Jumpstarting an Economy

Posted by Jeff Carter
on February 29th, 2012

Say what you will about Rahm Emanuel in the White House, he has done a decent job as Chicago’s mayor. He is slowly taking on the Chicago Teachers Union which is one of the most militant in the country. He has started the process of trying to save taxpayers money through better city logistics, changing snow removal and garbage pick up. His data officer is letting entrepreneurs get into city data so they can create companies from it.

There are entrepreneurs all around the midwest thinking about creating the next great start up. Will government get in the way, or stand aside so that the private economy can create and grow?

Today they released a World Business Chicago report. These two segments are interesting.

from the report:
Innovation and Entrepreneurship
Innovation can be understood as flowing from existing firms, often in conjunction with the commercialization of university- and lab-based research; from entrepreneurship and the “ecosystem” that supports it, including networks of peers, mentors, customers and investors; and from the interactions of firms in clusters.

Metropolitan Chicago has many key attributes of a center of innovation. It has highly valuable research and development driven by federal research labs, nationally recognized universities and private industry; support services for entrepreneurs seeking to commercialize new ideas and technologies; industry-specific innovation incubators and accelerators; and several stage-specific financing entities.

Nonetheless, Chicago has historically lagged behind other large metropolitan areas along the “innovation pipeline.” Per capita R&D spending in Illinois was approximately $1,100 in 2007, compared with $1,200 in the United States as a whole and $1,500 in peer regions. Chicago’s academic institutions take in far fewer R&D dollars than benchmark universities; for example, Northwestern and the University of Chicago together reported almost $800 million R&D expenses in 2009, versus approximately $1.4 billion reported at MIT alone.

Chicago also can improve its performance at the commercialization stage of the innovation process. Growth in the number of patents established per year between 1998 and 2009 was negative in Chicago (-3.18%), while the United States overall saw a marginal increase (0.05%). In terms of patent growth, Chicago ranks 243rd out of 363 global metropolitan areas. The region also trails peers in the number of utility patents.

Despite having two of the top-ranked business schools in the country (the University of Chicago’s Booth School of Business and Northwestern’s Kellogg School of Management), Chicago underperforms in rates of new business formation. The Kauffman Entrepreneurship Index – which measures monthly business creation rates in metropolitan areas throughout the United States – ranks metropolitan Chicago 12th in the U.S., behind peer regions such as New York, San Francisco, Houston, and Atlanta.96 Measured in another way, university students form 0.9 start-up companies per million residents in Illinois, compared with 2.2 in peer regions.

Chicago has historically trailed peer regions in the financing made available to start-up companies. Venture capital firms invested $39 per capita in Illinois in 2010, compared with $76 in the United States as a whole and $141 in peer states.

Finally, there is also some indication that many of Chicago’s mature industries, including certain manufacturing sectors, have lower rates of productivity than their competitors in other parts of the country. This suggests comparably low rates of innovation and new technology adoption among firms in the region’s most historic industries. Given that manufacturing companies are responsible for industrial R&D in the United States and employ 63% of domestic scientists and engineers, a competitive manufacturing sector is essential if Chicago is to remain a leader in knowledge production and innovation.

Despite these historical trends, Chicago has gained considerable momentum in entrepreneurship-based innovation in the last few years, with increased start-up activity and a growing support network for entrepreneurs. A flurry of high-tech firms have formed – at least 773 opened their doors between 2009 and 2010 – and Illinois now ranks second in the nation for the number of high-tech start-ups. This trend toward high-tech entrepreneurship appears particularly strong in the Chicago region, with nearly half of all start-ups there defining themselves as providing consumer web or digital products or services.

This growth in entrepreneurial activity seems to have generated a significant increase in the availability of VC financing as well. Chicago’s start-up firms have seen annual VC investments rise to over $1 billion for the first time since 2000. Start-ups in Illinois have raised over $2 billion in VC funding since the start of 2010, with slightly less than half of those funds going toward Chicago-based Groupon. The trend may be particularly true in the digital technology start-up community, where VC funding has increased by 40% in the last year even after excluding Groupon as a statistical outlier.

These trends are encouraging, and Chicago’s entrepreneurial community appears to be gaining considerable momentum. The region is developing a more robust and supportive entrepreneurial ecosystem – offering entrepreneurs greater access to training programs, peer groups, and stage-specific financing – as well as a more innovative, entrepreneurial, and risk-taking culture.

