[MUSIC] Welcome back to Beyond Silicon Valley, I'm Michael Goldberg. In this lecture we're going to explore the role of government in supporting entrepreneurs. We'll look at how this was done in Ohio, and focus on these key questions. What kind of initiatives should government support? And how does it justify its investments? Why should governments get involved in supporting entrepreneurship at all? Isn't it best to let the private sector handle investing in private companies directly since this is what they do best? In 2002, Entrepreneur Magazine ranked Cleveland dead last in its annual U.S. ranking of friendliness to entrepreneurs. But it wasn't as though the State of Ohio government didn't have any programs in place to support entrepreneurship at that time. They did, but the programs were small and disorganized and they weren't making a dent in the problem. It was critical juncture for the region. Northeast Ohio needed to grow new companies and add jobs in a much more significant way. It needed a way to support entrepreneurs and encourage them to start new businesses in the region. Charu Ramanathan is the co-founder of the medical device company CardioInsight. Charu believes that a new source of government funding in Ohio played an important role in bringing the technology she developed in a lab at Case Western Reserve University into a full-fledged independent start-up company. >> CardioInsight is developing a novel 3D mapping technology for mapping cardiac disorders. About 10% of our financing over our money that we've raised to date comes from state vehicles. So one of the vehicles that's really enabling is state financing. Because if your project is sound, and you're able to articulate exactly what you're going to do in paper, in their format, and it's credible, you get the money. >> To address the dire lack of support for entrepreneurs and create a nurturing environment for fledgling companies, the government of the state of Ohio stepped in and introduced a program in 2002, called the Third Frontier. The Third Frontier was envisioned to provide financial support in key sectors where Ohio possessed strengths relative to the rest of the United States and the world. But to work, it had to be big. Much bigger than the trickle of uncoordinated minor programs that had been previously available. Ohio voters ultimately approved over 2.3 billion dollars in funding for this program. Charu argues that the support from the Third Frontier kept her company in Cleveland. If we hadn't been able to do that, and we had to purely do this, you know, based on private financing, we, we would have have to move out of Cleveland. >> Government support for entrepreneurship was new and would present challenges. Government officials, unlike their counterparts in the private sector, lacked experience in selecting companies for investment that would be successful in the market. The State of Ohio addressed this by doing two key things. First, it required companies to find other investors to match the government grants. Second, the government would require third party independent evaluators to make recommendations for allocation. Frank Samuel was the Science and Technology Advisor to Ohio Governor Robert Taft, who launched the innovative Third Frontier Program. >> The Ohio Third Frontier Program was created about ten or 11 years ago because the then-governor Bob Taft felt that there was a need for a significant program to support innovation in the Ohio economy. >> Lisa Delp was the former Executive Director of the Third Frontier. >> The Third Frontier came out of the, the, the desperation and the need to make change. And a lot of regions in Ohio were looking for ways to make change. And, and at the same time, the Third Frontier was really launching, Northeast Ohio was coming together as a unit with a, a single voice and a single mission and, and goal. >> Dorothy Baunach, the former CEO of NorTech, was a key proponent of getting the government of the state of Ohio, which is based in Columbus, to play a more active role in funding entrepreneurship. >> The regular investors, that the risk is too high for any one investor to vet, to invest on one technology startup. You really need a pool of money and you need some additional incentives. So the Third Frontier really became that extra incentive. >> Rebecca Bagley, another leader in the entrepreneurship community in Cleveland, believes that the scale of The Third Frontier program was critical. Third Frontier is an extremely unique program across the country. For one thing, it's at scale. So it's a very large program when in comparison to other states. There's only a handful of other states who have programs that large. It's also been sustained program. So we've been able to sustain that level of funding for almost the last ten years. >> Another of the challenges for government programs is trying to narrowly define the type of startup company that offers the community the greatest opportunity for growth. >> So, we said we wanted high growth entrepreneurs. Entrepreneurs whose companies would be, you know, worth millions of dollars, in the years to come. That might represent an opportunity for an exit for the entrepreneur that they could then reinvest in the, in other start-ups. >> And how do you decide which companies to fund? To address this question, the Third Frontier program has a number of requirements, the first being that government funds must be matched by another funding source. Richard Seaman, a private business leader in Ohio, sits on the Third Frontier commission. Well, virtually every program that's been designed through the Ohio Third Frontier requires matching dollars, and, those matching dollars can come in, in many different ways. What this does is provides additional screening to the quality of the grantees in the programs that are out there. >> In addition to the matching requirement, the