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Nurturing the New Economy

States work to align IT policies and economic development.

They are called "gazelles" -- small, high-growth companies that came to exemplify the nation's new economy during the 1990s. Everybody liked that gazelles were engines of economic growth, accounting for the bulk of job creation and as much as 70 percent of the country's overall economic expansion in recent years. Between 1993 and 1999 their number swelled by almost 40 percent to more than 350,000, according to the Progressive Policy Institute (PPI).

So it's not surprising states have looked for ways to find new gazelles and help nurture their success. "The degree to which a state's economy is composed of new, rapidly growing firms is indicative of the degree to which the state's economy is dynamic and adaptive, which is a key driver of the New Economy," wrote Robert Atkinson, PPI's vice president and author of the report, The 2002 State New Economy Index.

Though gazelles can be started in almost any line of business, it is the high-tech sector -- information technology, nanotechnology, biotechnology and other life sciences -- where the entrepreneurial flame has burned brightest. Although the high-flying technology sector of the economy is no longer so robust, it's clear economic development infused with technology is the way of the future.

One factor that will help gazelles and other job-generating firms flourish is the role played by states.

Some states are aligning their IT strategies with economic policies, so gazelles and virtually any size high-tech firm can benefit from the knowledge and resources derived from massive public-sector investments in IT in recent years. The idea is relatively new, but already under way in a handful of jurisdictions, including Colorado, Massachusetts and Virginia.

"I have one of the few Cabinet-level positions in the country with the dual role of IT planning and tech-based development," said George Newstrom, secretary of technology for the Commonwealth of Virginia, adding that he not only deals with internal IT issues, but also attends trade missions to advance the commonwealth's economic policy around the globe. Overall, Newstrom sees state IT policies moving closer to economic policies and economic development in particular.

On the global level, critical economic issues -- including economic development -- will require public-sector CIOs to proactively integrate economic policy with IT strategy and execution, according to Carol Kelly, vice president of government strategies for Meta Group. In her report, Economic Policy: The Role of the CIO, she forecasts that during 2003 and 2004, leading governments will integrate economic planning with IT objectives, with widespread adoption of economic/IT planning processes occurring by 2006 or 2007.

Like Virginia, Colorado has taken steps to couple IT strategies with economic development. Gov. Bill Owens appointed John Hansen, former CEO of the Colorado Institute of Technology, as the state's CTO. Hansen also chairs the Colorado Institute of Technology, which helps link business and education to produce a high-tech work force for Colorado.

Integration of economic development and state IT also is occurring at other levels. Kelly noted that enhancing economic attractiveness and regional vitality trigger significant changes in business-to-government interaction, such as the development of Web portals. These economic development portals create "a holistic business process focused on ease of use, real-time completion of business applications and online submissions, as well as capabilities for business profiling, which enable a business to make relocation decisions."

In a number of states, an effort to integrate the power of the Internet with high-tech business development and growth is emerging. In Pennsylvania, the state's portal -- PAPowerPort -- has a business Web site that bundles all the available online information about starting a new business, including a link to the site for Ben Franklin Technology Partners, a technology-based economic development organization.

Massachusetts is attempting to build an online portal with applications specifically designed to support and expand new businesses. Known as MassConnect, the initiative has been proposed by the Massachusetts Technology Collaborative (MTC), a state-funded organization, along with the Department of Economic Development and the Department of Information Technology.

With the commonwealth's once high-flying tech industry currently in the doldrums, Massachusetts is trying to jumpstart it through a number of programs, including online economic development resources and applications.

The applications include:

- a wizard for starting and expanding a business;
- a funding database;
- a site location service;
- industry cluster mapping; and
- a permitting wizard.

The wizard, based on similar applications in Virginia (Launchpad) and Pennsylvania (Open for Business), will lead a client through the entire business startup process, including the search for funding. One unique feature would allow users to upload their business plan so venture capitalists could review and analyze them, said Kevin Paulsen, MTC's program manager for e-government initiatives.

While portions of MassConnect are in beta development, the entire cost for developing the digitized economic development center is an estimated $2.8 million, with an additional $550,000 per year to operate and maintain.

But economic development portals for new businesses will never fully replace the face-to-face assistance that a center for technology-based economic development (TBED) can provide. Although Virginia is moving aggressively to build just such a portal, there will always be a need for offline assistance, Newstrom said.

"Young entrepreneurs need someone to sit with them to help them understand the complexities of starting a business, to council them as they go through the process," he said. "Ultimately we have to act as their mentors, and there's no better way to do that than sitting down and talking with them."


Focusing on Job Generation
That's why nearly all states continue seeing the need for well funded, well staffed economic development centers to nurture and grow high-tech businesses as a long-term investment for economic survival and expansion.

"States' economic success will be increasingly determined by how effectively they spur homegrown technological innovation and entrepreneurship," Atkinson said. "In the New Economy, tomorrow's jobs will come from fast-growing entrepreneurial firms -- not from the small number of business relocations."

As a result, states need to shift their focus from "hunting and gathering," or industrial recruitment, to "gardening," or promoting growth from within, he said.

The No. 1 gardening tool used by states to grow new companies is the technology-based economic development center. Virtually every state has one, and they come in all shapes and sizes, according to Dan Berglund, president and CEO of the State Science and Technology Institute, an organization that provides support and information for these types of economic development programs.

