The economy of the future, and how not to create it

Call this an object lesson in what not to do. Well, to be fair, the idea, the fundamental concept is excellent. It on target. Its the implementation details that turn this good idea into a waste of time, effort, and money for those competing.

This is a post about Michigan, and its 21st century fund business plan competition. It is also a post about business conditions in the state. It is also a post about areas that Michigan is investing in, and areas it should be investing in (the two are not the same). This post isn’t about sour grapes, bruised egos, or whatnot else. FWIW: my company is a small Michigan based startup. We are focused on high performance computing and storage. We have been in business 5+ years, are profitable and growing. We are hiring in this state. We have products in market. The 21st century fund is a several times re-incarnated version of a program that sought originally to grow life sciences in the state. Basically in the early 2000 time period, the state created this thing called a Life Science Corridor. The concept was to pump money into key areas to grow research and startup capability in the state. Great idea. Put $100M of tobacco settlement money up for grabs to people in the state to build a life sciences focus. Michigan has been largely focused upon auto industry and everything that goes around it, with other things getting short shrift in terms of resource. Overspecialization on one industry/area. This is a failure waiting to happen. And it happened. So a group of bright scientists saw an opportunity to do something to help in diversifying the states economy. In 2000 the bubble was just starting the burst, and everyone was hot for biotechnology as the solution to our economic miasma. Invest in life sciences in the state, and companies will flock here due to lower costs of living, lower salaries, smaller burn rates, etc. Excellent. Great concept. How was it implemented? A board comprised mostly of state and university management decided upon the rules, created the competition, and started this process. The state allocated the money, and the RFP went out. So far so good … until we look at some of what the missioning of this program was, and what the board did. The missioning of the program, as it has been from the beginning, was to create jobs in the state. Not just temporary, soft money, low pay jobs. No. They want permanent, high quality, high wage jobs. This suggests that businesses should be competing for this money. Startups with risks, more established players that can do spin-ins, and university collaborations with businesses. Remember that board make-up. This isn’t what happened. Only 5% of the money was allocated to commercial. The rest became, well, the basis for a mini-NIH. Research projects were funded. Equipment was purchased. Groups were created or funded, or augmented. Very little hiring … direct/indirect … of permanent full time staff in high wage high quality positions was in fact made. Very little investment in small businesses, you know, the growth engine for the economy, was done. Ok, this was years ago. How does that relate to now? I am getting to this. During the next several years, the funding dropped precipitously, and politics intruded. Of course, when you are talking about spending this much money on things, politicians need to be seen as putting their stamp on it. The next year the competition had $25M available. The year after, $40M. And so on. To add insult to injury, very little of this was done for commercial entities. So, very few jobs were created. 4 years into the program, something like $150M +/- some was spent, with the number of created high wage/hiqh quality permanent positions numbering well under 100. The focus changed to the tri-technology corridor, providing funding to manufacturing, life science, and security. More about that in a moment. To call this inefficient is unfair to things that really are inefficient. During this time we did submit to this fund, for workflow tools, for accelerators (twice), and for some interesting business models. It is worth noting that the industries and foci (every single one) for which we submitted have experienced staggering growth since our submissions. We were at the forefront of a number of things, well out ahead of them. Any of them could have been a spectacular success, had the state the wisdom to invest. During one of the meetings of the board in 2005, the president of U-Michigan asked why corporate submissions were declining. She didn’t get it. I am sorry to say it was glaringly obvious to me, and to many others. Finally, in the last year we submitted (2006), the state realized that it had a problem. It had spent all this money, invested in all this research, and had very little to show in new jobs. For a state with a tight budget, massive layoffs, businesses leaving the state, this was not a good thing. The board makeup had not changed much during this time. They needed to focus this upon job creation. Invest in companies. In growth areas. We submitted two bids. One for HPC accelerators based on other work we had done. The other for a cloud computing system. We had been told that the state was very keen on the advanced computing as a future growth area. Well, this is what we were told. Our bids, which included tremendous industry and VC support, were marked as having insufficient industry interest to warrant investment. One had matching funds of $6M to the requested under $1M, and the other had customers already lined up to use it, and investors willing to put money in if the state did. Instead, the state invested in advanced manufacturing and a smattering of other things. Advanced manufacturing. In an age where all manufacturing seeks the lowest cost global provider (e.g. China). We are doing free research for them. They don’t have to pay. Funded by the state of Michigan. The only people who believe manufacturing jobs will stay here in the US and grow are people to whom the politicians have not been truthful