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Bright prospects for a Midwest Entrepreneurial Economy

Things are looking up. We have the beginnings of what one could arguably say is “not your father's Midwest.” Whether those of us in the region know, or care to admit, the Midwest has long been viewed as late in the game with respect to emergence of a culture of innovation and entrepreneurial energy. One need only look at the January 2010 Brookings Institution study , Turning up the Heat: How Venture Capital Can Help Fuel the Economic Transformation of the Great Lakes Region by Frank Samuel for an exposition of the major problems that face the Midwest in creating an innovation economy.

That report concisely and compellingly argued that to move toward a 21st Century culture of innovation, the Midwest needed to 1) dramatically improve access to capital and 2) create regional mechanisms to work cooperatively to encourage creation of fundable new ventures based on the strong base of world class research institutions that are located in the Midwest. To paraphrase a few of the findings from the Brooking study, Great Lakes region universities and medical centers account for about 33% of the nation's academic and hospital R&D spending and Great Lakes region public and private retirement funds contribute 40% of the capital supplied to the venture capital industry. In contrast, companies in the region receive a mere 14% of VC investment. Like a colonial economy, we are exporting our raw material and buying back the products produced by the new ventures funded by largely Coastal VCs.

So why are things looking up? In Mid-October I took part in the Fall members meeting of the Midwest Research University Network - we call it MRUN for short (full disclosure: I am a co-founder and I currently serve as president of MRUN). MRUN's mantra is regional cooperation to foster local startup development. The theme of this meeting was Catalyzing Angel Technology Investment. It was the third MRUN meeting organized on the CATTEC theme aimed at catalyzing technology transfer and investment. This MRUN event was in fact a joint meeting with the Midwest co-Investment Network (MIN) and sanctioned as a regional meeting by the Angel Capital Association. MIN is an alliance of 16 angel groups across 3 Midwest states who are working together to syndicate deals and share diligence resources.

The meeting brought the money people and the idea people together but not in the standard context of a venture conference where entrepreneurs pitch to an audience of investors. These two groups are working together to tackle Midwest problems of access to capital and regional cooperation while advancing their own objectives. The angels want better deals and connections with other angel groups that collectively can better finance attractive companies. The university startup professionals want to connect with investors and seasoned management for new ventures that seek to commercialize cutting edge university research. Whatever comes out of these meetings will assuredly not be the total solution but it will be a start and it will fuel the breakdown of barriers in a region where the key participants in the startup culture have not known each other well enough to effectively work together. With these beginnings of regional cooperation among investors and those who facilitate startup creation, the Midwest can begin to improve access to capital while leveraging the diverse innovation resources scattered about the region.

Allen Dines is President of Midwest Research University Network and Assistant Director of the UW-Madison Office of Corporate Relations. He can be reached at ajdines@wisc.edu.

The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Comments

Jacob Johnson responded 4 years ago: #1

Allen,

Thanks for the reference to the report, and for making the connection to the importance of groups like MRUN in that equation.

As you hinted, we have boatloads of expertise, research funding, and concentration of high-tech industry (acquisition targets) across the Midwest; however, we still lack the [] of the Palo Altos and Bostons of the US. Additionally, from my calculations, nearly 75% of earliest-stage VC are dumped into those two locations.

With groups like MRUN acting as "opportunity concentrators". The midwest can attract VCs to the presence of both research expertise and acquisition targets in key growth markets (healthcare, biotech (pharma, med device).

Let's start there.

Michael Sharer responded 4 years ago: #2

Allen,
This is a very important topic, and one that has interested me for some time. I agree largely with your viewpoint, and the views expressed by the Brookings report. But the Brookings report is from a "30,000 ft. view", and I think that once one looks at the problem closer, say from 5,000 ft., things look a little different, especially where universities/gov. labs/perhaps hospitals (non-profit research organizations, or NPRO's) are concerned.

With respect to NPRO's, the access to capital problem pointed out by the Brookings report takes another form, in my experience. That is, for NPRO (proposed) start-ups, where does the initial $200,000-500,000 (the "start-up capital") come from? It normally doesn't come from angel investors, as they typically invest in "going-concerns". And of course the typical assumption is from friends/family/founders, but this approach usually doesn't work well, if at all, for NPRO start-ups for a number of reasons (any TTO that wants to hang their hat on "3F" funding as the basis of their start-up formation process, well I wish them luck).

So one reason why the NPRO start-up rate is what I have always described as highly inefficient (around 1 start-up per $80 million in research expenditures, according to AUTM figures) and many universities are only turning out 1 per $100-200 million in expenditures (some in the greater Chicago area, for example), as opposed to a more reasonable figure like 1 start-up per $25-30 million as some have proposed (myself included), is because there is a clear capital gap at the start-up stage. So if you'd like to discuss regional cooperation to foster start-up development and specifically looking at the "access to start-up capital problem" for NPRO start-ups, I think that would be a very interesting discussion. And a very timely one given the current focus on innovation as a way out of the current economic situation.

best regards,

Michael Sharer

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