Midwest Economy Blog

Connecting to achieve tech commercialization

May 23, 2006

Several cities and metropolitan areas in the Midwest are actively encouraging startup technology companies. Not all of these cities are likely to succeed, but those that have a prodigious base of basic research activity have the best prospects. The Chicago metropolitan area has long been one place where the strong flow of both federally-funded and large-company R&D in the medical and life sciences suggests that there could be greater potential for technology startups as well.

A number of recent efforts in the Chicago region are specifically focussed on technology startups. These efforts include new technology parks, cooperative university R&D consortia, new venture funds, and entrepreneurial assistance. On May 15, technology leaders gathered at the Federal Reserve Bank to discuss the formation of a Chicago-based network that might better link and connect technology commercialization efforts to like-minded organizations in the metropolitan area. Places such as San Diego and Cambridge, England, are notable locations where such connecting organizations are reputed to have stimulated growth in technology startup companies. What can the Chicago area learn and adapt from such models?

The program began with the observations of a technology founder and business builder in both Seattle and in Chicago. Wilbur H. (Bill) Gantz, Chairman of the Board of Ovation Pharmaceuticals, Inc., in Deerfield, Illinois, emphasized how very difficult it is to successfully bring a new company to market. Raising funds is very difficult, but building a company with a profitable product is even tougher. As a result, life-sciences startups “can never get enough support.”

Life-science startups in the pharmaceuticals arena go through many distinct phases, each with unique support needs. University scientists may be needed early on. And in following stages, competent partners must be close at hand to assist with financing and protection of intellectual property. At later stages, product development, marketing, and manufacturing expertise may be crucial.

In Gantz’s Seattle startup, PathoGenesis Corporation, the University of Washington was a helpful partner in sharing university faculty in research and development. Local financing was also key to the startup there. However, the Seattle location presented challenges in local availability of pharmaceutical chemists. For that reason, such personnel were recruited from the Midwest and East Coast, and product marketing expertise needed to be outsourced to the Chicago area.

Gantz further emphasized that Chicago tends to be very strong in such basic business services as marketing, public relations, and intellectual property. Moreover, the metro area is rich in technical personnel that can be hired as necessary from the large life sciences companies Baxter and Abbott and local universities, or else recruited back to Chicago from former Searle employees who left the area when their facilities closed. Despite access to such personnel, recruitment of cutting-edge university scientists is more difficult; Chicago’s university scientists tend to be more adverse to risk and to commercial ventures than those in Seattle.

Nonetheless, Gantz sees the Chicago environment as strong and getting stronger. The real estate end has been expanding with the establishment of a research park at the Illinois Institute of Technology as well as one at the former Searle facility, along with expansion of the Chicago Technology Park. So too, Chicago’s early stage capital scene is now brighter as so-called angel investor networks are forming. Government support of an appropriate nature has also come around, as evidenced by the city’s competent hosting of the nation’s premier business conference in the life sciences, BIO2006.

The next conference speaker was Stuart Henderson, Partner and Biotechnology Practice Leader for Europe at Deloitte, UK, who offered his insight and experiences with Cambridge’s connecting organization, Cambridge Network. The initial conditions in the Cambridge area were not so different from Chicago, prodigious university research but comparatively less commercialization. Also similar to Chicago, there was no “burning platform” of general economic demise in the Cambridge area 20 years ago, but simply unfulfilled economic potential. Yet today, Henderson claims that there are 1,500 technology companies in a town of 200,000 people (though perhaps 6.5 million people reside in its labor market area), including global companies such as BP-Amoco, Schlumberger, 3M, Amgen, and Pfizer.

Henderson reported that a well-conceived organization called Cambridge Network was key to bringing about this success. The network was founded by a small group of highly passionate and committed leaders who put up only modest funding at the outset. He described it as “a simple meeting of minds.”

Henderson further described the Cambridge Network as serving as a window to the world into Cambridge technology capabilities and activity—a vehicle to showcase the Cambridge brand. Most importantly, the Network’s organization built a community of many other organizations who came to share information and to cooperate. The Network’s success depended on listening carefully to their members’ needs and responding quickly with appropriate services. These services included directories of who was who in technology, a continually-updated virtual (online) press room, training materials, benchmarking surveys of progress, open meetings, formation of special interest groups, and events to bring new and younger members into the mainstream.