to, when asking them to vote them into office. Or keep them there. Manufacturing, advanced or otherwise, will always seek to minimize its costs. It has to. On a global basis. Now compare this to the computing businesses which we wanted to grow in the state. Lots of good reasons to try in this state. We have lower costs, lower burn rates, and the state is a nice place to live and work. There is just very little capital investment going on here. Look at the PWC Moneytree report. It is appalling. For laughs, also look by region and then drill into the Midwest. Or, for laughs, drill in by industry. You can see where investment money, and therefore, growing companies are being funded. These are the companies that are creating high wage, high value permanent jobs. These are the companies that are going to be generating secondary demand for services and support, which is what an economy needs to grow. Of the areas on the list that the 21st century fund is willing to fund (notice computing is not on there), life sciences and alternative energy are in the industries. The midwest had 0.55% of the capital raised at $6M as compared to Silicon Valley’s $146M. None of these in Michigan. In fact one of the energy/industrial was a $2M investment in a ready to assemble furniture company. Maybe this is what the 21st century fund means by “advanced manufacturing.” Michigan took in about $20M in biotech/life science investment last quarter. Which was under 10% of each of the top 3 entries, New England, San Diego, Silicon Valley. In Software, the next big category, Michigan took home again, all of about $6M last quarter. Compared with $494M for Silicon Valley, $154M for New England. Medical devices, is next. Again, this is an area that Michigan feels it is strong in with Stryker and others. All of $6M last quarter, compared with $341M for Silicon Valley, and $111M for San Diego. Of the $7B in venture deals, which represent a reasonable barometer of growing companies, and thus to a degree, job growth, just $229M, or about 3.2%, showed up in the Midwest. Of which Michigan is just a part, and not a large part of. Ok, some people will complain about comparing “incomparable” things such as Silicon Valley and Michigan. Well, I reject the thesis that they are incomparable. We should be comparing them, and seeing what we can do to improve and get more like them. What we should be doing is investing in small companies that want to grow in the state. We should absolutely stop giving tax breaks to large companies that then leave the state or start laying off people. Tax breaks should be rescinded for such organizations. Life science growth in the state was dealt a near fatal blow when Pfizer left. This said, $30M isn’t nearly enough. Not even close. Single deals in the bay area are on that magnitude. If the state wants to be serious about growth, and serious about this competition, it needs to put some serious money into the game. It also needs to stop deluding itself as to which markets will grow and what it can lead in. Its focus on advanced manufacturing is one of those delusions. In the late 1800’s and early 1900’s I am sure some buggy whip companies, seeing a structural change in the economy, cried out for help. And politicians may have even tried to help them. But you can’t fight structural economic change. You adapt to it. Or you fail to adapt to it. The fossil record is replete with examples of organisms that have failed to adapt to the evolutionary forces around them. They should be object lessons to the state. We need to invest in the future. Not in the past. The current RFP as I read it on the web site is firmly rooted in the past. We are not competing. We are not submitting a bid. Any competition for funds where you have to pay to play is most definitely a waste of time and effort. In the last go around, there were 700+ submissions for consideration. Companies here are absolutely starved for capital. As the PWC noted, there really isn’t a noticable VC effort here in the midwest. Yes, there are a few companies here. But not enough to satisfy the demand for capital. What Michigan needs to worry about are companies like mine. We have been neglected, passed over in this state. We are hiring in this state. As soon as we have a good opportunity to leave this state, we will likely consider it, due to the tax burden and the almost complete disinterest of the state in real growing markets and companies. This is not what the state needs, it should not be what the state wants. It should want many companies like mine, hundreds of them, in this state. Instead we are losing residents, businesses … … all the while the large manufacturing companies continue downsizing operations, reducing their costs (which are high in the state for a number of reasons). The state needs to be investing hundreds of millions per year in helping get companies started and rolling in the state. Keeping taxes low. Provide incentives for small companies to form, create products and markets, and grow. $30M/year won’t cut it. Won’t scratch the surface of the need. And the state needs to drop its predilection for funding the buggy whip industries of today. Fund what will grow, add high wage, high value jobs. Stop wasting time/money on companies whose products we will be buying from China in 3 years anyway. As Abba Eban once remarked in a different context, the state hasn’t missed an opportunity, to miss an opportunity. They can’t afford to keep missing opportunities. Comments on the Freep and elsewhere when articles discussing the economic situation here are posted, often include the refrain “the last one out of the state, please turn off the lights.” This should give you a flavor of the situation. This is a great state to live and work in. You get all 4 seasons, you get lots of outdoors activities in all seasons. You get reasonable prices. Reasonable cost of living. You have a structural transformation going on in the economy and you can either adapt to it, or not. So far we have chosen “not”. It is time to change that choice.