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Representative terms from entire chapter:
venture capital
Page 48
States' Efforts in Small Business
Development: Two Models
David N.McNelis
University of North Carolina at Chapel Hill
Depending on the diversity of the existing business base, states
have set different goals and approaches to economic development in
the high-tech area. Two models are presented herein—one from
Nevada, which tends to emphasize the importation of businesses from
areas outside the state, and the other from North Carolina, which
emphasizes the seeding and nurturing of new high-tech businesses
from within the state.
Historically, the various economic development authorities in the
State of Nevada have had only minimal success in promoting the
immigration of advanced technology companies or the growth of
existing or new advanced technology companies from within the
state. For example, of the 78 new enterprises for FY2000 for which
origin data is available at the Nevada Commission on Economic
Development ( www.expand2nevada.com/companies/recent.html
), 67 originated outside the state. Also of note, of the
total of 98 new enterprises, 47 are in manufacturing and only 1 is
in R&D. The other new businesses are in either the service or
the distribution sectors.
Only as recently as 1991 did Nevada seriously undertake to pool the
resources of the university system, state government, and private
industry. A visionary group of Nevada leaders, in recognition of
the need to diversify the state's economy and build on emerging
university-based technology, formed Nevada Industry Science
Engineering and Technology (NISET) to lead this effort. The
organization served to create an environment that was politically
and economically attractive to the technology-based businesses and
strove to assist the regional development agencies in attracting
them to Nevada. In that same time frame, the uni
Page 49
versity system initiated an effort to develop and implement an
intellectual property policy and a technology transfer program.
As background, several years ago most technology in Nevada was
associated with the federal government, i.e., with the Nevada Test
Site or the Department of Defense or with the University of Nevada
System. Because of the nature of the business and security concerns,
the operation of the Nevada Test Site has essentially been a closed
industry and now, with the exception of activities at Yucca Mountain
and its use as a geological repository, it is a nongrowth industry
with little opportunity for the development of spin-off companies. The
main industry in Nevada now is gaming and tourism, and
diversification, which was not attractive to the casinos in the past,
is now considered essential to the sustainability of the gaming and
tourism industry.
Small companies in Nevada are the backbone of the business development
community. For example, 40 percent of the new businesses in Clark
County, Nevada (the county that includes the city of Las Vegas) have
four employees or fewer; nearly 20 percent have 5 to 9 employees and
almost 13 percent have from 10 to 19 employees. By contrast, only 0.3
percent of the businesses in Clark County have 1,000 or more
employees, and 0.2 percent have from 500 to 999 employees.
More generally, the common characteristics of most state technology
development programs beginning in the early 1980s include the creation
of tripartite linkages between state economic development agencies,
universities, and private industry; a recognition of the importance of
technology development as a key ingredient of economic renewal and
diversity; and a significant investment of funds. Matching funding,
however, is typically required either from federal, state, or private
sources.
Differences in these programs tended to be more numerous. Some of the
more significant differences were the degree to which basic or applied
research is emphasized; the nature of the relationship and degree of
private sector involvement; the manner in which state funds are
distributed; and the degree of accountability that is applied to the
programs.
In 1983 the North Carolina State Legislature established the
Technology Development Authority (NCTDA) ( www.nctda.com ) to create jobs and wealth
throughout the state and gave it authority to establish incubators to
transfer technologies into commercial applications by private
industry. Since then the NCTDA has expanded its offerings to
effectively provide and connect entrepreneurs through business
incubation, venture capital, technology transfer, rural initiatives,
and entrepreneurial expertise to commercialize promising business
opportunities.
The incubators typically provide office and laboratory space,
consultant expertise, an administrative infrastructure, and Internet
access. The goal, of course, is to graduate, and the incubators
provide incentives by
Page 50
setting terms for tenure and by periodically raising the charges for
rent and support.
The documented return on investment for the NCTDA indicates that
There are now 27 operational TDA-managed business
incubators in North Carolina (and more than 800
nationwide).
More than 50 new companies have graduated from the
Research Triangle Park TDA area alone.
The TDAs have accounted for more than 12,000 new
well-paying jobs.
During the past year, more than $5.9 million in
investments was made in 33 projects.
Over the past year, the TDA has approved nearly $600,000
in loans for rural enterprises.
A technology development partnership has been formed with
the administration of the 16 campuses of the University of
North Carolina.
There are over 700 enterprises involved in the incubators.
Each dollar provided by the TDA (i.e., a public subsidy)
has resulted in $46 in matching funds raised from other
sources, mainly venture capital. According to the National
Business Incubation Association (NBIA), $45 is also
generated in local tax revenues for each dollar of public
operating subsidy provided the incubator, clients and
graduates.
A total of $12 million in state, local, and sales taxes
has been generated.
