Net Jobs Creation Engine Gvf Report

Multiple Strategies for Federal Investment to Support Americas Proven
Net Job Creations Engine: Young Companies
Report Topic: Government Venture Fund

Multiple Strategies For Federal Investment To Support
Americas Proven Net Job Creation Engine:
Young Companies


Independent Report Researched and Prepared by:
Roger London
Chairman American Security Challenge
Innovation Director, Chesapeake Crescent Initiative
410‐340‐5335
RogerL@NationalSecurityInitiative.com
December 2009


Summary

State of the Union: The economy is struggling, small businesses are starving for capital, the
public and private sectors are seeking innovation to help be more competitive, the venture
capital markets and to some extent angel investing have virtually dried up, and the US has
spent over $1,000,000,000,000 on Research and Development this decade.  How do we feed
our jobs engine under these conditions?  More precisely, THE QUESTION is how do we create
the most jobs at the lowest cost and in the shortest time possible that are permanent, high
paying jobs with young firms in growth industries (hereafter‐desirable
jobs).
THE QUESTION is:
Job Creation Solution: This report proposes the creation of a
Government Venture Fund (GVF) that invests in young companies …. how do we create the
and leverages the Federal agencies as a customer to stabilize and most jobs at the lowest
validate young companies, which makes it easier to attract cost and in the shortest
investment capital and/or additional customer revenue.  That in turn time possible that are
helps acquire more investment capital if needed and more permanent, high paying
customers….all of which supports new desirable jobs in a self‐ jobs with young firms in
sustaining entity.    growth industries.

It is our belief that the program with the most impact to net job creation is
the GVF; however, there are multiple strategies/solutions to aid startup THE ANSWER is:
creation and young company growth not described herein.  A
…replicate successful
comprehensive plan is anchored by GVF’s but also includes programs that:
models that advance
1. Annually distributes $1B co‐investment funds to states as matching young companies, proven
capital for their young company investments the primary source of net
jobs growth, including
2. Modify SBIR programs to shift use of proceeds away from research
to commercialization funding in the form of pilots (proof of creation of a government
concept) trials for the sponsoring agency customer with a venture fund(s).
predetermined path to procurement if pilot proves successful
3. Annually invest $1B as LP into early stage VC funds
4. Organize existing alumni wealth into smart money alumni angel pools and annually co‐invest
$1B with Alumni Angel funds
5. Currently $150B annual R&D spend with average of 1 startup per $77M R&D = roughly 2,000
startups.  Allocate 1% of R&D spend or $1.5B to fund 4,000 spinouts/startups doubling the
annual output of spinouts.
6. Annually co‐invest $1B with corporate venture capital groups with pilot and procurement paths
to  drive additional investment into technologies that quickly turn into company sustaining
revenue

The proposed GVF is a hybrid of the best elements of several successful existing models,
including Corporate Venture Capital (CVC) models like UPS, and Government Venture Fund
(GVF) models such as the CIA’s In‐Q‐Tel and the Army’s OnPoint Ventures.  The Chesapeake
Prepared by Roger London Chairman American Security Challenge
Tel: 410‐340‐5335      Roger@AmericanSecurityChallenge.com or RLondonMD@gmail.com


Crescent Region is home to government agencies with tremendous purchasing power.  A
substantial amount of the annual technology procurement in the federal government’s $2.7
trillion budget is spent in the Chesapeake Crescent region by agencies attempting to fulfill their
missions.  A GVF can help agencies invest in new technologies for strategic enterprise value and
enhanced performance.  These investments ensure that the sponsor agencies receive the most
relevant, up to date technologies to help them fulfill their mission all while supporting young
company growth and job creation.

While seeking game changing technologies to invest in, many technologies will be next
generation technologies and not game changing technologies.  For example, rather than
waiting for a new solar technology that is perhaps a decade away that can be manufactured
and applied on a large scale which produces energy/electricity competitive with coal or gas,
new technology can be applied to the market immediately that cuts fuel costs 25‐50% with an
ROI in 3‐5 years.  Inclusion of next generation technologies in this funding strategy will create a
substantial number of jobs in the near term, reduce fossil fuel use, reduce emissions, lower
business and consumer costs while moving America closer to a clean and independent energy
nation.

Minimum funding for a pilot GVF is projected at $25 million with recommended funding of $45‐
$50M.

Possible Program Solutions:  Before selecting GVF as the first strategy, multiple programs were
examined relative to the desired outcomes defined by THE QUESTION.  Different experts will
have different answers; however, there is significant statistical data to support the GVF
conclusion.  There are many who claim that the answer to THE QUESTION is investing heavily in
more research.  Others may say research parks or other innovation facilities, entrepreneur
programs, tech transfer programs, or translational research.  In order to figure out a lower risk
approach we consider various employment, investment, small business and other facts which
lead to a surprisingly uncomplicated answer to THE QUESTION.

