Prior to the 1990s, the development of entrepreneurial companies increased rapidly in principally two areas: Boston/Route 128 and Palo Alto/Silicon Valley. By the 1990s, however, the development of centers of entrepreneurial ferment in other states began to accelerate.
Since 1994, Tullis-Dickerson has been investing in entrepreneurial companies in such areas and, accordingly, has had an opportunity to observe that the development of a favorable entrepreneurial environment is an iterative process requiring an increase in the quantity and quality of each of three critical elements: research and development, capital and entrepreneurs. Further, each of these elements typically grows in relation to the others in a sort of “virtuous cycle.”
To visualize the operation of the cycle, begin with the box labeled R&D: The local university technology transfer office creates a startup from a professor’s technology and encourages initial investment from angels, friends or family. This provides the impetus for an entrepreneur (or the professor) to actually take the helm of the startup. Success of this entity encourages other professors to seek out the tech transfer office, which causes more capital to become available, thereby encouraging more entrepreneurs to seek opportunities and so forth. The development of the virtuous cycle requires the involvement of people at all levels in the locale, including the political infrastructure, the business and the academic communities.
The cycle is supported by two additional catalysts that supplement the three prime elements. One is an institution or group of individuals to bridge the “capital gap,” i.e., the gap in funding between the inception of a company and the significantly later stage in its development when it can command professional venture capital. The other catalyst is enthusiastic community support of the growth of the entrepreneurial environment. While the interaction of the first three elements is evident, these last two deserve a few additional comments.
The Capital Gap
For a locale to achieve its goal of successfully creating an entrepreneurial environment, it must get a least a few companies to bridge the capital gap. Yet getting a company to the point where a VC will show interest is a complex task. All the elements that professional venture funds require must be in place: competent management, a credible business model, a persuasive business plan, a board of directors, etc. While there are VC firms that will help put these pieces into place, they are few and far between.
The complexity of dealing with this issue has resulted in a wide variety of solutions, dependent on a locale’s specific history, culture and institutions. In some locales the university technology transfer office addresses the issue. In others, private interests do. In yet others, municipal or state institutions carry the burden. But without mechanisms for bridging the capital gap, developing an entrepreneurial environment is very difficult.
The other critical catalyst is a visible sense that the community as a whole deems the development of the entrepreneurial environment critical to its very future. There are two aspects to this.
The first is the need for the community to create a wide variety of organizations and activities that together constitute a supportive entrepreneurial infrastructure. This includes such disparate elements as workshops, seminars and conferences on entrepreneurial topics; appropriate courses at the local business school; angel groups; a venture capital forum or association; and entrepreneur support groups such as YPO, CEO or Tech. In addition, some states have established government initiatives, such as tax breaks, startup funding programs, incubators and research parks and direct investment in venture capital funds willing to invest in the state.
The second aspect is the need for the pervasive communication of the activities outlined above, in the form of a continuing drumbeat of announcements, press releases and favorable media coverage. Repeated clear expression of commitment from all sectors of the community is not only a prerequisite to the successful development of the entrepreneurial environment, but its strong presence will offset significant shortcomings in the three elements that comprise the virtuous cycle.
In summary, the development of the entrepreneurial environment requires the simultaneous development of a number of related elements, which work together as a “virtuous cycle.” Beyond research, capital and entrepreneurs, two further elements are needed to complete the picture: an approach to bridging the capital gap and visible commitment on the part of the entire community that the encouragement of entrepreneurial activity is critical to its future.
Tom Dickerson is Chairman of Tullis-Dickerson & Co. Inc. The venture capital firm is based in Greenwich, Conn., with offices in Alabama, Michigan and New Mexico.