Third Frontier requires that all of the applications for funding be evaluated by an independent third party. This requirement brings high standards of professionalism, transparency, and independence into grant making. Lisa Delp explains how this helps remove favoritism from the decision making process. >> In the constitutional language that governs the Third Frontier, they wrote in that awards have to be made based on a third party evaluation. So, someone from the outside has to be contracted to look at a proposal that's structured around a request for proposals in a very measured manner. >> Okay. So, the government program is up and running. But how do you know it's working? Worthy companies are vetted, selected, and are receiving money. But how do you measure success? What metrics do you use? >> Job creation as a metric tends to be first top of mind for everybody, I think. If you're going to make these investments, you're doing it to grow the economy. You're doing it to grow the economy to create jobs. Part of the problem with that metric today is that a lot of these investments improve the productivity of a particular person. So I think in addition to looking at what the, what the job creation numbers are from a quantity standpoint, you also have to look at the quality of the jobs and how much revenue is an individual job creating. >> So to measure the success of the Third Frontier programs to support entrepreneurship, three key metrics are considered. Job creation, tax revenue, and the amount of follow-on capital that is raised by entrepreneurs after the state investment. There is a spirited debate about the extent to which government should be involved in supporting entrepreneurship. Ray Leach of Jump Start explains why governmental intervention was important in Cleveland. >> One could take an approach, whether it's an NGO or a community that says, we want to keep public sector dollars completely out of this. And that could be a reasonable approach, but in our experience the public sector dollars have been able, have enabled us to create a lot of momentum in a relatively short amount of time. If you get the right private sector leadership and you get everybody organized, and they're committed for 20 years, you can make a significant difference. Ohio didn't have 20 years. >> David Liddle is a Silicon Valley based venture capitalist with US Venture Partners. >> So I'm cautious about the value of the, of the role of government. If it's done light handedly which as far as I can see so far, is the case here. Then it can be quite good. >> Morris Wheeler is an active angel investor based in Cleveland. >> Government can be an important, and in some cases necessary, catalyst for start-up activity. But it shouldn't attempt to be the kingmaker. And it shouldn't attempt to design the start-up activity. Instead, it should look at the entrepreneurs. It should look at the needs. And, and work to, as a as a catalyzer and as a, an enabler. Not as a controller of entrepreneurial activity. Some organizations involved in supporting entrepreneurship around the world, such as Endeavor, are less enthusiastic about working closely with governmental entities. Peter Kellner is a co-founder of Endeavor. >> Very early on, was Peter never taking money from the government, particularly in these countries because there are always strings attached. And you never know what's going to happen in government. People leave, people come in, the incentives are not aligned with your strategy, which is long term. >> So we've heard about the role of government in the Cleveland case study. But what is the experience of government intervention internationally? Let's look at a couple of perspectives. Chris Zobrist, the Deputy Director at the Vietman National University's John Von Newman Institute explains that the role of government in Vietnam in supporting entrepreneurship is still emerging. >> In the past it hasn't, because the ecosystem is so new and I think the government hasn't really put much attention or thought into how to try to guide the development of the anchor system. In the end, I think the start-ups will be successful, not, not necessarily because of the government funding, but, but, it would certainly help speed up the process. >> Moez Dalloua of FSVC in Tunisia discusses a Tunisian government program that lacks the type of external match that the Ohio Third Frontier requires. >> For the entrepreneur they provide, I mean, in some schemes, they provide up to 96% of the total project cost. So entrepreneurs just put 4% of the total amount needed to to to, to fund this project, and this is a situation where there is no skin in the game, and speculative temptations can be very important. >> Government involvement in providing support for entrepreneurship is complicated. The ultimate return on investment can take years, if not decades, and political leaders tend to want results more quickly. A few key factors to consider. How big is the program? Funding has to be large enough to make an impact. How will the program be set up to avoid favoritism? How diverse will the program be? Would it fund different stages of entrepreneurship from imagining to sales? Would it fund both research and entrepreneurship? What metrics will be used to measure success? We will continue to look at the role of Ohio's Third Frontier Program in supporting entrepreneurs in Cleveland and upcoming lectures as we explore the formation of intermediary organizations, leveraging anchor institutions, seed acceleration and promoting angel and venture capital investments. There have certainly been successes and challenges in Ohio regarding structuring government programs to support new company formation and growth. In our next lecture, we'll be looking at how philanthropy or donors can support entrepreneurship in the community alongside government and the private sector. See you next time. [MUSIC]
