National Innovation Seed Fund

A collective response to financing innovation-based businesses

The United States is currently losing is its innovation leadership and national competitive advantage by not supporting high-growth entrepreneurial companies. According to the U.S. Small Business Administration, innovative small businesses have generated between 60 to 80 percent of net new jobs annually over the last decade. These young companies employ 30 percent of high-tech workers such as scientists, engineers, and information technology workers.

Furthermore, small-and medium-sized enterprises produce between 14 times more patents per employee than large patenting companies. In short, small companies are a key source of innovation for themselves and for large companies in terms of fueling mergers, acquisitions, and licensing activities. See the diagram in Figure 7 for a quick understanding of the financing lifecycle that creates this innovation.

The current seed-stage and early-stage funding gap, which has always existed for early innovation and entrepreneurs, has widened recently because of the current national economic crisis. Banks and hedge funds are failing, and loans and lines of credit for working capital are at extremely low levels and unavailable for some. Venture capital has moved “upstream” to where the average investment by firms last year was $8.3 million per investment. Only about 4 percent of the capital went to early-stage companies, with all other investment activity occurring in later stage deals. Private and angel investors who once attempted to fill most of this gap reduced their investments by more than 26 percent in 2008, and the availability of investment capital among this category has decreased dramatically by 40 percent.

Over the past decade, state governments have led the charge in their own jurisdictions to address this early-stage financing gap or what has come to be known as “The Valley of Death” in the world of entrepreneurship. But now state budgets are also in crisis mode and have less money to invest in technology-based economic development initiatives. Recently Ohio, Kansas, Connecticut, and Pennsylvania, just to name a few, have all either reduced economic development spending or suggested wide consolidations to control it.

In April 2009, the National Association of Seed and Ventures Fund, at the request of the Small Business Administration, surveyed seed- and early-stage venture funds as well as entrepreneurial support professionals to find out the state of seed- and early-stage funding for innovative-based entrepreneurial companies. The survey found that 70 percent of seed/early stage venture investment funds are having a difficult time raising capital from private investors, pension funds, local, county and state authorities. The most startling finding was that nearly 90 percent of the already-funded companies surveyed are currently unable to attract follow-on capital, and that 70 percent of these companies need less than a million dollars to continue their business and product development (see Table 2).[16]