High-tech competition inspires states, universities to innovate

David Fettig | Managing Editor

Published October 1, 1991  | October 1991 issue

During a recent visit to California, Dale Stein, the retired president of Michigan Technological University (MTU) in Houghton, stopped into an office building next to Stanford University to meet with an acquaintance who worked with a venture capitalist group.

Upon entering the building, Stein was asked if he needed directions to a particular office. He said he was looking for the venture capital firm in the building.

"Which one," came the reply. "there are 96."

Creating a financial marketplace in the U.P.

Stein, who retired this August after 12 years as president of MTU and another eight years as a professor, tells that story with a deep sense of irony. Twelve years ago he was a member of a high-tech task force for the state of Michigan and, as a part of its effort, the task force prepared a list of Michigan venture capitalists. There was one name on the list.

Today, Stein doubts the list has grown very much. "You can have great science and engineering, but if you don't have someone who understands venture capital, you're dead."

And if you're a highly regarded technological university situated in the Upper Peninsula of Michigan, somewhat isolated from risk-takers who would be willing to apply your research to industry, you may have to take matters into your own hands. And that's what MTU did.

About nine years ago the university and the state of Michigan split the $604,000 start-up costs of a new venture capital firm. Stein believes it is the first—and only—time a university has entered the markets as an investor in private business.

MTU, which is ranked by U.S. News and World Report and Money magazine as one of America's best collegiate buys, is ultimately committed to exploiting its research for practical application, Stein says. The university's work in minerals, metals and forestry has played a positive role in the economic development of the Houghton area, he says. For example, Peninsula Copper Industries (PCI) was formed by an MTU grad in 1983 following joint research with two MTU scientists. PCI is now one of Houghton's major employers with 50 workers, and the company—which extracts copper oxide from copper scrap for use in lumber preservation—may ultimately reopen a nearby copper mine and create 100 additional jobs.

But in a world without venture capitalism, such successes are the exception, not the rule, Stein says, and that's why the university became involved in private-sector financing. And even though the university's venture group has accounted for about 500 new jobs in the Upper Peninsula—from either new or transferred companies—and at one point managed revenues of about $50 million a year, the group may be disintegrating due to lack of public acceptance.

Stein estimates that about 90 percent of the public thinks that the university should not be involved in venture capitalism. He said much of the public's attention has been focused on the amount of compensation for the venture group's managers; also, many people believe that the university should have received more funds in return for the school's investment. Stein, on the other hand, says the money was best used to create more jobs.

"It was a very controversial program," Stein says. "Nobody else in the country had done something like that." The former MTU president, who remains committed to the university's efforts, says he plans to spend much of the coming year investigating and writing about the school's foray into venture capitalism.

"You've got to be able to do something with your ideas," Stein says of applied research, "and you've got to do them quickly. And that's the problem. If you get to the marketplace in second place, you may as well not have even started."

Amenities/programs lure high-tech firms to Montana

A 1990 study of the location of high-tech entrepreneurs in the
non-metro Western United States, says that the greatest concentrations of such firms includes the western slope of the Rocky Mountains, "in or near the university towns and recreation-oriented areas of Idaho and western Montana."

With their mountains and the attendant recreational and environmental amenities, Montana officials know they have a strong magnet to lure entrepreneurs from the large cities of the West Coast. But they have recently made that magnet stronger by advancing state programs with the purpose of aiding high-tech start-up companies. Six years ago the state Legislature created the Science and Technology Alliance and funded it with $7.5 million from the state's coal tax fund.

The Alliance has two missions, according to Senior Investments Manager David Desch, to finance new companies "who aren't bankable because of risk," and to support research and development.

Montana's justification to enter the marketplace echoes Dale Stein's sentiments at Michigan Technological University—the lack of private-source funding. With no venture capitalists in Montana and, Desch says, none in the Dakotas, northern Idaho or Wyoming, the state is starved for start-up funds. Banks and other traditional lenders can't be counted on for venture funding, Desch says, because high-tech companies are generally too risky and their payoffs are generally five to 10 years down the road.

