Economic Development and Technology and Small Business

Tech fund set for overhaul: State shifts focus to commercial results; founders fear changes to peer-review process

May 30, 2005

Indiana's showcase program for new technology development is about to be redesigned.

Version 2.0 of the 21st Century Research and Technology Fund will direct more money to entrepreneurs. It will concentrate on projects whose commercial prospects are clear.

And as it distributes $75 million of taxpayers' money over the next two years, it will expect a return on its investments.

"The goal is, if a company does well, to get a return for the state," said Michael S. Maurer, president of the Indiana Economic Development Corp. and a majority shareholder in IBJ Corp. "In the event these companies we invest in hit the jackpot."

But some worry several key features are being left out of the overhaul. They are concerned corporate projects will struggle to attract money from the 21st Century Fund. And they think universities, which create the pure research that eventually spawns entire new industries, will also see a smaller share.

Meanwhile, the 21st Century Fund's out-of-state scientific peerreview process, carefully designed by its founders to eliminate potential conflicts of interest, appears headed for the scrap heap. In its place, IEDC envisions an in-state appraisal with heavy input from business experts.

"We felt it was the [out-of-state peer review] process that assured we were always making our decisions on the best science and the best team," said former Lt. Gov. Kathy Davis, a Democrat and one of the 21st Century Fund's primary designers. "It was very important to get the most top-notch science. It was in that we felt we would have competitive advantage."

Results orientation

Maurer cautioned that any changes remain tentative. But certain points recur over and over in conversations with the key figures charged with reviewing the 21st Century Fund.

Dane Miller, president and CEO of Warsaw-based orthopedic implant-maker Biomet Inc., is an IEDC board member. He also holds a seat on IEDC's entrepreneurship subcommittee, which is directly responsible for analysis of the 21st Century Fund.

Miller wants to see more time and attention spent following up on 21st Century Fund investments, instead of "just tossing the project in a file somewhere."

"It looked to me like various projects were funded [under the previous administration], but there was little effort to find out whether the objectives of the fund were achieved," Miller said.

In the past, most 21st Century Fund money was distributed through grants. The state took a long view, with no strings attached, aiming to plant seeds that would sprout fruit years later. Now, Maurer said, Indiana will seek a more direct gain on its outlay. Depending on the deal, he said, 21st Century Fund money may be offered through loans, equity investments or other convertible securities.

Academic projects previously held the inside track for funding, and the state proudly touted the new relationships between professors and managers that resulted. But IEDC has apparently heard the pleas of independent entrepreneurs, who complained they couldn't get attention without university affiliation.

"There will be no predisposed thinking as to where that money has to go, to a university or entrepreneur," Maurer said. "We'll look at the best deals we can find."

IEDC Board Member Cathy Langham, president of locally based freight management company Langham, also sits on the entrepreneurship subcommittee. She emphasized the IEDC's new "bold and aggressive" effort to gain returns from 21st Century Fund investments that might then be plowed back into other startups.

"The new approach is going to be more of a business approach," Langham said. "While I think the old board made very good decisions and did a very good job, they were scientists. There were no businesspeople on the board, and they made decisions from a scientific perspective."

Conflicts of interest

Several former 21st Century Fund board members would likely object to Langham's assessment of their perspective.

Entrepreneur David Becker has founded and sold several successful information technology companies. Ron Brumbarger is president and CEO of Carmel-based Web developer BitWise Solutions Inc. Stephen Ferguson is chairman of Bloomingtonbased medical-device-maker Cook Group Inc. David Wortman is president and CEO of local health-care-software maker Mezzia Inc. Venture capitalists Tom Hiatt and Teri Willey are among the most active in the state. And voice-mail innovator Scott Jones is perhaps Indiana's bestknown high-tech guru.

In its review, IEDC hasn't solicited the input of the 21st Century Fund's previous board members. But there were reasons behind their funding decisions-reasons they say shouldn't be lightly rejected.

Davis said the former national peer review allowed Indiana to learn how its new technology projects stack up on the international stage where they'll ultimately compete. At the same time, it gave heavyweight out-of-state reviewers a reason to tout Indiana as a high-tech hub.

And it reduced the likelihood that political or geographic pressures would influence grant decisions, she said.

IEDC wants to ensure that other states don't poach Indiana's best ideas during the peer review, Maurer said. Although he admitted that hasn't been a problem, he wants to avoid having it become one. Biomet's Miller agreed.

"In general, I think conflict of interest is an overused term in today's society," he said. "I don't think you have to go out of state or take people who have no vested interest in the outcome to ensure an unbiased conclusion is reached. People who have a vested interest in a decision may be the best people to make a decision."

Distributing limited dollars

Directing more money to early-stage entrepreneurs necessarily means less for academia. Dr. Craig Brater, dean of Indiana University's School of Medicine and a former 21st Century Fund Board member, warned against sacrificing expansion of pure research capacity in the search for short-term financial gains.

If the 21st Century Fund isn't going to make those long-term investments, he said, the state needs to find another vehicle that will.

"You're not going to have the kind of idea generation you need unless the research capacity is increased substantially," he said.

Purdue University Calumet Professor of Mechanical Engineering Chenn Zhou is a 21st Century Fund award recipient. She used the money to research ways to make the steel industry's massive, energy-guzzling blast furnaces more efficient, and thus more profitable. She hopes to apply for more 21st Century Fund money to apply her findings to other parts of the steel factory.

Since the IEDC plans to emphasize small entrepreneurs over big business, she's less likely to get money next time around.

"I agree small business needs help," she said. "But the U.S. manufacturer needs help, too."

Miller said established businesses like his have internal resources for research, and the 21st Century Fund's limited dollars could be better directed elsewhere.

"It's the small entrepreneurial firms that would create the greatest benefit to the state," he said.

In its first half decade, the 21st Century Fund devoted more than $130 million to high-tech projects, mostly with an eye on results that remain a decade or more away. Perhaps, said Karl Kohler, the 21st Century Fund's longtime deputy director, now is the time to consider the short run, too.

"In the first five years, the general nature of the investment was in the fiveto 20-year time frame. It may well be time to pull that time frame in, so we have near-term things going on as well. That makes sense if the state was itself a business," Kohler said. "We have planted those seeds. Maybe it's time to do other gardening activities. It's just a pity we don't have enough money to do everything."
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