Sunday, April 25, 2010
By Bruce Katz and Jennifer Bradley
The Vindicator
Ohio needs jobs. A combination of industrial restructuring and two recessions have drained the state of more than 300,000 jobs over the last decade. New firms are likely to be the source of the new jobs that Ohioans need now and that their children will need later.
Recent research by the Kauffman Foundation shows that young firms created almost all the net new jobs in the U.S. between 1980 and 2005. In 2007 alone, young firms were responsible for about two-thirds of new jobs.
On May 4, Ohioans will vote on whether to renew a critical source of funding for new firms and new job creation for four more years. This program supporting new firms is called the Third Frontier.
Young companies are often powered by innovation, something at which Ohio excels. It is among the top 10 states in battery, hybrid system, and fuel cell technology patents, in academic research and development spending and in small business innovation research awards.
But the state falls short in converting those great ideas into flourishing companies. Initiatives like the Third Frontier program are critical to transforming the ideas generated in Ohio into companies that create jobs for Ohioans.
Innovation-driven companies tend to rely on venture capitalists for the funds to grow. In a perfectly functioning market, venture capitalists would scour the country for promising investments, and supply a pipeline of cash at all the critical stages of a company’s development, from initial idea to prototype to product to sales.
The events of the last few years show that markets do not function perfectly. Private capital in the United States has not been sufficiently allocated to productive investments, rather than investments built on financial manipulation. People make decisions based on incomplete or imperfect information, or they let their own biases get in the way of smart analysis.
Creating companies
Third Frontier is designed to correct these market failures, and create more new companies and jobs.
A new analysis of venture capital investing in the Great Lakes region released by the Brookings Institution explains that, to save time and effort, venture capitalists focus investments in places that have a reputation for having a rich, promising array of start-ups, usually Silicon Valley or greater Boston. That’s why California alone absorbs half of U.S. venture capital investment, and Massachusetts gets 10 percent. (Ohio doesn’t even get a full 1 percent.)
Third Frontier investments fill the gap left by East and West Coast investors who figure that they can make plenty of money in familiar places and ignore emerging innovations elsewhere.
A more pressing market failure these days is risk aversion. With fewer dollars to invest, venture capital funds search for companies that have solved many of the problems that bedevil very early stage endeavors and have established a bit of a track record.
Third Frontier helps companies survive until they get to the stage. Through its rigorous, non-political screening Third Frontier identifies those companies that are most likely to succeed and supports them while they are most vulnerable. There is almost no other way for these companies to survive. That doesn’t reflect a flaw in the companies, just the reality of the current economy and venture capital markets.
Third Frontier also interacts with the market in another way: It sends a big signal that Ohio is an ideas state. Ohio doesn’t currently make the lists of the leading technology states, or top venture capital states because its efforts are too new. It takes 20 or 30 years for vibrant innovation and technology clusters to take root.
Ohio is still in the middle of the process of reorienting its economy and rebranding itself. Venture capital investments in the state, pre-recession, were moving in the right direction. If Third Frontier funds dry up now, it tells venture capitalists that they don’t have to take Ohio seriously as a hotbed of innovation. That means missed opportunities and missed jobs.
Bruce Katz is Vice President and Director of the Metropolitan Policy Program at the Brookings Institution in Washington, D.C. Jennifer Bradley is a Senior Research Associate with the Program. They are two of the authors of “Restoring Prosperity: Transforming Ohio’s Communities for the Next Economy”, which was released in February.