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Innovation and Entrepreneurship

The best action the state can take to assure future prosperity is to make it possible for talented people and great ideas to take root and flourish, fed by an availability of funding and support. We must start by leveraging the power of government to make it easier for private risk capital to invest in the talented, ambitious people who live here.

We believe that a new emphasis in Connecticut on "innovation economics"⁷ can transform Connecticut into a center of innovation that can be a magnet and model for entrepreneurs across the region. There are many people already in our state that want to launch new businesses, and within an hour's drive there are a huge percentage of all entrepreneurs who operate outside of the Silicon Valley tech concentration. We know that historically, firms less than five years old accounted for all net job growth in the United States from 1980 to 2005.⁸

Moreover, as national business consultants have said, "Governments, which are often viewed as most effective when they stay out of the business sector's way, actually play an important role in nurturing and protecting one of their most important engines of growth: entrepreneurs.  Effective public policy stokes economic growth."⁹

The Roundtable makes recommendations to support a continuum of efforts to improve and develop our capacity to be a stronger center of innovation-based job growth. Each piece supports and enables the next piece to be more powerful and to attract more ideas, private investment and talent:

1. Investing at all stages of business growth
2. Supporting industry clusters
3. Exporting assistance
4. Innovation in government
5. Realignment of tax credits

A. Investing At All Stages of Business Growth

Today, one of the greatest challenges to our businesses (nationally) is the lack of risk investment capital.

In this section we discuss ways in which we will position Connecticut as a place of innovation, and a magnet for entrepreneurs. Inherent is the need for capital at all stages of the business development process. The underlying assumption of many of these items is that the state's role is not to "pick a winner" in the marketplace by creating policy that is too narrow in focus, but rather to support and grow private sector investors by leveraging some state resources. 

Innovation proposals ranked high among the Roundtable members. Roundtable members emphasize that the various proposals for financing are linked, in that they support industry at different phases of evolution.  And, items such as angel investor tax credits and industry cluster support mechanisms help to sustain an environment of innovation.

Roundtable members recommend providing both financial and operational support for innovation at all "stages of investment" in the entrepreneurial process.  Some participants refer to this concept as "investment in an innovation eco-system" or a "technology-based innovation continuum."

Regardless of the terminology used, the state should:

• Provide pre-seed funding. Using bonding, create an annual fund in the range of $12 million to support pre-seed/proof of concepts.  Administration of this program should be separate from seed and early-stage funding sources, and administered in coordination with appropriate cluster support, which could also provide support services (technical/incubator/mentoring) to high-potential entrepreneurs with ideas in the initial stage of development.¹⁰ A full innovation support concept utilizing the enhancement of the former Innovation Pipeline Accelerator should also be created.

• Create an Angel Investor Tax Credit program, modeled on successful programs in other states, to support start-up companies.¹¹  The value of the tax credit program would be in the range of $7 million to $10 million. This incentive would leverage private investments by building new angel investment networks in Connecticut, and have a major impact on the "flow of deals". The process to register as angel investors should be simple, and the eligibility to qualify should be clear.

• Create a seed/start-up co-investment fund (sometimes referred to as "side car" funding) to leverage angel investor money.¹²  The state or its agents would be a passive investor and rely heavily on approved angel investment groups.

• Develop a mechanism to provide Early to Later Stage Funding¹³ to support growing companies that now often leave Connecticut in search of funding support, just as they are about to produce jobs and profits.  Create a fund of $150 million, using $75 million of state pension funds.  Matching funds will come from qualified private equity fund manager.

B. Supporting Industry Clusters

The old-school approach to economic development is to "land one big deal at a time".  With the global economy this approach is no longer effective.  A comparable amount of resources can be used more effectively by supporting the clusters of industry that are already here in Connecticut.

The recent Program Review and Investigations Committee (PRI) report, The State's Economic Competitiveness in Certain Areas (12/09), demonstrated that the state's industry clusters have been a good economic development strategy.  However, dwindling support from the state has decreased their effectiveness.  We must make the reinvigoration of the clusters a major priority, and reevaluate the current cluster definitions to either identify new clusters or amend current definitions.  To maximize a cluster's potential it is critical that there be inter-agency cooperation and coordination. 

• Renew support of industry clusters with appropriate funding and evaluate whether current clusters are still appropriate, and/or if additional clusters should be developed, such as health care, green jobs, or creative industry.

• Invest in a Regional Innovation Cluster Hub and Connector, using state and leveraged federal dollars to build an environment of innovation and entrepreneurship in conjunction with the administration of the pre-seed fund.¹⁴

C. Exporting Assistance

With the downturn in the economy many businesses are looking to find new markets abroad for their products.  Surveys show that there has been a rapid increase in the number of companies who have begun exporting since the economy turned sour.  They also show that there is very strong interest in companies that wish to begin exporting, but that they lack any information about how or where to start. They also need to know that the state provides this assistance. 