Job Creation Research Conclusion: among existing job creation research, the recent 2009
Kauffman Foundation study “Where Will the Jobs Come From?” concludes unquestionably that
the source of the vast majority of net job creation are young companies (defined as startups
and growing companies younger than five years old).

• Startups are the most powerful net job creation force averaging four net jobs per year.
• Over 30 years startups contributed 2‐4 million net jobs every year, however, excluding
startups net jobs the entire economy had positive net job growth only seven years.
• The Kauffman report determined that of the 12 million net jobs created in 2007, young
companies created two thirds of them or 8 million.

The Kauffman study correctly notes that only 69% of startups survive two years so all the jobs
they created will disappear.  No economy can survive with such constant turnover which leads



to the second largest source of net job growth who are the three to five year old companies.
The top 5 percent of 3‐5 year old companies averages 26 net new jobs per company or 78‐130
over a five‐year span.  These top 5 percent represents only 3.5% of the overall young
companies’ community.

Venture capital is a valuable and integral resource to young company “That financing market
survivability/growth.  The National Venture Capital Association has disappeared…. that
(NVCA) shows only 1% of all small businesses receive venture funding.   is totally broken.”
It is no coincidence that the most productive young companies are Senator Mark Warner (D‐
also only 3.5% out of all small businesses. Virginia) July 22, 2009
regarding the availability
Analysis of research further concludes that venture capital backed of capital for small and
companies have overlapping success with young company job startup businesses
creation averaging a new employee for every $18K invested.  Further
venture‐backed companies currently employ 12% of the national
workforce and are responsible for 21% of GDP.  Analysis of research To address this early
shows that 77% of venture‐backed companies over the last decade stage funding shortage,
are still in business indicating a substantial link between venture government venture
capital and the top 5 percent young firm job creators.  Unfortunately, fund(s) should be
there is an alarming loss of available early stage investment capital established replicating
(see former Venture Capitalists and now Senator Mark Warner’s highly successful
quote in the sidebar text box).    investment models.

However, there are several successful government venture funds that can be replicated
(successful models include In‐Q‐Tel and OnPoint) as well as an increase in Corporate Venture
Capital (CVC) investment.  These investors realize great benefit from the purchasing power of
their parent or sponsoring entity.  Accordingly, what can the federal government do to help the
economy’s most productive jobs engine, young companies, who are in need of capital from a
rapidly decreasing venture capital pool?  It can bolster the shrinking venture capital pool with
the replication of successful government venture investment funds.


Background

GVF Program Highlights: While In‐Q‐Tel and OnPoint approach operations and management
from different perspectives, they both operate as independent third party entities, which they
have proven allows them to work nimbly and successfully.  From the sponsoring agencies
perspective (CIA and Army), the GVF provides technology scouting services identifying
innovative and novel technology solutions that the sponsor agency cannot easily locate.
Accordingly, third party GVF models have proven to facilitate rapid procurement.  Procurement
can be “fast‐tracked” as it is reasonable for the sponsor agency to expect that innovative and
novel technology does not have a robust competitive market and accordingly can be quickly
procured without an extended procurement process.

Similar to many CVC’s, In‐Q‐Tel and OnPoint the GVF will primarily provide early stage capital to
start up companies to bridge the “valley of death.”  It would provide an average of $100,000 in
angel capital to start up companies as well as provide an average of $1,000,000 for the first
institutional venture round.  Another principle of these successful investors is investment in
companies with “convergent” technologies that have applicability in the commercial sector as
well as the government.

The proposed GVF model is similar to CVC’s but has a government parent or sponsoring agency
instead of a private sector parent.  The GVF is also similar to the successful In‐Q‐Tel and
OnPoint models but will be smaller and more nimble (like CVC’s) allowing it to make faster
decisions and more easily attract co‐investors.  Like CVC’s and In‐Q‐Tel, the GVF will incorporate
customer driven pilots into its framework thereby ensuring the technology will work for the
customer.  Use of a pilot if successful will substantially expedite the procurement process for
the sponsoring agency customer, and for the young company will generate life supporting
contract revenue from the subsequent procurement.

The proposed GVF can be established in the national capital region as a pilot and expanded
throughout the county.  The pilot GVF will make approximately 20 investments with most of
them receiving a full Series A investments which would provide the necessary capital to bridge
the financial gap until customer revenue and/or additional investment capital is available.  In‐Q‐
Tel prefers to co‐invest with other private venture capital firms to spread the risk (and increase
their capital available for other investments).  Typically, in a $1,500,000 round, a CVC or GVF
would invest alone or “lead” a syndicate of investors who buy‐in part of that $1,500,000.

