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January 2012

Venture Capital in Pennsylvania

According to the National Venture Capital Association, Pennsylvania was ranked 7th for overall venture capital investment in 2010 with $559 million in VC investment (California ranked 1st with $11,603 million, Massachusetts 2nd with $2,472 million and New York 3rd with $1,401 million. Our neighbor New Jersey ranked 10th.)

Here are a few statistics provided in the presentation I link to above:
•    “From 1970 – 2010 venture capitalists invested $13.3 billion in 1,130 companies in PA.”
•    “Public companies headquartered in PA that were once venture-backed account for 783,527 U.S. jobs and $238 billion in U.S. revenue.”
•    “One U.S. job was created for every $16,930 of venture capital dollars invested in the state of Pennsylvania.”
•    39% of the VC funding in PA goes to the biotech industry and 16% to medical devices.
•    “80% of VC investment in PA comes from out-of-state.”

Such strong results are in no small part due to Pittsburgh’s renaissance as a hotbed for innovation, combining the expertise of national research universities such as Carnegie-Mellon and the University of Pittsburgh with the presence of leading hospitals such as the University of Pittsburgh Medical Center. Pittsburgh often appears in “most livable cities” rankings and was selected as No 1 in the US in the 2011 ranking by the Economist Intelligence Unit. It also has a thriving cultural district covering 14 blocks around Penn Ave downtown.

This January 2009 article in the New York Times provides a few reasons for Pittsburgh’s renewal story: “A development plan begun in the 1980s successfully used the local universities to pour state funds into technology research. Entrepreneurship bloomed in computer software and biotechnology. Two of the biggest sectors are education and health care, among the most resistant to downturns.” The city benefited from the lack of a real estate boom and the conservatism of its main financial services firm, PNC.

A September 2009 story in The Atlantic continues in the same vein, highlighting the local businesses that have been started as a response to the demise of the steel industry and giving a special mention to the Pittsburgh Technology Center, an office park housing high-tech R&D companies.

Ben Franklin Technology Partners – ranked among the Top 10 Venture Capital Firms in the nation by Entrepreneur magazine – has played a critical role in Pennsylvania’s renewal by providing both early-stage and established companies with funding since 1983. BFTP has four regional headquarters in PA and 10 satellite offices.

Its northeastern office oversees the Bethlehem area, among others, and has, since 1983 (according to their website):
•    Started 420 new companies
•    Developed 1,017 new products and processes
•    Created 14,922 new jobs
•    Retained 21,358 existing jobs

Because of Pittsburgh’s role in pushing PA numbers up, creating about 15,000 new jobs since 1983 (for public or private companies) doesn’t seem like much compared to the 750,000 created in PA as a whole (for public companies) since 1970, but the Lehigh Valley count about 820,000 residents in the 2010 US census compared to 2.3 million residents in the Pittsburgh area and 12.7 million in Pennsylvania, the 15,000 jobs are a quite respectable outcome in the area (representing 1.8% of the 2010 Lehigh Valley population as opposed to 5.9% in the state, although the lack of data for 1970-1983 makes a precise comparison difficult).

Because the eastern side of Pennsylvania is within commuting distance to New York City, it will be interesting to see how the tech campus recently approved by Mayor Bloomberg for New York City (representing a consortium between Cornell and Technion) will affect the venture capital equilibrium in Pennsylvania, and whether it will hurt the efforts of Ben Franklin Technology Partners to turn the tech park around Lehigh University into a far-ranging innovation hub. But since it will be many years before the new campus in New York is completed, there remains a significant opportunity for Pennsylvania to solidify its position as a regional leader in science and engineering.


The Lemelson-MIT Program

To continue this blog series on innovation, today’s post focuses on the Lemelson program at MIT. It is best known for administering prizes that honor innovators:

  • The Lemelson-MIT Prize, where a mid-career innovator is awarded $500,000, in recognition for “improving our world through technological invention and innovation”. Such an innovator must have “developed a patented product or process of significant value to society, which has been adopted for practical use, or has a high probability of being adopted”.
  • The 2011 winner is Dr John Rogers, a professor of materials science and engineering at the University of Illinois at Urbana-Champaign who “attributes his entrepreneurial success to appreciation for both science and the creative arts” (his parents are a physicist and a poet). He has over 80 patents to his name and is involved in 4 start-ups. Current interests include biointegrated electronics, with applications in cardiology and neurology, and high-performance semiconductors of relevance for sustainable energy.

    He is also very active in mentoring and “manages student-driven programs that span every aspect of science, technology, engineering and math education, from summer day camps to research experiences for undergraduates.” His honors include “the MacArthur Fellowship, election to the National Academy of Engineering, and selection as one of the Top 100 Young Innovators for the 21st Century by MIT’s Technology Review.”

