredited investors to increase equity investments in certain qualified small businesses. • A federal credit is under consideration, and it would be the first of its kind. That legislation is the result of the work of a nine person panel of experts, which included Bruce Gjovig, director of the University of North Dakota Center for Innovation. Material Support for the Missouri Technology Corporation’s Recommended Funding Missouri Technology Corporation
Material Support for Grow Me State “Proof of Concept” Technology Business Finance Program (TBFP) To be eligible for TBFP funding, an entrepreneur must be at the early development stage of commercializing an advanced technology. The business must be classified as a small business based on SBA guidelines, and at least fifty percent of the employees or assets must be located in Missouri. The Proof of Concept Technology Business Finance Program is designed for advanced technology companies in the State of Missouri. Advanced Technology is defined as any state-of-the-art material, design, process or know-how. Eligible industries include:
Eligible firms must be technology-based, sufficiently innovative to provide a competitive advantage in the marketplace and have the potential for significant, high performance growth. They must also exhibit significant potential for high sales per employee, substantial value added per employee, wage levels 35-40% higher than average, and other indicators related to the generation of wealth for Missouri's economy. Location in Missouri Size Stage of Development Approximately twenty-five awards of $50,000 each are available annually. Process A completed application, and required document attachments including a complete business plan, must be filed with the Program Manager. Staff will review all applications and business plans for completeness and compliance with eligibility requirements. Those applications/business plans that meet the standard criteria will be forwarded to an expert, independent review committee for analysis and scoring. Besides business advisors, the review committee would have representatives of the major research institutions, i.e. Mizzou, Missouri State, Missouri S&T, UMKC, UMSL, and Washington University. Applicants whose plans exceed the minimum required score will be offered an award contract at the recommended funding level until Program funds are exhausted. Guidelines for writing business plans and a description of the qualification and scoring criteria are available and (other programs) can also help applicants identify service providers to assist them. Applicants are encouraged to use these resources to help them prepare successful application materials. Applicants do not have to be clients of the Missouri Innovation Centers, but are strongly encouraged to become clients if the score on the business plan review does not meet the minimum standard. What kind of match is required? What kind of payback is expected? When is payback expected? Material Support for Grow Me State “Seed Capital” Technology Business Finance Program (TBFP) How the Seed Capital TBFP Fund Works: The fund anticipates making up to 20 investments from $250,000 to $750,000 per year in rounds of up to $1.5 million (50% match). Investments will be determined by a traditional investment due diligence process that is timely, practical, and thorough. The use of funds is based on the company’s submitted business plan. They may include such activities as developing the IP, building prototype, market study, implementing business operations, identifying the management team, and securing the management team. Missouri clients may access advice and guidance from Missouri Innovation Center directors, or SBTDC Directors during any stage of the process, from application to presentation preparation through due diligence. If they are not already, prospective portfolio companies are encouraged to become clients of the Missouri Innovation Centers and Missouri SBTDC Network. Who is eligible? Missouri advanced technology companies in the seed or start-up stage that engaged in producing an innovative product or service with strong growth potential are eligible. Advanced technology is defined as any state of the art, proprietary product, process, material, design, and/or know-how. The Seed Technology Business Finance Program expects to invest in firms in the following Industries:
Firms not eligible for seed funding by the program include:
Investment Criteria. The Seed Capital Technology Business Finance Program is primarily focused entrepreneurial, advanced technology companies with strong management teams, well-protected IP, and break-through solutions that provide/serve large, well-understood markets. Companies will meet the following criteria: • 50 percent of employees and/or assets resident in Missouri Companies must demonstrate that they are potentially attractive to private co-investors. Economic development factors such as creating jobs with higher than average salaries that stay in Missouri are also important. Prospective portfolio companies are encouraged, though not required, to become clients of the Missouri Innovation Centers and SBTDC Network. How do you get the money? While there is no set time for the completion of this process or any way to predict how long due diligence will take for any particular deal, we recognize that ideas are perishable, and our goal is to be practical, thorough, and as timely as possible.
Is co-investment required? Co-investment by one or more outside investors will normally be required. Material Support for Grow Me State Pension Initiative To encourage the Governing Boards of Missouri’s 116 state and local pension funds to establish proactive policies for In-State Private Equity Investment & Economically Targeted Investments. Public Pension Funds. A recent Civic Progress study (Dec 2006 UMSL Public Policy Research Center Pension Funds Investment Strategy Study) reviewed major pension or state funds and found that many of the States place some emphasis on in-state alternate investing. Their list include states which actively support technology-based economic development through broad planning (California (CalPERS), Kentucky, Louisiana, Massachusetts, Ohio, and Pennsylvania), while in 18 states “Private Equity and Venture Capital” is mentioned explicitly. This list includes states against which Missouri is directly competing: Alabama, Arkansas, Iowa, Michigan, Minnesota, North Carolina, North Dakota, Virginia, and Wisconsin. The UMSL study reveals that “of the two major state funds in Missouri, MOSERS has made no commitments to or investments in venture capital viewing it as a “relatively unattractive” area for alternative investment. Even though venture capital is mentioned specifically, their private equity funds (some $319 million) go into corporate buyouts and special situation/activist equity. The second Missouri fund, The Public School & The Non–Teacher School Employee Retirement Systems fund has “committed” $291 million to private equity investment but only $29 million had actually been invested as of 6/30/05. Their “strategy allocation” of this is 17 percent to venture capital (page 3).” Moreover, Missouri funds should, like several other US state funds, identify the goal of having Economically Targeted Investments (ETI’s), which are investments that have mutual intent to develop the regional economy as well as a reasonable financial return commensurate with its risk. The objectives of ETI’s are to provide both a competitive rate of return back to the fund while achieving public policy goals (aka ‘double bottom line’). “ETI’s often fill what is known as a ‘capital gap.’ A capital gap would be, for example, worthy Missouri companies that would qualify for and greatly benefit from seed or venture capital and who are currently not being served by the marketplace. A targeted pension fund investment is a means of closing such a capital gap (page 6).” |
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