High tech at risk

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The current economic crisis imperils both short- and long-term prospects for our economy. In the near term, lack of liquidity, collapsing asset values, bankruptcies, job losses and foreclosures spell financial ruin or deep distress for most. The long-term impact on our ability to recover and to thrive in the post crisis world is less obvious but perhaps even more troubling.
 
The United States leads the world in scientific and technical innovation. As long as the government continues to invest in research (and it seems as if at least for now it shall), we can continue to lead the world for many years to come. The success of our economy and our competitive advantage relies in large measure on our ability to translate innovation to commerce. Interruption of the flow of invention to new business opportunities and to increases in productivity may convert short term troubles to long term failures. 

Venture capital is the primary financial tool for commercialization of scientific and technical innovation. Venture capital identifies promising technologies, creates companies and funds them. We in America have pioneers and world leaders in venture capital.
 
Venture capital requires both access to capital and a robust public market for young companies. Until recently capital was abundant and the public markets for young companies strong. Today, capital is scarce and the public markets for new ventures closed. The global collapse in asset values means that little to no new capital is available. Many venture firms face early redemption. In some cases limited partners are unable or unwilling to meet contractual obligations for capital calls. Traditional exits are also blocked. The market for follow-on new offerings of young companies has vanished. Unable to get or get out, the venture market has virtually collapsed.
 
For the past 25 years I have been an active participant in the creation and management of venture-backed companies. I have never seen the situation so dire. Companies without reliable cash flow and profit are vanishing at an accelerating rate. Companies that have been surviving by cutting expenses and by obtaining bridge loans for founders and existing investors are running out of options and have nowhere to turn.

Attempts by venture firms to salvage what is left by merging portfolio companies is a short-term tactic at best. The great engine of innovation that has nurtured the American economy for decades is dying.
 
What is now lost cannot be quickly recovered simply by restarting the venture business post recovery. The value of inventions diminishes with the expiration of protective patents. We may lose a generation of both technologists and businessmen with skills needed to create new enterprises. American competitiveness may be seriously damaged in the long run as new centers of research excellence in China, Korea, Japan, Taiwan and India re-emerge post crisis with the technical skill and innovative know-how to create new companies at lower cost than here. Without a manufacturing base and without a commanding lead in high-tech business we face a grim economic future.
 
What might we do? One approach is to have government provide badly needed capital to venture firms. The government would function as an additional limited partner, receiving the benefits of successful investments without interference in management of the funds. Additionally government may provide direct assistance to small- and medium-size innovative firms by substantially increasing the money available through the Small Business Innovation Research funding mechanism. These measures would open the door to new companies and help fledgling companies survive through the crisis. With these measures I believe the venture business may survive together with our hopes for a healthy recovery. Without these or other actions we face a more difficult and uncertain future.

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William Haseltine is a former professor at Harvard Medical School, where he researched cancer and HIV/AIDS. He is the founder of Human Genome Sciences, where he served as chairman and CEO, and the president of the William A Haseltine Foundation for Medical Sciences and the Arts. He lives in Washington, D.C.

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