SSTI Digest

In last week’s Digest article – Alternatives to VC: Reconsidering the Startup Financing Paradigm – SSTI examined the conventional venture capital (VC) model as well as its advantages and limitations. In this installment, we will highlight alternatives such as revenue-based financing, venture debt, crowdfunding and a new financing model for cleantech proposed by Massachusetts Institute of Technology (MIT) researchers. We also take a look at the potential that these alternatives have for the field of tech-based economic development. Revenue-Based Financing Revenue-based financing or royalty-based financing (RBF) is a flexible type of financing structure where a company sells a set percent of its future revenues to the investor in exchange for a capital investment. At its root, RBF is a blend of debt and equity focused on companies with no to limited assets. Unlike the typical fixed bank loan, the monthly repayment amounts are based upon a percentage of revenues. This allows the company to shift the repayment of the loan from a fixed monthly expense to a variable expense. The RBF model is especially effective for companies…

The U.S. ranks second on a global manufacturing competitiveness index, according to the 2016 Global Manufacturing Competitiveness Index by research firm Deloitte Global and the Council on Competitiveness. The U.S. ranking has improved in each of the past studies and is poised to take over that top spot from China by 2020, the study maintains.  However, executives from across the world in responding to the study, noted that talent is the leading factor in determining manufacturing competitiveness, and finding and cultivating that talent is a topic that has received increasing attention from the manufacturing sector. While such rankings provide an interesting focal point, their real value lies in the discussion and attention focused on the subject matter. SSTI recently interviewed several leading thinkers on the subject, finding common calls for changing the approach to the talent pipeline in manufacturing, as well as a cautionary note on rankings. Sridhar Kota, director of MForesight: Alliance for Manufacturing Foresight, cautions that policy and issues surrounding competitiveness are somewhat different from those affecting innovation, and it is innovation that leads…

As new and supplemental state budgets are being proposed, SSTI is monitoring the proposals and will report on developments impacting prosperity through science, technology, innovation and entrepreneurship. The first budgets released – from Colorado, Mississippi, Oregon and Wyoming – represent a mixed bag with new initiatives proposed in three states and program elimination in the fourth.   Colorado Colorado Gov. John Hickenlooper’s proposed budget includes an overall 3.3 percent increase in spending but requires legislative changes to Taxpayer's Bill of Rights (TABOR) rebates and reductions relative to inflation on K-12 education spending, in addition to other measures, to close a potential $500 million gap. Approximately $160 million in new funding is proposed for an Aerospace Engineering Science Building at University of Colorado-Boulder and an Institute for Biological and Translational Therapies at Colorado State University. An economic development policy proposed in the budget would require regions to incorporate succession plans into their state-supported strategic plans - a best practice known to be…

This week, America remembers the 75th anniversary of the attack on Pearl Harbor and its entrance into World War II. Veterans of World War II have had a considerable impact on the current economy: The Bureau of Labor Statistics finds that World War II veterans had the highest rates of self-employment of any period of service. The topic of veteran entrepreneurship, however, has received relatively little scholarly attention compared to other aspects of the military experience, according to a recently released report by the Institute for Veterans and Military Families (IVMF) at Syracuse University. This research, which examines qualitative and quantitative research on the topic, coupled with new datasets emphasizing the demographics of self-employment, sheds light on the current state of veteran entrepreneurship. With the September 2016 release of the Census Bureau’s new Annual Survey of Entrepreneurs, researchers have more data than ever on veteran entrepreneurship. An SSTI analysis of the data finds that veterans were most likely to own firms in the finance and insurance (11.0 percent of identifiable firms), mining, quarrying, and oil and gas extraction (10.3…

As a way to support populations that are underrepresented in entrepreneurial activities, the Kauffman Foundation has announced $4.3 million in grants to 12 organizations that provide entrepreneurial support services to women and minorities. The awardees were selected from more than 376 applicants and range in both geography and industry-focus. They will receive awards ranging from $87,000 to $420,000 over the next two years. The Kauffman Foundation Inclusion Challenge grantees are: Association for Women in Science, Washington, D.C.; BioSTL, St. Louis; Chicago Urban League Entrepreneurship Center, Chicago; Commons on Champa, Denver; The Company Lab, Chattanooga; Entrepreneurship + Innovation at Arizona State University, Tempe, AZ; EforAll, Massachusetts; Kapor Center for Social Impact, Oakland, CA; LAUNCH, Chattanooga; Meda, Minneapolis; The New School, New York; and, Propeller, New Orleans.

NC Gov. Pat McCrory conceded the election to Democrat Roy Cooper on Monday after a recount he requested in Durham County was showing no change in the election results.  Acknowledging that it was a divisive election, Gov.-elect Cooper said, “I know still that there is more that unites us than divides us.”  Cooper will face a Republican super majority in both chambers of the state legislature. The results of Maine’s Question 2, a tax on income above $200,000 to fund education initiatives, will also stand.  Opponents withdrew their request for a recount of election results, which showed approval of the measure by a less than 1 percent margin. Revenue from the surtax will be used to fund public education.

