Legislature and State Budget and Government & Economic Development and Economic Development and Technology

High-tech 21st Century funding in doubt

April 2, 2007

The state's showcase program for making investments in new high-tech firms is in jeopardy in the General Assembly. And Indiana Secretary of Commerce Nathan Feltman is starting to fear there won't be a last-minute rescue.

"We're nervous and concerned that we, as a state, have some people who might not think that investing in and keeping our best technologies ... is as critical as other priorities," he said.

"There's a lot of negotiation between the [Statehouse] chambers that's going to take place over the next few weeks. At this point, we're not running scared, but we certainly are concerned."

On Feb. 22, the Democratic majority in the Indiana House of Representatives passed the first version of the next state budget on a 51-49 party-line vote. The $25.6 billion House budget didn't include any money for the Indiana 21 st Century Research and Technology Fund, which provides financial assistance to promising high-tech startup companies.

Since launching in 1999, the 21st Century Fund has received a total of $230 million from the state, including $75 million each of the last two bienniums.

Indiana Economic Development Corp. officials would like the fund to receive that much or more in the next budget. But as the General Assembly's 2007 session approaches the finish line, Feltman worries lawmakers may give it substantially less--or nothing at all.

IEDC officials this year now have testified more than half a dozen times about the 21st Century Fund's impact. Because it is one of Gov. Mitch Daniels' top priorities, Feltman said he's hopeful funding will be restored by the Senate. But time is running out. The General Assembly is set to adjourn by April 29.

What will be in or out of the final budget is difficult to handicap, said Sen. David Ford, R-Hartford City, an advocate of the program who leads the Senate's economic development and technology committee.

"It's something that, of course, is a fairly closely guarded secret by the people trying to put the budget together," he said. "They are scrambling right now to see what they can fund and what they can't. I don't think the door is closed on anything yet."

After speaking with Republican caucus leadership, Ford concluded it's likely the Senate will earmark $69.8 million for the 21st Century Fund--just $5.2 million less than IEDC requested. But that tally could plunge if House Democrats choose to haggle in conference committee.

Sizable spending proposals of every kind are receiving a chilly reception at the Statehouse, said Ed Feigenbaum, publisher of the Indiana Legislative Insight newsletter. The state is not even keeping pace with its relatively low projections of tax revenue growth from before the session began. And most every idea to raise new money--such as leasing the Hoosier Lottery to a private contractor or increasing cigarette taxes--has foundered. The main exception is legislation to add slot machines to Indiana's horse racing tracks in Anderson and Shelbyville.

Feigenbaum expects to see a variety of spending cuts in the final version of the budget.

"The money simply is not there," he said.

Even so, that doesn't spell doom for the 21st Century Fund, Feigenbaum said. He noted that the House version of the state budget omitted several other important spending programs, such as an increase for Medicaid or money to underwrite meals in state prisons. Such items will almost certainly be restored before the end. How much they'll get is another question.

"We're not at the panic stage yet," he said. "Nor should you be until 24 or 48 hours before the vote on the thing."

But Indiana's high-tech entrepreneurial community is abuzz with concern. Its leaders say any substantial decrease of the 21st Century Fund's appropriation would be an enormous setback on the path to innovation.

Consider the story of Chad Barden, who in November 2004 founded West Lafayette-based QuadraSpec Inc., a medical-diagnostics company that has grown quickly.

Thanks to a $933,000 grant from the 21st Century Fund and careful use of the state's venture capital tax credit, Barden now has raised a total of $9.4 million for QuadraSpec from equity investors.

Today, QuadraSpec has 45 employees. Barden said he regularly gets offers from venture capitalists to invest far more, if he would simply move his firm to one of the coasts. QuadraSpec has remained rooted in Indiana mainly because of the resources available from IEDC and Purdue University.

"Seventy-five or $100 million for the 21st Century Fund is a pittance compared to what we should be doing," Barden said. "And I told the speaker of the House the same thing. [Decreasing its funding] will chase people like me out of Indiana and force us to start companies in Boston or Silicon Valley."

Bob Foley, CEO of the Indianapolis IT startup Matrix Global Partners Inc., has a similar story.

He put up a "low seven-figure investment" to launch his software company in 2003. Matrix then landed a $1.2 million grant from the 21st Century Fund. Foley said he's used the money to develop a system that provides secure e-mail for highly regulated professional-service providers, such as physicians, attorneys or accountants.

Matrix also has a second product in its pipeline to remotely manage geographically dispersed IT systems, such as the computers in a franchise chain. The startup has seven employees.

"The 21st Century Fund allowed us to bridge that gap between we're dead or we have to court other people outside the state to invest," Foley said. "Without it, at this point the dream would be abandoned, or I'd be out of state."

Since the 21st Century Fund came under IEDC management in early 2005, it has instituted new rules that would allow it to one day recapture some of the gains if its early-stage investments pay off. But Feltman doesn't see that happening for at least a decade. In the meantime, the state budget is the only source of funding for the program.

"To shut off the dollars flowing to early-stage deals would really send a chill through the innovation and talent world we're trying to make inroads on here," he said. "There are lots of deals in the pipeline. Some of them are going to go without funding. That's the ramification."

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