  • The Lemelson-MIT Student Prize, where a MIT senior or graduate student "who has created or improved a product or process, applied a technology in a new way, redesigned a system, or in other ways displayed a portfolio of inventiveness" receives $30,000 in addition to significant exposure in the national media, which allows him/her to connect with other inventors. The Lemelson foundation also gives prizes to student innovators at the Rensselaer Polytechnic Institute (RPI), Caltech and the University of Illinois at Urbana-Champaign.
  • The 2011 MIT winner is Alice Chen, a biomedical engineer and graduate student in the Harvard-MIT Division of Health Sciences & Technology (HST), "for her innovative applications of microtechnology to study human health and disease", including "a humanized mouse with a tissue-engineered human liver, [which] is intended to bridge a gap in the drug development pipeline between laboratory animal studies and clinical trials". She has also co-founded a biotech company called Sienna Labs (pioneering a new generation of medical pigments) with fellow MIT graduate Todd Harris.

    The other 2011 student winners are:

    at Caltech, Guoan Zheng for "an on-chip, inexpensive microscopy imaging technology", the applications of which include "many potential applications, including improved diagnostics for malaria and other blood-borne diseases in the developing world and rapid screening of new drugs",

    at RPI, Benjamin Clough, for "a new technique that employs sound waves to boost the distance from which researchers can use terahertz spectroscopy to remotely detect hidden explosives, chemicals, and other dangerous materials",

    at UIUC, Scott Daigle for "a system that utilizes automatic gear shifting to reduce the efforts exerted by wheelchair operators" (more information on the company he founded, IntelliWheels, Inc). It is worth pointing out that UIUC has wheelchair athletics teams in men's basketball, women's basketball and track, showing a positive example to youngsters with motor disabilities. 

  • The Lemelson-MIT Award for Sustainability/Global Innovation, which awards $100,000 to "individuals whose technological innovations improve the lives of impoverished people in the developing world."

    The 2011 winner is Elizabeth Hausler, who won for her work in developing "sustainable, safe housing solutions in [disaster-prone areas of] developing countries." She is the recipient of a Fulbright scholarship to India as well as "a 2009 Ashoka-Lemelson Fellow and a 2008 Tech Awards Laureate."

  • The Lemelson-MIT InvenTeams, which "are teams of high school students, teachers, and mentors that receive grants up to $10,000 each to invent technological solutions to real-world problems." This initiative is designed to "excite high school students about invention, empower students to problem solve and encourage an inventive culture in schools and communities". Current InvenTeams are working on an ergonomic bariatric rescue system, a desalination drip irrigation system, an off-shore rip current alert system and a portable medical support system, among other projects.

The Lemelson-MIT program is named after inventor Jerome Lemelson (1923-1997), funded by the Lemelson Foundation and administered by MIT's School of Engineering. The Lemelson Foundation, which was created in 1993, funds many innovation-related programs and centers throughout the world. To date it has spent $110 million in support of its mission. The application deadline for the 2012 awards has passed. Check out the program webpage in the spring to learn about the winners.


Manufacturing and Innovation, Part 2

As I mentioned in my previous post, the January/February issue of Technology Review has a fascinating profile of Prof Suzanne Berger (it appears in the MIT section of the magazine and I am not sure if non-alumni can read it in the print version of the magazine, but it is available in its entirety online.) It has the intriguing headline: “In more than four decades at MIT, political scientist Suzanne Berger has shifted from studying French peasants to spearheading research on how to revive US industry.”

Here is a summary of the article (please do read the whole piece on Technology Review's website):

  • “In Berger’s view, although laboratory research continues to thrive in the United States, too often it remains untapped commercially.” She also “disagrees strongly with those who insist that US manufacturing is in a state of irreversible decline.”
  • Berger is “co-chair of a new MIT initiative on manufacturing, Production in the Innovation Economy (PIE)”, which investigates questions such as: “What is the best ways to move innovations from the lab to the shop floor? And how can manufacturing firms grow from tiny startups to large-scale enterprises?”
  • I also enjoyed reading the story of how Berger came to study peasants in France’s Brittany for her doctoral thesis. She joined MIT in 1968 and was asked to serve on the Commission on Industrial Productivity in 1986, which interviewed companies, analyzed data and made recommendations. This led to the book Made in America, co-authored by the commission chairmen.
  • The article discusses the phenomenon of creative destruction/recomposition.
  • Berger is the lead author of the 2006 book How we compete, which analyzes when companies outsource business tasks and factories and argues that “profits come from being able to do something that another company cannot easily replicate” instead of simply lowering labor costs.
  • An important point Berger makes is that there is a strong connection between manufacturing and services, because companies that sell equipment also service it. It is therefore important to look at the bundle of products rather than assuming the US will become dominated by service-industry jobs.
  • Berger is also opposed to the view that “the IT industry is the basic paradigm for innovation-based manufacturing in America.”
  • The article ends with a short example of innovative manufacturing in the US.