Henderson cautioned on the pitfalls into which their organization sometimes stumbled along the way. His suggestions included being ruthless in keeping non-contributing government officials and other “hangers-on” away from discussions and events, along with entrepreneurs who had been “one-hit wonders” who monopolized discussions with poor advice for others. As always, the leadership of the network also needed to be constantly vigilant against turf-fighting behavior among membership organizations while promoting partnership and consensus instead.

San Diego’s over-arching organization, called CONNECT, is highly renowned as a prototype to facilitate interchange among technology interests leading to commercialization of technology. Unlike Cambridge’s motivation to build on untapped potential, the original impetus for San Diego’s actions was a rapidly-sagging economy in the mid-1980s that was impacted by the Savings & Loan crisis, military base closings, and reductions in national defense spending.

According to CONNECT’s CEO, Duane Roth, CONNECT’s purpose is to facilitate the spawning of commercial enterprises from the region’s R&D base. Over the past 20 years, the region has experienced 1,000 company startups, a rate of about one per week. The public and quasi-public research base is now comprised of over 40 institutes and centers including Scripps Research Institute, Salk Institute, and the University of California, San Diego. Both major institutes and many companies are located close to each other in the San Diego area which Roth considers an important precondition for the continuous inter-personal communication and collaboration that ultimately gives rise to innovation and new ventures.

Duane Roth characterized the collaborative culture that has been achieved in San Diego by describing how local entrepreneurs first market themselves to visitors. Unlike most other places in which a company director will begin touting their own enterprise to visitors, Roth claims that San Diego companies will instead begin touting the San Diego cluster and working environment.

As a former Iowan, Roth also made a clear cultural distinction between the Midwest and the West Coast. Midwesterners are, on average, less likely to take the risks that lead to new enterprises. The reason is that, in places such as San Diego, failure is not a cause for personal condemnation, and so, entrepreneurs are willing to just try again after failure. To a greater extent, at least in Roth’s experience in Midwest agriculture, the fear of failure and the resulting shunning by the community tends to create a culture where people are afraid to take risks in the first place. In order to build and nurture a risk-taking culture, the community must also support entrepreneurs of well-crafted failures in the aftermath.

Roth also mused that, because changing an existing culture is so very difficult, it may be easier in the Midwest to “start a new one.” By this he meant that entrepreneurship should especially be pitched to the young and, more generally, to as many willing listeners as possible in order to generate the critical mass of people that are necessary.

In addition to the celebratory and risk-taking culture in San Diego, some of the key processes that give rise to new companies and enterprises are rigorous and intense. Of these, a “springboard” program sets up panels of critics before which would-be entrepreneurs vet their business plans in two-hour sessions. Review panels are comprised of volunteer “entrepreneurs in residence” along with financial company reps, professors, angel investors, and business professionals. To prepare for such rigorous reviews, CONNECT offers many short and intense educational programs on starting and building a successful technology enterprise.

Despite its success, San Diego’s technology industry currently faces challenges if it is to sustain its growth. In particular, work force availability is tight and high housing costs limit the recruitment of new personnel to the area. Industrial land for later stage operations, including manufacturing, is also very tight and restrictive.

Partly for these reasons, Roth foresees a deconcentration of technology activity to other regions of the U.S. Perhaps places such as Chicago, Indianapolis, and St. Louis, can most easily enter the small company technology arena by specializing in those business stages such as marketing, scale-up development, clinical testing, or manufacturing where they currently have an advantage, and then possibly expand from there to other (more innovative) niches.

In any event, the successful experiences of San Diego and Cambridge have given interested Chicagoans much to consider as they build a CONNECT-type organization. Existing features that have been successful elsewhere, and those that have flopped, offer many practical clues. However, adaptations will be necessary because some features are different in the Midwest, such as a more spread-out geography of existing technology activity. Still, the basic and most important precondition of a large R&D base would appear to be here already, in addition to the region’s added strengths in business services, transportation, and manufacturing.

Can these strengths be successfully connected and appropriately commercialized?

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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