Some TBEDs provide both technical assistance and guidance on such things as how to draw up a business plan and how to apply for federal grants. Others work to commercialize research and development efforts at major universities, and find investors who can finance the startups. Some tech-based economic development centers act as venture capitalists, providing seed money to help the best young firms to grow and take root.

Universally they focus on new firms that can generate new jobs. Firm relocation -- that old-style economic development performed by states -- isn't their agenda.

"The goal of Ben Franklin Technology Partners is to spur economic growth through innovation and through the investing and nurturing of small, early stage technology companies," said Terry Singer, director of statewide affairs for Ben Franklin Technology Partners, one of the most successful TBEDs in the country.

In 20 years of operation, the Pennsylvania-based organization has invested in more than 2,500 companies, most of which are in the earliest stages of development when they seek assistance. Though Ben Franklin Technology Partners provides financing and investment opportunities for projects and infrastructure, its main activities are investing in and assisting emerging companies. The amount of debt or equity it provides ranges from $50,000 to $500,000, but the average amount is $250,000, according to Singer.

Those investments have paid off. A recent study conducted by Nexus Associates Inc., an independent consulting firm, found that the Ben Franklin Technology Partners program boosted Pennsylvania's economy by $8 billion between 1989 and 2001, generated 93,105 jobs that lasted at least one year, and led to more than $400 million in additional tax revenue for the state.

The recipe for this success isn't cheap, however. Ben Franklin Technology Partners' current budget is $27 million in state funds, which are shared equally among four regional centers in Pennsylvania that work with 20 to 40 new companies each year.

Investments are made only after careful scrutiny of the client firm, according to Singer. "When we decide to invest in a company, we scrub them up and down and look at them through a microscope," he said. "There's an extensive due diligence process. As a matter of fact, most venture capital firms look at firms that have gone through the Ben Franklin process as the Good Housekeeping seal of approval."

Virginia's High-Tech Advances
In Virginia, the Center for Innovative Technology (CIT) has taken a more nuanced approach to economic development, compared with Ben Franklin Technology Partners' broad-based initiative. The philosophy at CIT is to look at the entire continuum of what's needed to succeed in the high-tech business environment, according to Peter Jobse, the organization's executive vice president and COO.

Though CIT invests far less than Ben Franklin Technology Partners in the companies it nurtures, it does focus broadly on all elements that could lead to new ideas and businesses. "Our cooperation with the venture capital community and the universities makes it a very holistic environment," he said.

In general terms, that means investing in knowledge and transferring it into the marketplace while promoting the growth of entrepreneurial firms, in the hope they will become the next gazelles.

The total return on CIT's investment of $7.8 million in fiscal 2003 is expected to reach $267 million. Jobse noted that CIT collects metrics to ensure it stays focused on its mission. While stressing that $1 invested today might not show a return for five to nine years, Jobse added that CIT's metrics program "includes looking to the future in terms of the impact of investments we make today."

CIT's impact can be found in a range of programs and companies, including the Center for Power Electronics Systems, established by CIT in 1988 at Virginia Tech. CIT's initial funding of $3 million for Center for Power Electronics Systems resulted in the creation of 762 jobs and nearly $52 million in increased competitiveness for Virginia companies.

Another is Lighthouse Instruments, a manufacturer of pharmaceutical testing instruments. CIT put the young firm in contact with the University of Virginia, which helped Lighthouse develop a prototype instrument. Today, the company has received nearly $1 million in small business innovation research funding from the FDA and is profitable.

From Ponytails to Cash Flow
In the mid-1990s, it didn't take too many ideas or too much talent to attract investors.

"People used to say that if you had a ponytail, an earring and a PowerPoint presentation, you could get $5 million," Singer joked.

Those days are over. Finding cash and good investment ideas have become more difficult. The biggest challenge today, according to Jobse, is bringing a young company to the point where it has enough energy and financing to continue to prosper.

"We need to keep the entrepreneurial flame alive while it's still windy outside," he said. "It's very challenging for young companies to find funding. The angel [investor] market is very dry in Virginia and other states."

That's the situation in Mississippi, where high-tech firms have always struggled to find venture capital even in the best of days, but now find the situation dire. "Our biggest challenge is lack of cash," said Andy Taggart, president and CEO of the Mississippi Technology Alliance (MTA), a state-funded nonprofit that helps startup firms develop business plans, and finds companies and individuals willing to invest in the new ventures.

"There's not a lot of wealth here in Mississippi," he added. Yet innovative ideas keep cropping up. Taggart touted MTA's success in a tough environment. With its modest $2.5 million budget, the alliance assisted nearly 250 Mississippi-based clients with their business plans, and used seed money in the form of $3,000 grants to create local technology councils in cities and counties throughout the state. It also launched a new publication to attract and energize the high-tech community in Mississippi.

MTA's goals are to become self-funding and to help the state meet several objectives for high-tech economic growth, including raising industrial productivity, growing high-tech employment, and increasing the amount of small business innovation and research awards that state-based firms receive. Though MTA may struggle to reach these objectives, the mission remains firmly locked on generating new jobs from new companies.

"We'd rather have 100 companies with five employees than relocate five companies with 100 employees," Taggart said. "The idea is to create wealth, not import it."
With more than 20 years of experience covering state and local government, Tod previously was the editor of Public CIO, e.Republic’s award-winning publication for information technology executives in the public sector. He is now a senior editor for Government Technology and a columnist at Governing magazine.