• Connecticut needs to expand and improve its support for international opportunities to increase business growth, using both state and federal offices.¹⁵

D. Innovation in Government

Making government more efficient and responsive to the needs of business will demonstrate in very concrete ways that we are committed to the health of the existing businesses in our state. 

This section suggests actions that are transformative for the state's economic development efforts.  Our goal needs to be a more seamless, easily accessed government process. 

The Roundtable recommends:

• Maximize web-based government services. Improvements in electronic information flow that facilitate business growth such as license renewal and permitting will have first priority.¹⁶

• Provide incentives for regionalization of municipal services.

• Promote the launch of a business institute that will promote and foster an ethos of information sharing. This could be a private entity with stakeholders convened by legislative leaders and the governor.

• Launch a strong initiative to reduce unnecessary paperwork and redundant data collection by the state.

E. Realign Tax Credits:

The Roundtable recommends realigning selected tax credits (at no new net cost) to provide incentives to job growth in line with priority economic development for the new economy.

• Redirect the existing Insurance Reinvestment Fund tax credits (currently $200 million) for funds that will invest in emerging technologies, clean technologies and energy innovation. 

• Implement a new, more general tax credit system that promotes quality job growth to take effect in 2010 and end in 2013.  Criteria for eligible jobs includes: employee must be a Connecticut resident, pay must be at least 80% of median income, and include health insurance.¹⁷  Examine recommendations included in the PRI Report, The State's Economic Competitiveness in Selected Areas regarding tax credits.

No Cost/Low Cost actions that might also be considered

More Information about recommended actions and other possible actions

⁷A helpful discussion of the "Innovation Economics" model is at Program Review and Investigations Committee, "Connecticut's Economic Competitiveness in Selected Areas" (Staff Briefing, October 6, 2009), pp. 6-10.

⁸See the presentation by Liddy Karter to the Roundtable.

⁹Ernst and Young, "Entrepreneurship and innovation:  The keys to global economic recovery" (2009), p. 1. (See also pp. 16-18.)  This report is located at http://www.ey.com/Publication/vwLUAssets/Entrepreneurship_and_innovation: _the_keys_to_global_economic_recovery/$FILE/Entrepreneurship_and_innovation_the_keys_ to_global_economic_recovery.pdf

¹⁰Program Review and Investigations Committee, "Connecticut's Economic Competitiveness in Selected Areas" (Staff Findings and Recommendations, December 17, 2009), pp. 31-34.

¹¹Program Review and Investigations Committee, "Connecticut's Economic Competitiveness in Selected Areas" (Staff Findings and Recommendations, December 17, 2009), pp. 35-38.  For other states, see National Governors Association Center for Best Practices, "Issue Brief:  State Strategies to Promote Angel Investment for Economic Growth" (NGA, February 14, 2008) located at http://www.nga.org/Files/pdf/0802ANGELINVESTMENT.PDF .

¹²Program Review and Investigations Committee, "Connecticut's Economic Competitiveness in Selected Areas" (Staff Findings and Recommendations, December 17, 2009), pp. 38-39. 

¹³"The venture capital community is moving more toward only wanting to invest in companies that have some customer traction and developed products," after angel investors have brought them to that point.  Quoted in National Governors Association Center for Best Practices, "Issue Brief:  State Strategies to Promote Angel Investment for Economic Growth" (NGA, February 14, 2008), p. 4.

¹⁴Program Review and Investigations Committee, "Connecticut's Economic Competitiveness in Selected Areas" (Staff Findings and Recommendations, December 17, 2009), pp. 34-37.

¹⁵Program Review and Investigations Committee, "Connecticut's Economic Competitiveness in Selected Areas" (Staff Findings and Recommendations, December 17, 2009), pp. 41-47.

¹⁶Program Review and Investigations Committee, "Connecticut's Economic Competitiveness in Selected Areas" (Staff Findings and Recommendations, December 17, 2009), pp. 20-21.

¹⁷Program Review and Investigations Committee, "Connecticut's Economic Competitiveness in Selected Areas" (Staff Findings and Recommendations, December 17, 2009) pp. 55-57.

Members:

Representative Denise Merrill
House Majority Leader

Senator Martin Looney
Senate Majority Leader

Senator Gary LeBeau

Representative Chris Perone

Representative Brendan Sharkey

Representative Jeffrey Berger

Representative Peggy Sayers

Fred Carstensen
Connecticut Center for Economic Analysis

Bill Cibes
Chancellor Emeritus of CSU & former OPM Secretary

Richard Cole
CT Academy for Education in Mathematics, Science & Technology

Karla Fox
UConn School of Business

Elliot Ginsberg
Connecticut Center for Advanced Technology

Theresa Hopkins-Staten
Northeast Utilities

Ed Marth
American Association of University Professors

Mike Meotti
Department of Higher Education

John Meyers, Consultant

Matthew Nemerson
Connecticut Technology Center

David Pepin
Next Generations Venture, LLC

Bob Tessier
Connecticut Coalition of Taft-Hartley Health Funds

Lyle Wray
Capitol Region Council of Governments