Charlie Barnett, chief science officer and founder, NanoDetection Technology
, Star Tribune
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"New ideas, no money" is an occasional series that explores the declining investment in new technology companies in Minnesota and its implications for the state's economy. For earlier stories, go to www.startribune.com/venture
State has a model for boosting technology, but not the money
- Article by: WENDY LEE
- Star Tribune
- October 5, 2011 - 7:50 AM
The recession of 2001 was hard on Ohio. Auto factories were shutting down. Tens of thousands of workers lost their jobs, and politicians searched for a way to reinvent the economy.
From this slump came the vision for the Third Frontier, an ambitious campaign to make Ohio a force in areas such as bioscience and information technology. So far, $2.3 billion in state money has gone into the effort.
Now Minnesota is looking to emulate Ohio's plan.
The state last year set up the Minnesota Science and Technology Authority to figure out a way to create high-paying technology jobs in the state. Advocates studied programs in other states and borrowed many of Third Frontier's ideas.
But where Ohio has spent billions, Minnesota committed only $350,000 this year beyond salaries and overhead. Some question how much the authority can accomplish on that budget.
"I don't know how you make a name with those few dollars that are there," said Mark Heesen, president of the National Venture Capital Association. "This is a hard business. Many of our companies fail. You need to be out investing significant dollars to see some results at the end of the day."
The push for an authority in Minnesota last year came as venture capital investments in the state dropped to their lowest level in 15 years. Investors in medical devices, traditionally the state's biggest area for start-ups, say they are cautious because of uncertainty about the government's process for approving devices.
In Ohio, Third Frontier is a massive initiative that began in 2002. It was first funded with $1.1 billion and later gained voter approval for $500 million in bond money. Last year, Ohioans approved $700 million more in bond money, extending Third Frontier programs until 2015.
Executive Director Norm Chagnon thinks the initiative has been a success. Third Frontier spent $681 million from 2003 to 2008, resulting in 41,300 jobs and $6.6 billion in economic activity, according to research firm SRI International.
"The people of Ohio think this is important," Chagnon said. "Any state that is looking to advance its economy and any growth industries going forward is going to have at the heart of it innovation."
Minnesota's budget fight
The Minnesota authority had hoped for more money, but the state's tight budget got in the way. The authority's advisory commission, made up of officials from the public and private sectors, sought $10 million a year for things like advising entrepreneurs and backing promising technologies.
Instead, the group received $350,000. That money will be used to help fund internship programs and to help companies looking for federal grants, said Betsy Lulfs, who had previously helped companies in Ohio before signing on as executive director of the Minnesota authority.
Minnesota legislators say they had to make tough choices. "It's certainly a priority, but we're short on funds and we do have to be cautious," said Julianne Ortman, R-Chanhassen. "What's available is going to limit our choices."
In Ohio, Third Frontier is spending $2 million this fiscal year on internships alone. Chagnon said most states with effective programs to support technology are spending far more than Minnesota.
"That's a real challenge to get anything meaningful when you're having to operate with that small amount of money," Chagnon said. "Relative to just about any other state that's making some impact, you're really needing to be talking millions."
The best approach?
Some question whether programs like Third Frontier really boost the economy.
Ohio State University economist Mark Partridge said he's skeptical of Third Frontier's job-creation claims. He said companies that benefited from the program might well have gotten help elsewhere and questioned whether it's appropriate for the government to try to pick winning technologies.
"Maybe it would have been better to fund things such as scholarships for the engineers and build the human capital that would do the research instead of actively having a government agency try to figure out what is the hot research in the future," Partridge said. "If you have a good workforce, the best companies will come to you."
Rep. Keith Downey, R-Edina, doubts that Minnesota's authority can solve the larger problems that impact the state's entrepreneurial community.
"We can build all the state programs that we want," Downey said. "If we don't make Minnesota a more-attractive place for investors to take risks, we won't have addressed the long-term fundamental issues."
Ohio has some success stories
Some entrepreneurs that have benefited from Third Frontier say their companies wouldn't have survived without its help.
Diagnostics firm AssureRx Health Inc. received a $1.2 million loan from Third Frontier. The company is commercializing technology from the Cincinnati Children's Hospital Medical Center, which also got help from Third Frontier.
Today, AssureRx employs more than 40 people.
"It is highly likely that without that loan, the company would not exist as it does today," Chief Operating Officer Don Wright said. "It certainly would not exist in the state of Ohio."
Third Frontier also has attracted promising out-of-state technology to Ohio.
NanoDetection Technology, which uses computer chips for DNA and protein analysis, had only two more years left before it ran out of money, said Charlie Barnett, founder and chief scientific officer. The company received $2.3 million in public and private funding in Ohio, as well as help with its business plan, if it agreed to move from Knoxville, Tenn., to Cincinnati.
"Money is the lifeblood of the company. With no money, the company dies," Barnett said. "It's either close the company or move."
It's unclear whether Third Frontier's work has spurred private investors to put more venture capital into Ohio companies.
From 2003 to 2010, the number of deals doubled to 58 transactions, according to the MoneyTree Report from PwC and the National Venture Capital Association, which uses data from Thomson Reuters. But the amount invested rose only 4 percent, to nearly $185.1 million.
"The data is what it is," said Mark Scholtes, a partner at PwC. "It's hard to draw conclusions as to what impact, if any, the program in Ohio had."
Scholtes said other factors, such as the health of the economy and the number of good business ideas, also influence the level of investment.
Lulfs, from Minnesota's authority, said she believes the Ohio model works. She said the authority will be back asking the legislature for $10 million again next year.
"Your goals change based upon the amount of money you get," Lulfs said. "If we don't get anything, we won't be able to do anything."
Wendy Lee • 612-673-1712
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