Manufacturing and innovation, Part 1

Two of the very best articles I have read in a really long time are in the January/February issue of Technology Review. The first one is: “Can we manufacture tomorrow’s breakthroughs?” The second one, a profile of Prof Suzanne Berger entitled “Standing up for manufacturing” (part of the MIT-specific section of the magazine), will be the focus of the post I will publish on Thursday.

The article, whose title becomes “Can we build tomorrow’s breakthroughs?” once you open the magazine to the correct page, has the following subtitle: “Manufacturing in the United States is in trouble. That’s bad news not just for the country’s economy but for the future of innovation.” The piece is rather long but absolutely riveting – I highly recommend it. For today’s post, I’ll simply write a point-by-point summary of the article, with hopefully enough details to interest you but also make you want to read the whole thing. Again, this is one of the very best articles I have read in recent memory.

  • The article starts with the example of General Electric’s new battery manufacturing facility, “one of a number of facilities around the country producing new technologies for rapidly growing markets in advanced batteries, electric vehicles and solar power.” (It is accompanied by beautiful pictures of said facility.)
  • This, the author argues, “cannot counter the reality that the US manufacturing sector is in trouble” because the outsourcing of production has led many companies to lose “the expertise for the complex engineering and design tasks necessary to scale up and produce today’s most innovative new technologies.”
  • A key thesis of the article is that “it’s not necessarily true that innovative technologies will simply be manufactured elsewhere if it doesn’t happen in the United States.” It cites the case of integrated photonics as an example of innovation that has not been adopted as widely as expected because of the outsourcing of production by telecom companies to countries in which photonics were not cost-effective.  
  • The article also gives the example of General Motors’s Detroit Hamtramck assembly plant as success story regarding electric power and lithium-ion batteries. We are also treated to the details of the manufacturing of these batteries in a nearby plant, a joint venture of Dow Chemical, TK Advanced Battery and the (French) Dassault group.
  • After this description of large companies, there is also a fairly long section on the startups pioneering some of these technologies. “The strategy begins with the recognition that any new technology must promise advantages far beyond what is possible with existing products”. I enjoyed reading about the use of the periodic table “for materials that might overturn current technology”, including MIT’s Materials Project.
  • As the article emphasizes, these new technologies require enormous upfront investments (in the hundreds of millions of dollars.) A recent startup that was able to successfully address this challenge is A123 Systems, which benefited from the right set of circumstances and political climate to raise nearly $1 billion in public and private investments.
  • Of course, the article also touches upon the lessons learned from the bankruptcy of startups Evergreen and Solyndra, including the need for increased collaboration.
  • It ends with a promising area of research for the next generation of batteries, envisioning a way to get rid of the expensive non-energy-storing ingredients to make manufacturing less capital-intensive. The researcher who came up with the idea comments: “The best way to do battery research is having started a battery company. Being close to the manufacturing, you recognize what can have an impact.”

On Thursday: the profile of MIT’s Prof Suzanne Berger, who is “spearheading research on how to revive US [manufacturing] industry.”


Innovation: Boston's Route 128 and San Francisco's Silicon Valley

Both the Route 128 area outside Boston and the Silicon Valley outside San Francisco provide excellent examples of innovation hotbeds, which benefit from local research universities of international reputation and a thriving start-up culture with R&D office parks.

Silicon Valley

Stanford's then-dean of the School of Engineering and MIT graduate Frederick Terman (1900-1982) played a key role in the development of the Silicon Valley, along with William Shockley (1910-1989), who received the Nobel Prize in Physics in 1956 for co-inventing the transistor.

Terman led the creation of Stanford Industrial Park in 1951 (now renamed Stanford Research Park), supposedly the world's first technology-oriented office park, with tenants such as Hewlett-Packard, General Electric, Lockheed Corporation and Eastman Kodak. Terman was also Stanford's Provost from 1955 to 1965, overseeing the expansion of science and engineering departments, which cemented Stanford's reputation as a leading university in high tech. He is also a founding member of the National Academy of Engineering.

Shockley, who invented the junction transistor in 1951, directed the Shockley Semiconductor Lab at the Beckman Instruments company in Mountain View, CA starting in 1955. He is alleged to have had an abrasive management style, which led 8 of his employees to resign in 1957 and started Fairchild Semiconductor instead. One of the eight was Gordon Moore, who would later found Intel. Other companies later created by some of those eight employees include Molectro, later acquired by National Semiconductor (which recently became part of Texas Instruments) and Advanced Micro Devices (AMD), Intel's rival.

