Creating a National Innovation Seed Fund
We believe the federal government can play a role in funding these entrepreneurial companies, thereby stimulating innovative job and small business growth. Neither traditional financial institutions nor venture capitalists are providing the gap funding of $500,000 to $2 million that seed-stage and early-stage companies need to grow. Our solution is to create a National Innovation Seed Fund sparked by a U.S. federal government investment. This fund would make venture investments in that key financing range to structurally address the “Valley of Death” funding needs of small companies, and would be invested equitably and equally throughout the innovative regions of the United States.
This new fund would be structured as a public-private partnership and would enlist experienced early-stage investors to manage the fund. The National Seed Stage Fund managers would work with the NPPPIP to engage the rest of the innovation ecosystem in the United States to ensure strategic oversight and success. The NPPPIP would determine the most experienced early-stage funds that would then invest in innovative companies in their regions. It would collaborate with state technology-based economic development organizations, national seed, angel, and other innovation-based associations and networks to leverage resources and create a connected national community of innovation.
Examples of organizations are the Ben Franklin Technology Partnership in Pennsylvania and the National Association of Seed and Venture Funds. The consortium of partnership organizations would guarantee the effectiveness of the National Innovation Seed Fund by creating quality investment opportunities with the investments and participation of the Federal Innovation Partnership program and the National Innovation Advisor. The overall purpose of the fund is to stimulate rapid knowledge-economy job creation as demonstrated can be done from the data from the Small Business Administration.
Federal money for the new seed fund would be appropriated through an agency such as the Small Business Administration or U.S. Department of Commerce’s Economic Development Administration or National Institute of Standards and Technology, and would be managed through the National Public-Private Partnership Innovation Program. The federal agency would manage the contractual relationship with the NPPPIP and maintain administration, audit, and financial reporting functions.
The investments would at some point generate a financial return on investment for the federal government, though for budget purposes those returns would have to be anticipated over the course of 10 years—like any venture capital firm would do—which means funds must be allocated until investment maturity can be realized five or more years into the future. More immediately, however, the $2 billion would be invested in new companies creating new high-skilled, high-paying jobs, thereby adding to immediate post-recession economic stimulation.
These types of seed fund investments would be made right before most venture capital firms would look at investing, which is risky but also rewarding. Many venture-backed companies are or quickly become the most innovative and prosperous companies in the world. A Global Insight report in 2007 found that venture capital-backed companies were directly responsible for just over 10 million jobs and $2.1 trillion in sales in 2005, which represents 9 percent of total private sector employment and 7 percent in total sales. Furthermore, venture capital-backed companies created jobs three times faster and pay significantly more than the average private-sector jobs.
We have studied other sources to gauge the impact of a National Innovation Seed Fund and found that for each $1 billion invested in innovative small businesses a minimum of 100,000 high-skilled, high-wage jobs would be created. The Commonwealth of Pennsylvania’s Department of Community and Economic Development, the longest existing organization investing early-stage capital, in 2008 created or retained 8,150 jobs based on a total of $90.7 million in investments or $11,130 per job. If you applied Pennsylvania’s $11,130 in seed dollars invested per job to the $2 billion of potential funding for the national innovation seed fund, 180,000 new jobs would be approximately created with the opportunity to retain many of the high-skill and high-paying jobs into the future. This same result was confirmed in a study completed by the Community Development Venture Capital Alliance of more than 50 providers of community development venture funds that make equity capital and grant investments to build entrepreneurial capacity and community wealth.