State Policies Impede Tech Funding, Growth

It seems that everyone — certainly most “public figures” — wants to have knowledge-based, information-intensive, or technology-centered enterprises in their bailiwick. (In the interests of brevity, we shall refer to such enterprises as “KBITTC” in this commentary). This is not surprising considering the presumed character of KBITTC enterprises, which we have come to expect to generate high-paying jobs, thereby producing appealing levels of tax revenues. We expect them to help reduce the problem of “brain drain” by employing university graduates and to increase the prestige of the area — and to do so while making relatively few demands on the environment or for publicly supported infrastructure.

There are other characteristics of these KBITTC enterprises that are important but that fewer people appreciate. Growing a KBITTC company requires capital, but commonly this capital is invested in people rather than things: in process and information — not inventory. These enterprises need to be agile in business and capable of fast responses to opportunities — factors that are critical in view of continually decreasing product and process life cycles in high technology arenas.

It is against this background that I would like to explore a couple of the problems encountered by early-stage KBITTC enterprises in Arkansas. The first problem is associated with raising patient capital. In fact, the dearth of such capital is clearly a major impediment, severely crippling local and statewide growth of KBITTC enterprises.

Entrepreneurs, particularly in KBITTC enterprise start-ups, frequently exhaust personal resources along with those of “friends and family” before sustaining revenue generation is established. In such cases, early-stage investment or debt financing or some combination thereof is likely to be required to keep the enterprise alive. Even if revenue generation is sustaining early in the development of a KBITTC enterprise, it may need to grow faster than such revenues alone permit in order to thrive or to capture a transient competitive advantage.

So what happens when an early stage KBITTC company tries to borrow money in Arkansas? Remember that everyone really wants this kind of company in their backyard, so getting a loan should be a piece of cake. Right? How about a loan that is 85 percent guaranteed by the Small Business Administration?

Sounds good, but, sorry. It’s a non-starter for KBITTC companies because of their very nature and deliberate design. Commercial lenders, the necessary vehicle for SBA-guaranteed loans, view such companies as being under-collateralized. Hardware stores and hamburger emporia have it easy by comparison. They have inventory on the one hand and equipment that can be liquidated on the other — easily valuated tangible assets that commercial lenders understand as collateral. In contrast, the value in a progressive KBITTC enterprise is in its people, and its collateral is typically in the form of intellectual property rather than tangible assets. Commercial lenders are therefore reluctant, to say the least, to make loans to them even when their maximum exposure is 15 percent of the loan value.

If loans are hard to come by, how about assistance for KBITTC enterprises from government programs? Unfortunately, the state government has a blinkered view of the world. Its economic development policies were largely developed to promote and support manufacturing companies, and its practices remain designed to promote and support manufacturing companies.

These policies were necessary and reasonably successful during the post-Depression conversion of Arkansas from an agrarian economy to today’s mixed agrarian-manufacturing-service industry economy. Under these policies, the raw number of jobs to be created is the dominant qualifier for programmed assistance. Unfortunately, the state’s increasingly archaic programs substantially fail to promote or support new KBITTC enterprise development.

There may be a ray of hope in the emergence from the last legislative session of such things as SB808, Venture Capital Investment Act of 2001 (now Act 1791). Perhaps the new Director of the Arkansas Department of Economic Development will do more than cause another departmental name change and PR blitz. Forward-looking new policies that reflect today’s economic and competitive realities could be, indeed, must be developed and put into action.

Private citizens and private sector enterprises should require better economic development performance from the state. Metrics should be established and clearly enunciated in conjunction with the start of new programs. The government derives its resources from us, and we should hold it accountable for the effective and beneficial use of those resources. Accountability is expected by the government (e.g., achievement testing mandated for education). Is our holding the government accountable for adequate performance not equally valid?

There are, of course, many other factors that compound the difficult problem of the capital availability for early stage KBITTC enterprises in Arkansas. Among them are personal and corporate tax structures that are less favorable than those in contiguous states; no critical mass of technology enterprises; no key or hub technology enterprise(s); no recognized areas where we have a leadership position in technology; a “premier” research university that is inadequately funded to be nationally competitive; and a poor image and reality with regard to income, education, and technological sophistication of the state’s citizenry.

So if all this is the bad news it seems to be, is there any good news? Perhaps some lies in the opportunity for even relatively small enterprises to make a dramatic positive impact on the development of area technology-centered enterprises (proportionately if not absolutely). Consider Fayetteville-based Mercari Technologies, a merchandise applications technology provider, which received $20 million of the $28 million (or about 70 percent) of the venture capital invested in Arkansas for the first nine months of 2000. In 1999 Arkansas firms received just a total of $22.5 million in V.C. investments.

We have to start sometime, and I am convinced that since we didn’t start when we should have (10 or more years ago), the best time is now. It is easier to identify the problems than it is to find positive things to do. I am pleased that Beta-Rubicon has been able to bring to Northwest Arkansas and will co-host “Seed Investing as a Team Sport,” a workshop that will be held on August 17 in Fayetteville. This is what I hope will be the first of a continuing effort to proactively attack some of our economic development problems.

R.R. Goforth, Ph.D., is the general manager of Beta-Rubicon Inc. in Fayetteville which may be reached on the Web at www.beta-rubicon.com.