How much should government help risky new cybervenlures?
by Burney Simpson
On a crisp autumn morning, tourists
standing atop the world-famous
Fermi Lab in suburban Batavia can just
make out the black form of the Sears
Tower, looking like the bump where
Chicago should be in that humorous
illustration of a New Yorker's view of
the world.
It's easy to lose perspective at Fermi,
where scientists search for tiny quarks by
sending atoms rocketing around two
giant rings called colliders. In fact, the
lab's Tevatron Collider and the Great
Wall of China are the only human-made
objects astronauts say they can see from
outer space.
But an even more powerful collider is
set to open in Switzerland in 2006.
And that has the Fermi scientists and
Illinois' politicians scrambling to
find ways to keep the lab's highly
sophisticated, pioneering research going.
Most of those efforts are based in
Fermi's home of DuPage County and in
downtown Chicago, where Mayor
Richard M. Daley has been pumping
money into retrofitting the Loop for
future high-tech ventures. Meanwhile,
Gov. George Ryan, with the help of
influential business leaders, has been busy
building the infrastructure for a high-tech
state educational system.
Nevertheless, high-tech entrepreneurs
argue, those efforts by themselves won't
alter this state's place in an economy that
increasingly rests on rapidly advancing
technology. To Internet movers and
shakers, this state remains a small bump
on the global horizon — though the view
has shifted west. These days, Illinois isn't
being eyed from New York, but from
Silicon Valley. And the major stumbling
block to securing a place for Illinois in
this retooled economic world, these
entrepreneurs say, is an inability to raise
the cash to get ideas off the ground.
To that end, Ryan and state officials
have begun putting public dollars toward
enterprises that are developing Internet
and computer-related products. Leaders
of this high-tech effort say Illinois has a
lot of positives, including excellent
universities, a well-trained work force and
a center of capital in Chicago. The state
might not displace California as the hot
place to write the latest software, they
argue, but it could overtake other tech
leaders like Massachusetts, North Carolina and the suburbs of Washington, D.C.
But are such economic incentives the
best use of public resources? It's an old
question, no matter how new the technology, or competitive the challenges.
The timing certainly seems right for the
governor's latest economic initiatives. The
golden glow that emanates from anything
Internet-related does tend to overshadow
any objections.
Still, those who dare to disagree say it
may not be the state's business — or in
the state's best interests — to invest in
risky start-up firms. There are plenty of
potential investors, they note, as long as
an entrepreneur has a good idea that will
lead to a viable product. Indeed, the state
might well be better off in the long run
updating the old-style approach to
economic incentives that harkens to the
days of the dying Rust Belt, an eternity in
megabyte time.
There's something else to consider. In
Illinois, it's always worthwhile to take a
closer look at the potential winners and
losers in any economic development
strategy. And no matter how advanced
Ryan's thinking, he is still relying on old
friends and backers to help him decide
which firms will get those start-up bucks.
What's the tab to date? In the spring
legislative session, Ryan got $100 million
for his high-tech initiatives. Most of those
dollars will be spent on technology education from first grade through college.
But about $16 million is designated for
grants and investments in technology-related firms.
The quasi-public Illinois Coalition is
the primary conduit for these investments. And while the coalition is backed
financially by some of the state's largest
corporations, it can draw on those public
dollars for high-tech ventures. The only
catch is that it must get matching funds
from the private sector. Since 1997, the
coalition has slated about $2.7 million in
state funds for 13 firms.
The coalition also acts as an information center and a source of advice for
entrepreneurs. It will review a proposed
product, help write grant requests and
connect an inventor with funders.
At the same time, the group is moving
forward on developing a mega-research
park near Fermi and the DuPage County
Airport. U.S. House Speaker Dennis
Hastert, a Yorkville Republican, helped
get $500,000 in federal money for a
consultant to study the possibility. As it
happens, the director of Hastert's Batavia
office, Shaye Mandle, became president
of the Illinois Coalition last month.
6 / November 1999 Illinois Issues
Meanwhile, state legislators are moving
forward, too. A task force chaired by
Republican Sen. Kirk Dillard of Downers Grove has been holding hearings on
how best to develop, grow and retain
technology businesses in Illinois.
Fred Giertz, an economics professor at
the University of Illinois at Urbana-
Champaign, advised task force members
that putting public resources into more
basic areas would encourage such
growth. Giertz told the group that Ryan
is on target in putting more money into
education and bolstering the state's technically skilled work force, but focusing on
high-tech efforts has its limitations.
"We should be concerned about all the
businesses in the state, not necessarily just
target the high-tech firms," Giertz
advised. "The government should not
choose the firms to come here and give
them special considerations."
