One year later | Karen Mills, clusters, innovation and equity present opportunities for small businesses
In a piece for this column a year ago (“What Mills Means,” in the Feb. 23, 2009, issue), I speculated on incoming Small Business Administration head Karen Mills’ plans for that agency. In an April 2008 Brookings report she co-authored on regional industry clusters, it seemed clear that she intended to apply her interest in this form of economic development to the agency she was to lead. Mills’ report advocated for a more unified federal approach, engaging multiple agencies to work together, versus individual agencies working in silos. If Obama’s fiscal year 2011 budget is any indication, there may be signs that this work has begun (see www.whitehouse.gov/omb/budget/Overview/).
Industry clusters — geographic concentrations of interconnected companies, specialized suppliers, service providers and associated institutions in a particular field that are present in a nation or region — speak to the full spectrum of businesses, from startups to large public companies. Innovation clusters are considered faster growth variants of the more general industry clusters. Small business innovation, spurred by venture capital, is considered a particularly important source of cluster-related innovation, particularly in respect to emerging high-growth sectors like clean energy/technology, life sciences and information technology.
Obama has been talking about innovation clusters since 2009, inspired — if not directed — by Mills, who is arguably the administration’s most informed player on the topic. In the 2011 budget, at least four agencies are proposing innovation/cluster initiatives along these lines:
- EDA: The Department of Commerce’s Economic Development Administration has long provided co-funding for industry cluster research at state and regional levels. The first step to fostering clusters involved inventorying the region’s innovation assets — work force, businesses, universities, trade and tech associations, etc. — so as to assess where existing, emerging and potential clusters may exist. In EDA’s 2011 budget, $75 million is requested for innovation and cluster- related research.
- USDA: The Department of Agriculture describes allocation of 5% to 20 existing programs for a Regional Innovation Initiative. The $135 million allocation is to be used, per the language of the budget, to support “regional pilot projects tailored to local needs and opportunities. This targeting effort will allow USDA to prioritize areas with the greatest need and potential by encouraging comprehensive and innovative approaches to foster rural revitalization.”
- SBA: Mills’ agency proposes a new $14 million pool to support business growth and cluster development. The budget includes $3 million for competitive technical assistance grants to expand SBA’s Emerging Leaders (formerly Emerging 200) initiative and $11 million to enhance small business participation in regional economic clusters by awarding competitive grants to facilitate greater coordination of resources.
- DOL: The Department of Labor proposes a “Workforce Innovation Fund” of up to an estimated $108 million to help ensure that the work force development system also aligns with regional cluster growth by facilitating regional collaboration among training and employment services providers and stronger linkages with employers so that worker training leads to good jobs.” Maine’s Sen. Snowe has been an advocate for work force training related to high-growth industries, co-sponsoring the SECTORS Act of 2008, which provides funding for workers seeking specialized training for emerging industries.
Unlike his predecessor, Obama has made small business a key element of his overall strategy. For the first time in several years, SBA’s budget — driven primarily by loans — shows material increases across the board, even after consideration of Recovery Act-related small business stimulus.
As noted in another Mainebiz piece (“The Good with the Bad,” in the March 23, 2009, issue), however, federal support for early-stage equity continues to lag, perhaps understandably, in light of the budget freeze announced at the State of the Union address. The SBA defines “small business” as companies with fewer than 500 employees and under $18 million in pre-tax income. By my estimate, this suggests businesses as large as $100 million to $150 million in sales. These larger small businesses do indeed need the very credit that the government seeks to activate; the smaller small businesses, however, will continue to be challenged by lack of access to capital.
And while it’s true that more established businesses have the greatest potential to create meaningful jobs in the short term, some of the greatest innovations begin with startups and early-stage businesses, with revenue that typically range from zero to $5 million in sales — a range that fails to meet the credit test for most banks.
Early-stage equity investment is key to innovation, whether from individuals or professional venture capital funds. Larger companies’ research and development departments contribute much to the picture but most would agree that game-changing innovation often comes from the startups. If innovation clusters are to be catalyzed, the administration, in partnership with private markets, must address the early-stage capital gap.
Michael Gurau, president of Clear Innovation Group and a Portland-based venture capital fund, can be reached at mgurau@clearinnovationpartners.com. Read more of Michael’s columns.
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