The internal rate of return during 1996 was 39 percent.
Figure 1 shows the growth of these incubators
in the State of North Carolina during the period 1985–2000. What
is indicated here is that this highly proactive mode of encouraging
and assisting entrepreneurs and small enterprises in North Carolina
(and elsewhere in the United States) is a relatively recent activity.
Of the enterprises in the North Carolina incubators, approximately 38
percent are women-owned and about 41 percent are in a manufacturing
business. There are now more than 500 graduated enterprises, of which
approximately 88 percent stay within a 30-mile radius of the
incubator. Those graduated enterprises have averaged over $1 million
in sales. The National Business Incubation Association (
www.nbia.org/info/fact_sheet.html )
provides corroborative national statistics, i.e., member incubators
report that 87 percent of all firms that graduated from their
incubators are still in business and 84 percent of incubator graduates
stay in their communities and continue to provide a return to their
investors. More importantly, the NBIA reports that the startup firms
annually increased sales by $240,000 each and added an average of 3.7
full- and part-
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~ enlarge ~
FIGURE 1 North Carolina incubators, 1985–2000.
time jobs per firm. Also, for every 50 jobs created by an incubator
client, an additional 25 jobs are generated in the community.
One example of a highly innovative enterprise that graduated
relatively recently from a North Carolina incubator is Blue 292. Blue
292 ( www.blue292.com/blue292/default_ns.asp
) is a business-to-business Internet exchange for
environmental, health, and safety products and services. The Research
Triangle Park-based company designs customized secure websites that
match customers and the best suppliers of these services. It includes
testing and monitoring equipment, sampling supplies, and analytical
glassware, as well as staffing, training, analytical laboratory, and
compliance services. Blue 292 combines market expertise with
worldclass technology to allow major international companies to meet
the challenge of compliance in a systematic and practical manner.
Their software is designed to be easily integrated into a client
company's existing business system and can be tailored to meet
their unique needs.
In general, in the United States, universities and nongovernmental
organizations have, over the past decade or so, aggressively sought to
establish an endowment to support stability and growth. According to
one such example from the Entrepreneurial Development Center of North
Carolina State University (NCSU), the data indicate that during the
100-year period from 1898–1998, five new enterprises were formed
around NCSU technologies. The University holds an equity interest in
two of
Page 52
those new enterprises. During the next two years, 15 new companies
were formed about NCSU technologies, and the University holds an
equity position in eight of those new enterprises. Those 15 companies
also caused the creation of 220 new jobs. There is, of course, a
difference between the number of companies that launch a new business
and the number that survive. As indicated previously, many do survive,
however, and a few develop into major enterprises.
A sample highlighting the diversity of other small business
development programs in North Carolina includes:
Small Business and Technology Development Center
(SBTDC). The SBTDC, organized as an interinstitutional
counseling and technical assistance program of the University of North
Carolina, has as its mission supporting the growth and development of
the state's economy by encouraging entrepreneurship, assisting in
the creation and expansion of small businesses, and facilitating
technology development and transfer ( www.sbtdc.org ). The SBTDC maintains 15
offices across the state and The SBTDC maintains 15 offices across the
state and has, since its inception in 1984, provided managerial and
technical assistance to thousands of new and established small
business owners.
NC Biotechnology Center. The NC Biotechnology Center
was established in 1981 by the State to support biotechnology
research, development and commercialization statewide ( www.ncbiotech.org ). The Center assists in
biotechnology startup enterprises in business development, science,
and education.
MCNC. MCNC is a unique corporation that provides
access to advanced electronic and information technologies and
services for businesses, state and federal government agencies, and
North Carolina's education communities to provide clients with a
competitive advantage ( www.mcnc.org ).
The Council for Entrepreneurial Development. The CED
serves the Research Triangle community of North Carolina by providing
a forum for business managers to meet and exchange concepts of mutual
interest. The CED also publishes a comprehensive resource directory of
the organizations and agencies that provide assistance to startup
enterprises. It also serves as a guide for growing a business and
includes coverage of such issues as planning, financing, human
resources, growth, and selling the business.
Research Triangle Park (RTP). RTP was established in
1959 by the Research Triangle Foundation, a not-for-profit
organization, to stimulate the development of technology enterprises
in the region. It is recognized internationally as a center for
cutting-edge research and development and is now home to more than 140
enterprises with a total of approximately 42,000 employees. It also
serves relocating and expanding companies that want access to
technology-transfer opportunities made pos
Page 53
sible thanks to its close proximity and ties to the University of
North Carolina at Chapel Hill, Duke University, and North Carolina
State University.