Interestingly, Fairchild Semiconductor is viewed as the first venture-backed startup, receiving investment in 1959 by what would become Venrock Associates ten years later. This came shortly after the passage of the Small Business Investment Act of 1958, which created Small Business Investment Companies (SBICs), "privately owned and managed investment funds, licensed and regulated by SBA [Small Business Administration], that use their own capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses". This act ushered in a new era in the professionally-managed venture capital industry. More information to request SBIC financing for a small business is available here.

Shockley Semiconductor and the companies formed by these eight former employees created a core of high-tech companies in the area to the south of San Francisco that later became the Silicon Valley.

According to a recent report by the National Venture Capital Association, from 1970 to 2010 venture capitalists have invested over $210 billion in almost 10,000 companies in California. Public companies headquartered in CA that were once venture-backed account for almost 3 million US jobs. 23% of venture capital in CA goes to the software industry, 22% to energy and 15% to biotech.

Route 128

This highway around Boston, has been dubbed "America's Technology Highway" because of the large number of high-tech firms that set up in its vicinity from the 1960s onward, including Digital Equipment Corporation. The dotcom boom saw the venture capitalists' attention shift to software stronghold Silicon Valley, but the boost of innovation in the life sciences has benefited Boston with its world-class hospitals such as Massachusetts General Hospital, and the Route 128 area is now also a stronghold of biotech innovation.

A venture capitalist in a Boston firm explains in an interview with FastCompany.com why the area offers prime opportunities for innovators, from the presence of Harvard and MIT (but also, unmentioned in the article, Babson College, whose programs are regularly ranked as among the best in the nation for budding entrepreneurs, Tufts, Brandeis, Boston University, Boston College, Northeastern University and many others) to the strong hospital system to the presence of large companies and even the many intellectual property lawyers and the proximity of New York City.

The website of the Martin (1958) Trust Center for MIT Entrepreneurship mentions that, according to a recent study, "there are currently 25,600 companies in existence founded by living MIT alumni that employ about 3.3 million people worldwide. Those companies generate annual world revenues of $2 trillion, producing the equivalent of the 11th-largest economy in the world."

This report by the National Venture Capital Association states that:

  • From 1970 – 2010 venture capitalists invested over $50 billion in almost 3,000 companies in MA.
  • Public companies headquartered in MA that were once venture-backed account for over 750,000 US jobs.
  • The biotech industry accounts for 36% of the venture capital funding in MA while software represents 15% and medical devices & equipment 12%.

But Boston is not resting on its laurels: under the stewardship of Mayor Thomas Menino (the longest-serving mayor in the history of the city, who took office in 1993), it created in 2010 an Innovation District on the waterfront, so that companies no longer have to move to the suburbs to benefit from the innovation ecosystem pioneered by Route 128. Maybe the biggest threat to Route 128 comes from Boston itself rather than San Francisco. Babson College recently opened its Boston campus in the Innovation District, and many companies have already set up shop in the neighborhood, such as DataXu, Boston Technologies, Fundraise.com, Apperian, Greentown Labs and NPR Digital Services.

More resources

A good book comparing the Silicon Valley and Boston's Route 128 up to the early 1990s is Regional Advantage by AnnaLee Saxenian, the Dean of the School of Information at UC Berkeley. She finds significant differences in culture, with the Silicon Valley companies being in her opinion more open to collaboration and sharing of innovation. Because her book was published in 1996, it does not cover the recent breakthroughs in the biotech industry and the way life sciences companies have affected the balance between East Coast and West Coast.

The MIT Entrepreneurship Review recently published a post by a Principal with Redpoint Ventures entitled "What is really going on with venture capital". It explains a lot of the basics, including the difference between general partners (the "individuals investing in startup companies") and limited partners (funds that provide capital because they seek returns and, in the current climate, have "retrenched from investing in venture funds"), but also depicts in detail the state of venture capital today and provide a lot of interesting data such as the median time to IPO and M&A, which have increased from 4.5 and 3 years in 1998, respectively, to 9.6 and 6.5 a decade later.

In the author's view, "[t]he costs of regulatory compliance imposed by Sarbanes-Oxley or SOX, is a hefty drawback for vibrant private companies eyeing IPOs [because] SOX regulations meaningfully impact profitability margins." He argues that the recently introduced Reopening American Capital Markets to Emerging Growth Companies Act would alleviate this problem by creating a category of Emerging Growth Companies, which would have up to five years to comply with certain regulatory requirements, including Section 404(b) of SOX, of which companies with market capitalization below $75 million are already exempted.

Such an act would hopefully affect both the Silicon Valley and the Route 128/Innovation District areas by fostering the continued growth of the companies in their fold.