While the majority of founders say the tech industry is in a bubble (57 percent of respondents),  nine out of 10 founders believe that it’s a good time to be starting a company and are highly optimistic about their own firms’ futures, according to State of Startups for 2016 from First Round Capital – a seed-stage venture firm. This optimism has over 60 percent of startups focused on optimizing for growth with their eyes towards an exit – 72 percent of respondents predicted increased merger and acquisition (M&A) activity in 2017 – instead of optimizing for profitability (only 39 percent of founders). Nearly 25 percent of all respondents reported wanting to be acquired by one of four companies: Alphabet (11 percent); Facebook (5 percent); Amazon (4 percent); and, Salesforce (4 percent). In addition to their optimism about M&A, approximately one in five founders remain confident about their own company’s future  saying they’re certain they’ll build a billion-dollar company.  Based upon a survey of over 700 startup founders, the study highlights several interesting trends including: Nearly 68 percent…

University research and development expenditures reached $68.8 billion in FY 2015, an increase of 2.2 percent from FY 2014, according to recently released data from the Higher Education Research and Development (HERD) Survey by the National Center for Science and Engineering Statistics within the National Science Foundation.  While the bulk of the funding (55.2 percent of total R&D expenditures) comes from federal expenditures, in current dollars, federally funded R&D at universities dropped 0.2 percent from $37.96 billion to $37.88 billion in FY 2015.  Meanwhile, nonfederal R&D expenditures accounted for 44.8 percent of the total in FY 2015 compared to 43.5 percent in FY 2014 growing from $29.24 billion in FY 2014 to $30.79 billion in FY 2015. The greatest increase came from the business community (which increased their funding by 7.5 percent to top $4 billion for the first time), followed by nonprofit organizations and institution funds. Universities’ own funding of R&D comprises the largest source of non-federal R&D funding, or $16.7 billion in FY 2015. Medical sciences ($21.3 billion), biological sciences ($11.7 billion) and…

The country’s competitive position in the global economy hinges on developing broad-based understanding and support for federal policies that will spur innovation and growth.  The policy discussions surrounding the high-tech economy should encompass all congressional districts, not just the iconic places like Silicon Valley, according to a report released this week by the Information Technology and Innovation Foundation (ITIF). Every congressional district has some kind of technology and innovation capacity – either from long-established industries, like agriculture or manufacturing, or because developments like access to broadband have allowed innovators to create new, IT-enabled enterprises in any place they choose.  Therefore, each district has a stake in ensuring the high-tech economy’s future, the authors contend. The report details the breadth of the high-tech economy “so members of Congress and other policymakers can find common cause in advancing an agenda that builds up the shared foundations of national strength in a globally integrated marketplace.” Those shared foundations include a highly educated and skilled workforce…

Mosquito-resistant uniforms for U.S. military personnel and a bio-refinery that turned a city landfill into an “energy park” are two new developments resulting from investments in scientific research by the U.S. Department of Agriculture.  The USDA Annual Report on Technology Transfer for FY 2015 includes new agriculture-related discoveries, inventions and processes made by USDA researchers, universities and small businesses with the potential for commercial application. Their work encompasses 222 new inventions, 94 patents awarded and 125 new patent applications filed in 2015. One of the successful outcomes of the research resulted in the Federal Laboratory Consortium’s (FLC) 2015 Award for Excellence in Technology Transfer for its role in developing a system to control invasive brown tree snakes. Patents are being pursued for the system, which resulted from a cooperative agreement with a private engineering and design firm in Boulder, CO. The technology is adaptable and could have benefits for other invasive species management efforts.

Venture capital (VC) financing is a highly competitive process that backs only 1 percent to 2 percent of all startups that apply for funding, leaving many searching for financing alternatives.  In this two-part feature, SSTI examines the typical VC model, its advantages and limitations, and next week will highlight alternatives such as revenue-based financing, venture debt, crowdfunding and a new financing model for cleantech proposed by Massachusetts Institute of Technology researchers. Conventional VC Model Due to the highly competitive process, VC firms can be very selective in their process with many only investing in startups with the potential to become unicorns (high-growth startups with valuations of $1 billion or more) that also will offer a quick (less than five years) return on investment (ROI) through an acquisition or an initial public offering (IPO).  The conventional VC model is structured in a way that reflects those demands.  Many VC funds are commonly structured as a 10-year partnership where outside investors (or limited partners) provide capital to a group of fund managers (general partners) to make investments in high-…

The U.S. Department of Energy (DOE) recently announced the Zero Energy Districts Accelerator, an initiative to develop best practices for establishing commercial districts that have net-neutral energy consumption. The accelerator is now one of 12 listed under the Better Buildings Initiative, which also includes dedicated programming for community and manufacturing initiatives. DOE’s most recent annual report finds that collectively, Better Buildings programs saved 160 trillion Btus of energy and 2.3 billion gallons of water while collecting more than 400 resources on implementation processes and technologies through 2015. Better Buildings began in 2011 as a challenge for 60 partners to improve efficiency in building space by 20 percent. As the challenge has doubled the initial commitment to 4.2 billion square feet, Better Buildings has become a brand for a suite of DOE initiatives. Better Buildings Alliance develops technical and market efficiency solutions; Better Buildings, Better Plants is similar to the challenge, but for manufacturers; and, Better Buildings Accelerators targets specific building types or information needs. These initiatives create…