Donald Fry: Tapping into Maryland’s potential for innovation

By Donald C. Fry

Well over 200 entrepreneurs and business advocates descended on Annapolis earlier this week to urge state lawmakers to enact an O’Malley administration proposal that would create Invest Maryland – a premium tax credit program aimed at generating $100 million in private investment funding from insurance companies for early-stage bioscience and technology businesses in Maryland.

Speaking to individual lawmakers and testifying to two key budget committees, advocates articulated a straightforward answer to the key question: “Why does Maryland need an influx of newly-available investment funding for emerging tech-driven businesses?”

The answer? Compared to other states that are aggressively nurturing the growth of their bioscience and technology industry sectors, Maryland lags behind in available early-stage financing.

That’s a significant economic development shortcoming for a state that is so rich in research and innovative ideas percolating from within its plethora of research institutions.

There are three major components to a healthy entrepreneurial culture – innovation, entrepreneurs, and capital, Robert A. Rosenbaum, president of TEDCO, the state’s technology economic development agency, told members of the Senate Budget and Taxation Committee at its February 16 hearing on SB180, the Invest Maryland legislation.

Maryland is rich with innovation, and a generation of new entrepreneurs is emerging here, helped in part by entrepreneurial programs at universities in the state. But when it comes to capital, “This is where we’re very short,” said Rosenbaum, a former managing director of a venture fund.

How serious a disability is it to technology-related business development?

It recently cost Maryland a new business that is developing around the allergy-suppression work of Johns Hopkins University researchers, Hopkins President Ron Daniels told lawmakers.  The early-stage company will operate in Pennsylvania, which had readily available early-stage funding.

“This was our idea, and it’s going to be developed in another state,” Daniels said.

Other states where an abundance of early-stage seed funding is available include California (Stanford University) and Massachusetts (MIT), also primary competitors with Maryland for leadership in bioscience development, advocates told lawmakers.

Early-stage funding will become increasingly critical to tech transfer not only at Johns Hopkins, but to institutions in the University System of Maryland, where a newly-adopted strategic plan for 2020 places a strong emphasis on fostering entrepreneurship and capitalizing on tech transfer and economic development opportunities.

Investment experts cite the need for early-stage funding in Maryland to get emerging companies through the financing “valley of death,” the in-between stage at which entrepreneurs have exhausted most initial start-up investments from friends and angel investors, but need funds to get their new company to a more developed stage that will attract today’s venture capital firms.

In Maryland, the effects of the recession on financing have largely evaporated such early-stage funding, advocates say. “Today, if we had to start over again, I’m not sure we could make it in Maryland,” said Steve Dubin, CEO of Martek Biosciences, a Howard County-based company that now employs 600, including 250 in Maryland.

TEDCO’s Rosenbaum estimated that, right now, potential demand for early-stage investment funding related to research at Maryland’s institutions could amount to as much as $500 million.

The Invest Maryland legislative proposal would generate investment funds by selling tax credits, through an auction process, to insurance companies to offset state taxes that they must pay on premiums.

The tax credit sale would raise approximately $100 million from insurance companies over the next three years, but the costs to the state would be deferred until 2015, when the companies can begin to use the tax credits, in annual 20 percent increments, to reduce their tax liabilities.

The Invest Maryland legislation could directly benefit between 200 and 400 small businesses in Maryland over a five-year period, according to the Department of Legislative Services.

Legislation such as this will almost certainly be amended by lawmakers as it moves through the General Assembly.  But it’s important to keep our eye on the core purpose of this proposal – the need to implement strategic state investments in business growth and job creation.

The existence of such funding initiatives is one of eight consensus prerequisites – “core pillars” – for a competitive business environment that business leaders and economic developers detailed in the Greater Baltimore Committee’s recent report: “Gaining a Competitive Edge: Keys to Economic Growth and Job Creation in Maryland.” The Invest Maryland initiative also relates to another of the “core pillars” for job creation and economic growth – government leadership that unites with business as a partner.

The availability of an early-stage funding program is critical if we are to fully realize the business development potential within Maryland’s vast resources for innovation. Its passage would demonstrate that Maryland is ready and willing to participate in the new economy.