Giertz, who serves on the board of the
State University Retirement System,
notes that the pension program for university employees aims to invest about 5
percent, or some $500 million, of its
funds in venture capital operations. So,
he suggests, there is competition from
pension funds to find viable new firms.
Though supporting Illinois-based firms is
noble, Giertz warns, the first priority
should be making good investments.
"There is a danger to mixing social
goals with investment goals. And there is
the slippery slope of choosing between
certain needs. Do we choose housing, or
the environment or put it into stressed
areas?" Giertz says.
Private investors may finally be coming
around to the state's homegrown talent
anyway. Andrew "Flip" Filipowski
became a local hero when he sold his
Oakbrook Terrace-based Platinum
Technology Inc. communications firm
this year for $3.5 billion. His next project
is divine interVentures Inc., a venture
fund that will invest in Illinois-based
firms in the high-tech arena. (Illinois
Coalition's former president, Thomas
Thornton, moved over to interVentures
in October to become "venture catalyst"
for that company.)
This fall, interVentures more than
doubled its initial goal of raising $300
million. "The start-up capital is starting
to flow in now. That's key," says Paul
O'Connor, executive director of the
Chicago Partnership for Economic
Development, a planning group with $2
million in public dollars that is seeking
matching funds from private business.
While promising steps have
been taken to retool Illinois'
development strategies, the
state can't seem to shake one
tradition: putting insiders in
the middle of the action.
O'Connor recognizes that, while government enticements are important to
lure business, some of those strategies are
out of date. The state incentives from the
1980s included special tax deals, or real
estate breaks, and those are good for
what they were trying to do — preserve
heavy industry — says O'Connor. "Those
are still good tools. But the problem
now is scale. Those tools may not help a
15-person tech firm," he says.
O'Connor recommends a three-pronged approach. First, the state's
infrastructure must be capable of
handling the latest in fiber optics and
other technological advances.
Second, the work force must be trained
to support high-tech businesses, which
for some tasks may not require years of
advanced college level courses. Community colleges and vocational schools may
be able to fulfill that need. The dream is
to get a fund like interVentures to invest
in a jobs producing, tech-related business
in a hard-bitten neighborhood like
Englewood in Chicago, O'Connor says.
Finally, city and state governments
must market themselves as tech-friendly.
Illinois has a lot going for it, including
the University of Illinois at Urbana-Champaign, "the mother church of
supercomputing," says O'Connor. "But
we just aren't on the radar screen. We
have technology leaders, but all you hear
is Austin [Texas], Washington, D.C. and
Silicon Valley."
Chicago has already begun offering to
help make technology centers out of
empty buildings around its downtown.
The historic Lakeside Press building will
receive a $250 million makeover to get it
ready for Internet telecommunication
firms. The Lytton building is being fitted
with high-speed cable to entice software
developers. And the city has created the
$3 million Chicago Technology Growth
Fund, using dollars from city employee
pensions.
While some promising steps have been
taken to retool Illinois' economic development strategies, the state can't seem to
shake one tradition: putting political
insiders in the middle of the action. Ryan
has an indirect role in determining how
the Illinois Coalition will invest its
money. After the group reviews and
approves a grant or a loan, the recommendation goes to the Illinois Development Finance Authority for approval.
The authority's 15-member board
includes six members newly appointed by
Ryan. And the chiefs of the Department
of Commerce and Community Affairs
and the Department of Labor, both
appointed by the governor, automatically
become members of the board.
In fact, most of the board's members
are longtime political players. The current
chair is Michael Zavis, a co-managing
partner of prominent Chicago law firm
Katten, Muchin & Zavis. That firm
donated $22,750 to Gov. Ryan and a
total of $52,486 to other state politicians
and their campaign funds in 1997 and the
first half of 1998, according to campaign
finance records from the Illinois
Campaign for Political Reform. During
that same time, the authority's board
members, or their businesses, gave
$311,876 to candidates and officeholders
across the state, according to the watchdog groups.
"That's the pattern with this kind of
appointment. It goes to players and that
tends to be givers," says Cynthia Canary,
director of the group.
In September, Zavis told the Chicago
Tribune he would like the legislature to
establish an additional $100 million
special fund for start-ups that would
be overseen by the authority and the
Illinois Coalition.
What with the current strong economy
and Ryan's Illinois First money waiting
to be spent, maybe Zavis will get his
wish. But it could be hard to convince
legislators to invest in an Internet-based
business that may only exist on a drawing
board.ž
Illinois Issues November 1999 / 7
Are economic development
incentives the best use
of public resources? It's an
old question, no matter
how new the technology.