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This Region Must Bet Big to Win Big

Tuesday, April 15, 2008

Provided by The Plain Dealer
Written by Scott Shane

Northeast Ohio must decide just how much it wants to rely on luck to drive its economic future.

It took decades for political and philanthropic leaders to recognize the need to shift our region's focus from waning manufacturing industries to high-growth fields involving technology and medicine.

We cannot wait as long to embrace an investment approach that recognizes the realities inherent in the development of new businesses that will fuel this area's resurgence.

It's true that our area's largest foundations have refocused much of their energies on grant-making related to economic development. In fact, a recent study revealed that foundation dollars for economic development in Ohio had tripled over the past decade. As impressive as this progress is, it remains too modest to guarantee the kinds of returns we need.

It may sound counterintuitive, but for Northeast Ohio, the only sure bet is a really big one.

As much as scholars and others have learned about the ingredients necessary to launch successful companies, we have not yet developed pinpoint accuracy in determining exactly which firms will prosper.

In this context, if we invest in small numbers of new companies, we need to be extraordinarily lucky for our gambles to pay off.

But if we invest in more companies, probabilities kick in, and the odds tell us we will have some winners. Even if we don't know which start-up will be this region's next Steris, we can be confident that it will be among our investments.

To wit, we must find a way to triple annual investments in JumpStart, our region's nonprofit venture capital initiative.

The approach is the same one that experts advise for individual investors considering stock picks: diversify, diversify, diversify.

Let me be clear: The large number of foundations, corporations and government agencies that have supported JumpStart deserve applause for understanding the organization's enormous potential. Since its founding in 2004, the organization has drawn national recognition for its innovative approach.

More recently, Entrepreneur Magazine ranked JumpStart ninth in the nation among all venture capital firms in 2007. Meanwhile, an analysis from Cleveland State University last year put the organization's total economic impact at $40.3 million and 308 jobs. In short, JumpStart has proved it deserves our support.

Its leaders would like to fund more promising companies and know that many high-potential companies are out there.

But they haven't got the money to make as many investments as there are worthy recipients. The next step is to provide the resources necessary for its leaders to make investment decisions based not on limited funds, but realistic assessments of all promising applicants' chances for success.

Consider the example of Ireland, once one of Western Europe's least prosperous nations. A combination of government policies helped turn its moribund economy to raging success, spawning the phrase Celtic Tiger to describe the country's new, more ambitious approach.

Lower tax rates and increased investment in education certainly contributed to this progress, but a willingness to finance a large number of high-potential start-ups also played an important role. Enterprise Ireland, the government's agency to support individual start-ups, has helped the country vault ahead of most of its peers in the number of early-stage ventures launched.

As a director of Enterprise Ireland told the New York Times earlier this year: "We must support new approaches, nanotechnology, biotechnology and other sciences, because we cannot succeed in the future using what got us here in the past."

At long last, Northeast Ohio has begun to embrace this perspective. Now we must proceed full-bore. Our economic future is too important to leave to chance. After nearly two decades studying entrepreneurship, I can promise this: Tripling JumpStart's funding will ensure that we will have the high-growth companies this region sorely needs.

Shane is the Mixon Professor of Entrepreneurial Studies at Case Western Reserve University and author of "Illusions of Entrepreneurs: The Costly Myths that Entrepreneurs, Investors and Policy Makers Live By."