At the same time, several challenges continue to prevent the region from maximizing innovation, which should occur not exclusively through entrepreneurship, but also in existing firms through commercialization of R&D and cluster-based strategies:
• The value of both industrial and university-based R&D continues to lag significantly behind that of peer regions. Academic and institutional research agendas can be better aligned with the needs of private industry. This misalignment limits both the ability of research institutions to monetize R&D breakthroughs and the capacity of the region’s mature industries to adopt innovative new technologies.
• While existing institutions have stimulated considerable innovation through entrepreneurship in some of Chicago’s emerging economic clusters, particularly the information technology sector, entrepreneurial-driven and existing-firm-driven innovation opportunities in other sectors have not experienced such robust growth.
• More mature industries may lack the information, capacity, and capital (as well as, in some instances, short-term market incentives) necessary to invest in technology and innovation.
• Despite the recent creation of valuable institutions such as the Chicagoland Entrepreneurial Center, Excelerate Labs, the 1871 Chicago Tech Center, TechNexus, and the Chicago Urban League’s Entrepreneurship Center, young businesses, including minority- and women-owned businesses, and Business Enterprises Owned by People with Disabilities continue to report a need for better access to mentors, targeted technical assistance, and other forms of both informal and formal guidance.
• Firms continue to cite costly and time-consuming bureaucratic processes and regulations as a barrier to innovation, entrepreneurship, and the commercialization of new ideas.
• Despite recent progress, Chicago does not yet enjoy the innovation “brand” that defines many peer regions, such as greater San Francisco and the Silicon Valley.

and strategies to support their thesis.

Strategy 7: Foster Innovation and Support
Entrepreneurship
Chicago must build on today’s considerable momentum in capturing innovation through entrepreneurship, especially in the high-tech and web-based industries. Other emerging markets and industries, such as clean technology, present opportunities for rapid growth through innovation, as existing firms and entrepreneurs begin developing products and services in these sectors. Furthermore, Chicago should help its mature industries to accelerate their rates of innovation and new technology adoption, and support its largest research institutions to better align their R&D agendas with industry needs.

Three distinct but related steps will promote and enable greater levels of innovation throughout the regional economy. These key components of this strategy are:
• Build on recent entrepreneurial momentum by expanding formal and informal networks that connect entrepreneurs with customers, venture capital, and mentorship opportunities.
• Implement more targeted, cluster-based initiatives to extend and deepen Chicago’s competitive advantages in strategic economic sectors through innovation.
• Facilitate stronger connections between academic research institutions and private industry, to promote higher rates of innovation in existing firms and increase industry-driven university R&D and commercialization.

The different components of this strategy are mutually reinforcing. A richer entrepreneurial ecosystem may enable innovation through entrepreneurship in strategic clusters, while cluster-based initiatives may facilitate the commercialization of some academic research. Each of these components would benefit from their own focused, targeted initiative.

An informative example from another region is San Diego Connect, which has been extremely successful in fostering strong networks among entrepreneurs, small businesses, academic research institutions, and established industries. Since its establishment in 1985, it has helped create more than 3000 companies that have attracted over $10 billion of investment capital.

Existing Initiatives Relevant to Strategy 7
A variety of existing institutions in Chicago are already working to achieve similar entrepreneurship goals, and this strategy aims to build on the progress they have enabled in recent years. The University of Chicago’s Polsky Center for Entrepreneurship, Northwestern’s Levy Institute for Entrepreneurial Practice, and DePaul University’s Coleman Entrepreneurship Center, to name a few, provide guidance, mentorship, and early-stage financing to innovative entrepreneurs. The Chicagoland Entrepreneurial Center and Excelerate Labs connect emerging entrepreneurs to financial resources, formal coaching, and rich informal networks of peers. The region’s entrepreneurship ecosystem is particularly robust in the high-tech industry, where organizations such the Illinois Technology Association’s TechNexus work to incubate and accelerate high-tech innovation through entrepreneurial efforts. The newly formed 1871 Chicago Tech Center promises to be a robust incubator for digital start-ups and entrepreneurs.

end of selected excerpt

I think this ties into my previous post about job creation. There is a lot more in the WBC report. They have a huge section on investing in infrastructure, which is important. However, as Clifton points out in The Coming Jobs War, infrastructure development doesn’t create a lot of jobs. It just pays off unions.

Innovation by itself isn’t anything until that creativity garners customers and earns a profit.

My thought is that until the state, county and city actually take on the unions, and entrenched bureaucracies, there will be little change despite all the good efforts from the private sector.

What do you think?

follow me on Twitter

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.