The Alliance's State Capital Fund operates like a venture capital fund—with investment decisions made by a nine-member board appointed by the governor—except that the Alliance may not hold stock in a company. The Alliance's loans, however, which are made at a set 10.5 percent rate, may be converted to stock by private investors who buy the loans from the state. Aside from job creation and the accrual of taxes from new companies, that's where the state makes its return on the Alliance's investments—from selling the loans of successful companies.

The research and development arm of the Alliance has mainly consisted in establishing Centers of Excellence at state colleges and encouraging private investment in research.

Desch says the state's efforts in trying to create and encourage a high-tech environment are not only warranted by the lack of available financing, but by the presence of competing programs in other states. "A lot of states are doing similar things; you'd be hard-pressed to find someone who isn't."

Larry Swanson, director of economic analysis for the Bureau of Business and Economic Research, University of Montana, Missoula, says that even though high-tech industry provides just a fraction of total state jobs, continuing growth of the industry will be important to Montana's attempts to diversify its economy. In a 1990 study, Swanson reported that there were 204 high-tech firms in the state in 1989, up from 110 in 1979. Those 204 firms employed 1,097 with an annual payroll of $27 million, about 1.6 percent of all wage and salary payments in 1989.

Swanson says that although Montana's high-tech industry is just a small part of the state's economy, he thinks that the emerging high-tech environment will ultimately complement the state's existing resource-based industries.

Swanson is hopeful about Montana's high-tech future. In his study, he noted a survey that indicated location factors for high-tech entrepreneurs: "Unlike more traditional industries, proximity to input sources and product markets are of less importance to many high-tech businesses than such factors as local amenities, the quality of telecommunications and transport services, availability of quality commercial sites and proximity to quality universities and colleges.

"Continued growth in these industries in Montana will depend upon the state's ability to compete in these areas."

UND says "no" to state funds

While most states have established alliances between government and universities to further technological research, the University of North Dakota (UND) in Grand Forks has distinguished itself as somewhat of a maverick—it receives no state funds.

One of the first things Gerald Groenewold, director of UND's Energy and Environmental Research Center (EERC), was told when he took his post four years ago was that he had to make a pitch for state money in order to increase EERC's research funds. Groenewold declined for philosophical reasons and for practical reasons—he didn't want to be tied to a source of funding that was so dependent on political whim and economic fluctuations.

Since that time, the EERC's research funds have grown from $8 million a year to the current level of $24 million, and they are expected to reach $40 million in two to three years. In addition to the EERC, UND also conducts research in rural medicine, aeronautics and rural manufacturing; together, those fields make up about $18 million of the school's research budget. Two-thirds of the university's total current research budget of about $40 million comes from contracts with private industry, the rest from federal grants.

With its focus on the environment and energy-related matters, Groenewold says the secret to its recent success is that the EERC "happens to be doing things that everybody in the world needs."

And they do it in a practical way, he says, with a strict focus on applied research. "We are dedicated to answering complicated questions in a quick time," Groenewold says. And that attitude has made the EERC popular with industry, he says. Some schools conduct research as an ancillary to academics, according to the EERC director, but not UND, which conducts its research with the competitiveness of a private company. One company recently cancelled a contract with an Eastern school and brought it to UND, he says, because the company didn't believe the Eastern school was committed to the research.

Bruce Gjovig, director of the Center for Innovation and Business Development (CIDB) in Grand Forks, says the type of research conducted at UND is the type that will ultimately provide economic benefits that go beyond the research staff payroll. He says that since most of the school's research is driven by the economic activity of private firms, the results of that research may directly create markets for new products. The CIDB is not directly affiliated with the university; rather, Gjovig's office works to aid start-up companies and to transfer technology from research labs to businesses.

Gjovig believes the university's commitment to applied research will have beneficial effects for the state's economy. He says some companies have already formed along the Red River Valley because of university research, and he expects more in the future. Technological research often doesn't yield a product, or the potential for a product, for as long as five to 15 years, he says.

Other than increasing its levels of research funding, UND has plans to create a technology park where start-up businesses can apply university research in the production of new products. And Groenewold believes that UND's research, which is geared toward product application, provides fertile ground for business.

"When we do our job well," Groenewold says, "we provide an answer, we get a patent and we create some new jobs."