Based on the 1990 census, records of the Small Business Administration
indicate that there are a total of 159,745 small businesses
in North Carolina (1997 data). Some 229,600 businesses of all sizes
are women-owned (1999 data), and based on 1992 data, 29,221 businesses
are Afro-American-owned, 3,827 are Asian-owned, and 2,802 are
Hispanic-owned.
As a clear indication of sector interest, the venture capital
investments during 1994–1995 in North Carolina by industry are
shown in Figure 2. Almost 70 percent of those investments were in
technology-related enterprises (representing 40 percent of the total
number of enterprises). During this period, North Carolina had on the
order of 17–20 venture capital firms with an estimated capital
under management of over $375 million. The preferred size of the
investments, however, was between $100,000 and $1 million.
Some of the more common barriers to new business enterprises,
regardless of where they start up in the United States, include the
following:
economies of scale—deter entry by either forcing a
major entry and thereby causing the new business to risk a
strong reaction from the existing enterprises or forcing a
smaller entry and thereby causing a cost disadvantage
\
~ enlarge ~
FIGURE 2 North Carolina venture capital investments by industry.
Page 54
product differentiation—forces new business to spend
heavily to overcome existing competition and customer
loyalties
capital requirements—a large capital outlay is required
in order to enter and compete in the market
switching costs—expense to buyers to switch from one
supplier or supplier's product to another
access to distribution channels—the more limited the
wholesale or retail channels, the more they are tied up by
the competition
cost disadvantages independent of scale—the government
can limit or even foreclose the entry of a new enterprise
with such controls as licensing and limits on access to
critical raw materials
expected retaliation—history of vigorous retaliation to
new entrants from established firms having substantial
resources with which to fight back
government policy—established firms may have cost
advantages not replicable regardless of the new business'
size and economies of scale (favorable access to raw
materials, favorable locations, government subsidies,
learning/experience curve, proprietary product technology)
The Small Business Survival Committee (SBSC) ( www.sbsc.org ) released in July its 2001
ranking of the 50 states plus the District of Columbia according to
their respective policy climates for small business and
entrepreneurship. The Small Business Survival Index (SBSI), according
to its author, SBSC chief economist Raymond J.Keating, “offers a
gauge by which to measure and compare how government in the states
treat small businesses and entrepreneurships.” It manages to
capture much of the governmental burdens impacting critical economic
decisions. The SBSI ties together 17 major government-imposed or
government-related costs (see Box 1)
impacting small businesses and entrepreneurs across a broad spectrum
of industries and types of businesses. Many of these are, in fact,
taxes.
BOX 1 Government-Imposed or
Government-Related Costs
Personal Income Taxes
Corporate Income Taxes
Sales Taxes
Unemployment Taxes
Electricity
Crime Rates
Number of Bureaucrats
Internet Taxes
State Minimum Wages
Capital Gains Taxes
Property Taxes
Death Taxes
Health Insurance Taxes
Workers' Compensation
Right to Work Status
Tax Limitation Status
Gas Taxes
Page 55
These measures are combined into one index number—the small
business survival index. According to this index, the most
entrepreneur-friendly state for 2001 was Nevada, with a score of
27.060. North Carolina was number 35 (score of 49.590) and the
District of Columbia was number 51 (score 65.335).
The conclusion reached by the Small Business Survival Committee is
that the best policy environment for entrepreneurship includes low
taxes, limited government, restrained regulation, and government
protection for life, limb, and property.
Figure 3 is a graphic from the NCTDA that
shows the growth and development of an industry and the net benefits
of that industrial devel-
~ enlarge ~
FIGURE 3 Building returns on investment.
Page 56
opment. The first curve shows the magnitude of the industry as it
moves through the three stages of R&D, expansion, and finally
maturation. The second curve shows, in the first stage, the need for
public (private and/or government) investment and actually a negative
return on the investment. In the second stage the return becomes
positive, and finally, in the third stage—i.e., in the
sustainable growth mode—an endowment has been created. For most
university and NGO research, reliance for funding (75–85
percent) is on the federal sector. The trend in these institutions was
to use any discretionary R&D funds to provide seed funding for
research leading to the development of a new proposal. More recently,
however, the tendency is for more specific commercialization goals for
any IR&D expenditures.
Finally, companies, however, rarely succeed or fail for minor or
trivial reasons. The causes are usually substantial and are often
self-evident, at least to an outsider. Typical reasons for failure
generally include one or more key factors, i.e., that the enterprise
was over-borrowed, its management was weak, the enterprise was
involved in switching markets, governing or enabling laws changed, a
major competitor expanded its business, or the enterprise never
reinvested any of its earnings.
REFERENCE
The Council for Entrepreneurial
Development,1996. The
Entrepreneur's Guide to Starting and Growing a Business in the
Research Triangle.Research Triangle Park,
N.C.
