Colorado’s Cash Crisis is Hanging Startups Out to Dry

The engines of Colorado’s job creation have gone silent.

R&D purse strings remain tightly drawn. In 2004, total U.S. R&D expenditures are expected reach $284 billion, a rise of just 1.3% in inflation-adjusted dollars. Of this sum money earmarked for Colorado is notably absent. This is an alarming reality as the state’s economic doldrums show very little sign of recovery, and the startup world, once the most fertile ground for economic recovery, has been placed on life support.

Due to this lack of startup funding Colorado is now in a state of crisis. The jobless rate of 5.7% doesn’t tell the whole story. While the headlines say that 17,500 jobs were lost in 2003, a greater number of higher paying jobs were replaced with lower paying jobs. The net effect is that Colorado now ranks 49th in personal income growth, and 48th in overall economic recovery.

To fully understand this complex issue we need to drill deeper.

During a down economy business and industry tend to play it safe spending a high percentage of their R&D budget on enhancing current technologies. A Harvard Business Review study of high-tech firms showed that incremental innovations bring in 62% of revenue but only 39% of profits. However, disruptive technologies which represent only 14% of product launches and 38% of revenue was shown to generate 61% of profits. Disruptive technologies are technologies so radical that they change entire industries. They’re based on cutting edge science, research, and the spirit of innovation that has set this nation apart from all other for the past century.
Clearly we are missing the boat here.

More money needs to be invested in disruptive technologies because this is the segment where significant job creation occurs. Startup companies traditionally launch disruptive technologies. This is where the risk-takers live. Startup CEOs and their disruptive technologies are what force the larger corporations to take notice and invest more heavily in R&D.

Disruptive technologies are less likely to occur without startup entrepreneurs shooting tazers and stun guns at the large corporations.

The combination of the loss of high paying jobs and lack of available startup capital produces a frightening effect. Many talented people without jobs have chosen to take the entrepreneurial route. According to the Progressive Policy Institute, Colorado ranks fourth nationally in both number of patents issued. But with limited available capital this is a dangerous statistic. With no available startup money and a poor business climate in general, entrepreneurs are forced to tap credit cards, pension funds, and take out second mortgages on their houses. The net result has been that Colorado now leads the nation with the worst bankruptcy rate in history – over 25,000 filings in 2003.

And thousands of startup businesses have come crashing to the ground, leaving countless patents in the hands of people who either can’t afford to capture their value or don’t understand its potential. This lack of funding has destroyed many of our best and brightest. Traditionally Colorado has had the best-educated constituency in the world. But for many their jobs are gone, their home equity is gone, and with a failed business in their background, their confidence has been shattered. Many will be forced to leave the state.

In the mean time, the rest of the business world is sending millions of jobs overseas to countries like India and China. While many blame these countries for stealing our jobs, the real culprit here is the lack of funding for both R&D and new startups. These foundation blocks for business are the engines of job creation. We have plenty of new technology being created and tons of new businesses waiting to be launched. But without adequate funding, a large percentage of these ventures are dead on arrival.

Traditional forms of funding for a new business have been friends and family, angel investors, and venture capital.

Friends and family are also short of cash. While some money is still available in this circle, for the most part it is not enough.

Angel investors have also abandoned the startup market. While this had traditionally been the space that angels were playing in, they counted on being able to hand off these companies to VCs for later round investments. However VCs have not been kind to the angels, often squashing the investments or leaving the business to fail.

Venture capital is not a viable solution in the startup market due to mismatched objectives. While some VC firms are making investments, and Colorado ranks 6th overall, they are funding later stage companies. None are playing in the seed capital arena. Many would argue that VCs hurt more businesses that they help. With a 70% failure rate and no breakaway success stories in Colorado we would be doing ourselves a great disservice to expect much help on this front.

This vacuum in the capital funding market leaves a huge gap.

Attorney Karl Dakin, a former VC who is heavily involved in the startup arena, is testing one possible solution. His solution is a “new seed capital fund.”

The idea is to create a pool of money to invest small amounts, $50,000 to $250,000 in any project that can generate a reasonable rate of return. Each investment would be made jointly with angel investors. Investments would follow a standard form: 2-year balloon note with equity kicker. Money invested would be managed by a start up expert. This is a new idea that is based on conservative ideas with mitigated risk to due sharing it with more investors. This idea and others will need to be investigated and undertaken in order to maintain the innovative image, educated workforce and produce the needed jobs that Colorado has worked so hard to build.

For people who may be interested in exploring this idea, he has asked them to contact Karl(at)DakinLawTek.com.

Other new ideas will be tested at this year’s Future of Money Summit, which will be held in New York City in October. There a panel of people testing new solutions is being assembled to fully explore other possible solutions. But for Colorado, that is not happening quick enough.

At the DaVinci Institute we would like to hear your thinking on this. We will be assembling a series of focus groups to tackle this very important issue. Those who are interested are asked to contact dr2tom(at)davinciinstitute(dot)com.

The DaVinci Institute is a Futurist Think Tank based in Louisville, Colorado.

The DaVinci Institute goes beyond the traditional role of a think tank. We believe that shaping the future requires more than ideas; it requires action as well.

The DaVinci Institute believes that the people that will shape the future are people that take brilliant ideas and make them become reality. Inventors and entrepreneurs will shape our future. That is why the DaVinci Institute produces futurist event designed to assist the revolutionary thinking inventors and entrepreneurs, and helps them get their ideas off the ground.
The DaVinci Institute is a 501-c-3 non-profit organization supported by memberships, sponsorships and attendance fees for the programs we produce.

By Thomas Frey, Executive Director of the DaVinci Institute