Special Feature

For Homegrown Jobs, Look To Innovation Ecosystems
Fed By Universities And Talent

By Dr. Krisztina Holly, Vice Provost for Innovation, University of Southern California Member of the National Advisory Council on Innovation & Entrepreneurship (NACIE)

Just like any ecology, a robust innovation ecosystem depends on a complex interplay: human capital, financial capital, intellectual capital, and social capital all work together to create sustainable environment for the economy to thrive. The investment, entrepreneurial, and non-profit communities are all critical elements that, along with a foundation of functional government and exceptional universities, build a bridge between ideas and economic impact.

To create jobs, economic development efforts should refocus regionally on innovation-based economies, which have high growth potential, and focus on people rather than infrastructure. The most effective investment of these dollars is on the development of talent and the networks among innovators, investors, and entrepreneurs on the local level.

Higher education plays a vital and extensive role in driving innovation in the United States so government should look to research universities as a foundation of these regional networks. They offer a vast research base (a total of $50 billion nationwide), the ability to teach and develop a fresh new workforce (3 million graduates each year), the ability to convene disparate expertise, and a deep commitment to the local community.

Businesses are the key piece of the system, but there are only three sources of companies: they can be transplanted, which is done at the expense of other regions and can be very costly if incentive packages are involved, or they can be nurtured from the seed stage and homegrown.  It’s our view that the latter is the best long-term strategy for sustainable regional employment and economic growth.

Startup companies are the cornerstones of employment in the United States; without startups there would be no job growth, according to a 2010 Kauffman Foundation study.  University spinouts, defined as startup companies that arise from university research, are particularly high growth. In a 2004 book “Academic Entrepreneurship,” author Scott Shane concluded that university spinouts are more than 100 times more likely to go public than an average startup in the United States.

It should follow that high growth university startups can attract robust financing, and at USC this does appear to be the case, with 39 of our startups raising more than $800 million in the past 15 years.  And these companies appear to be "recession-proof," with nearly $400 million invested into USC startups in the past three years, during one of the most devastating recessions in American history. The funding raised by these startups is being invested both directly and indirectly in high-quality jobs today, and in product development, marketing, and sales that support sustainable job creation tomorrow. Therefore, university spinouts are exactly the kinds of high-growth companies needed to produce to attain sustainable employment in a region.

Unfortunately, the data also show a troubling fact: increasingly, USC startups are leaving Los Angeles—many even leaving the country—in search for capital and talent. Although a decade ago more than 70% of startups established in LA, now more than two-thirds are leaving.

What scares business away? Many contend taxes or regulatory issues are to blame for a stagnant business climate in California. But a recent USC survey of alumni indicate that founders of new businesses deciding where to launch may be more concerned with being close to customers, and with the lifestyle, culture, and the community in which they live and work, than a friendly regulatory environment or tax incentives.

The silver lining is that the USC spinoff companies in our study mostly stayed and grew in the same city where they were established. So if we can create the environment that makes it attractive for university spinoffs to start local and stay local, they create a self-reinforcing innovation ecosystem that enables scientists to continue to participate in the innovation process, experienced entrepreneurs to mentor the next generation of founders, and entrepreneurs to have the freedom to take risks and fail in anticipation of always having another opportunity to join a new company.  In a robust ecosystem, even business failures are valuable, as they become the "mulch" for the next generation and entrepreneurs feed back into the next batch of startup companies.

Many regions have invested a great deal of resources into research parks, or for tax incentives and tenant improvements to move a company from one city to another. But the real key infrastructure for innovation is people and networks.

One of the best ways to deepen networks and accelerate innovation locally is to establish proof-of-concept funding and mentoring programs to attract innovators, investors, entrepreneurs, and industry that will further develop these networks. I proposed one model two years ago in a policy paper called "IMPACT: Innovation Model Program for Accelerating the Commercialization of Technologies."

In today's search for job creation, economic development plans rightly look to the private sector. Yet if we look solely to established industry, we are missing a large part of the answer. The United States must refocus its economic development strategy toward self-reinforcing local and regional innovation ecosystems with universities and new ventures at their core.

It's the difference between transplanting a single mature tree and planting thousands of seeds that will grow into a luscious and sustainable garden of economic activity.