VC co‐investment is more attractive in a CVC or GVF model because the investment usually
funds a pilot with the sponsoring agency or company.  For instance, UPS may pilot test a GPS
solution that allows them to better track their packages and vehicles and if the pilot is
successful acquire the technology in a region or enterprise wide.  Similarly, In‐Q‐tel might fund
a pilot test for the CIA and if the pilot were successful, the CIA would buy more of the
technology.  Venture capitalists value the revenue prospects that the sponsoring agency or
customer can provide and co‐invest when possible.  This post‐pilot contract inherent in a CVC
or GVF investment lends credibility to the tech company and reduces the “riskiness” attributed
to young companies.  This credibility makes it easier for them to acquire other customers


(nobody likes to go first) and additional investment or customer acquisition far less risky.

The GVF will have a Strategic Advisory Board of senior subject matter, entrepreneur, technical
and investor professionals, much like the Strategic Advisory Board at OnPoint, which enables
staffing overhead of the business to be low, reducing their overall budget and/or increasing the
amount of capital available for investment.  The strategic advisory board is a panel of startup
experts that the GVF management team can access to get information on technology trends or
competition, customer trends, referrals, etc….similar to an advisory board of a startup.

GVF Sponsoring Agency: The selection of GVF parent agency and customer is critical.  The
parent/sponsoring agency must be obviously engaged with internal champions, but must also
be a large consumer/user of technology.  Given that the agency must buy new technology in
vast quantities and be in position to offer a contract at the end of a pilot program, the following
agencies are potential parent organizations for an investment fund addressing national
priorities; DoD, NASA, DHS, GSA and VA.

o DoD‐ annual budget of $664B, DoD consumes substantial amounts of new
technology for its service branches and others.  High DoD priorities include
physical and cybersecurity, life science and energy technologies.
o NASA‐ NASA technologies while only $18B in annual budget have consistently led
game changing materials and aerospace technologies into the marketplace.
o DHS‐ in addition to direct technology procurement from its $43B budget, DHS
technology requirements parallel thousands of private sector companies who
own 85% of the country’s critical infrastructure.  DHS priorities include physical
and cybersecurity, life science and energy technologies.
o GSA‐ while only a $6B budget, GSA is one of the largest property owners in the
world managing over $500B in properties.  With this enormous building
inventory in need of energy saving technologies, GSA priorities are renewable
energy and energy conservation technologies.
o VA‐ the $56B VA system offers healthcare services to 75M Americans through
the largest integrated healthcare system of 153 medical centers.  VA priorities
are healthcare IT, life science, cybersecurity and energy conservation.

Interesting choices to consider also include USPS, SEC and the new National Office of
Cybersecurity.

The following would not be suitable parent organizations as there are not large customers
(operators); NIH, DOE, USDA, ED, HUD, DOL, DOI, Treasury, FCC, FTC, EPA, and NSF.  (For
instance, NIH invests in life science research but does not own a hospital system, is not a drug
manufacturer or medical device company and does not normally buy new life science
technology for its own enterprise.  Similarly DOE is not a power or utility company and does not
buy technology to help it generate, distribute or store energy).



NOTE‐ a regional commercialization program has been designed by the author for the
Chesapeake Crescent Initiative which incorporates many of the concepts described herein
including a government venture fund, a spinout out engine and commercialization program
support.  This regional program can act as a pilot to evaluate the performance of these
strategies or as an anchor (as home to the federal government, the capital region is vital to
federal agency performance) if several regions.  In addition to and in collaboration with the
GVF, a Regional Commercialization Engine (RCE) chartered to create startups.  The Chesapeake
Crescent region receives more federal R&D funding than any other region or state in the
country yet is 37th in creating startups… stranding substantial technology in the lab.  RCE will
leverage this large inventory of Intellectual Property and manage multiple programs modeled
after successful tech transfer, entrepreneur and startup support programs

The RCE replicates several best practices from across the nation that spins out startups from
existing research, pairs entrepreneurs with startup opportunities, provides an innovation portal
to enhance commercialization, and support the regional angel community.

Funding for this GVF and RCE is approximately $25M chosen as an “acceptable” congressional
figure.  Ideally, the GVF and RCE would be closer to $45M or $50M, which provides more
operating capital and provides a small pool designated to angel co‐investment as well as follow‐
on investment capabilities.

About the Author

Mr. London is currently the Innovation Program Director for the Chesapeake Crescent Initiative,
a task force established by/for Maryland Governor O’Malley, Virginia Governor Kaine and
Mayor Fenty of Washington DC.  Leveraging his experience as venture capitalist, successful
entrepreneur, merchant banker, defense and intelligence community technology scout, and
security incubator manager, his role is to design a regional strategic plan to commercialize more
technology in the Chesapeake Crescent region.

Mr. London is also Chairman of the non‐profit American Security Challenge, the nation’s largest
security competition which is a platform encouraging new relationships between emerging
security technology companies with public and private customers to utilize new technology for
our nation’s defense.  Since its inception in 2008 the Challenge has grown exponentially –
increasing its applicants by over 100% and increasing its prize awards from $100,000 to over
$2.5 million in cash and contracts.  The Challenge h the most innovative mechanism in the
country that seeks to secure the nation by matching the most cutting edge entrepreneurial
technologies with both defense and homeland security applications/customers.


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