by Douglas Hutchings and Stan Green
Dean Matthew Waller of the Walton College of Business wrote about the bright future ahead for the solar industry in Arkansas for Arkansas Money & Politics nearly one year ago. The article is extremely relevant considering current policy changes, but I would argue that it highlights an issue of greater importance – the value created by fostering science-based ventures. These types of companies tend to take longer to reduce technology risk and require larger amounts of investment capital to scale, but the impact on the communities that foster them is long-lived.
All startups face technology risk, market risk and operational risk. Technology risk refers to the challenge of building the product, and market risk is whether or not anyone cares once you build it. The stereotypical example is a cure for cancer versus a mobile app. One has a huge development hurdle, and the other has a considerable market hurdle. Operational risk is primarily related to access to talent and would be an entirely different article. Generally, a science-based venture would tend to have a much higher technology risk while an IT company would have a lower barrier to entry but higher market risk.
Arkansas Power Electronics Incorporated (APEI) provides a local example. The founders’ background in silicon carbide provided a compelling competitive advantage. While the market wanted smaller devices capable of higher power capabilities, the challenge was in building them. APEI grew into a world leader in packaging for these devices and was acquired by Cree, a worldwide manufacturer of semiconductor products in 2015. The fifty-plus jobs created for technical talent along the way were inherently “sticky” as there is no practical way to move everyone and you can’t replace them since similar talent doesn’t exist elsewhere. Instead, the team continues to grow and provide jobs for local graduates with advanced degrees while recruiting from around the world to Northwest Arkansas.
APEI is an Arkansas success story but also set the stage for technology entrepreneurs in adjacent markets. Many of the companies highlighted in Waller’s article have benefited in some way from APEI (or from each other), and Arkansas is now recognized as a technology innovator in both power electronics and solar cell/module technologies. While there is no definitive lineage, without APEI, there would probably not be a Picasolar. Without Picasolar, WattGlass may not exist. If WattGlass did not exist, then SurfTec may not have been started.
In the bestselling book Zero to One, Peter Thiel writes that a “Zero to one moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. Tomorrow’s champions will not win by competing ruthlessly in today’s marketplace. They will escape competition altogether because their businesses will be unique.”
This makes us wonder if the next billion-dollar Arkansas company will be in the area of retail, logistics, finance, protein production or something entirely new?
SETTING THE STAGE
The entrepreneurial ecosystem in Arkansas is developing rapidly. Part of this development is figuring out where we want to deploy limited resources. Dr. Richard Brown, dean of the College of Engineering at the University of Utah, recently spoke at the inaugural Arkansas Innovation Council, formed by Gov. Asa Hutchinson. Brown illustrated how Utah actively fosters engineering entrepreneurship while being capital efficient. The University of Utah encourages commercialization, and the ecosystem has developed ways to secure capital to reduce technology risk. The take away for Arkansas is not “how do we be more like Utah?” but instead how do we build our own culture and mechanisms to foster a strong pipeline of potential success stories?.
Innovation is not geographically limited. Arkansas researchers are doing world-class work in diverse fields. The University of Arkansas continues to demonstrate its commitment to economic development and various programs have been developed to enhance the earliest stage of the pipeline through interdisciplinary research, proof-of-concept and research commercialization funding. While access to capital at all stages remains challenging, it is more available to grow companies that have addressed their fundamental technical risk. The biggest gap that exists today is funding for the extensive research and development to bridge university labs and the marketplace.
The Small Business Innovation Research (SBIR) program is billed as “America’s Seed Fund” and deploys over $2.5 billion each year to high-risk, high-reward companies. Programs at individual agencies like the Tech-to-Market and Advanced Research Projects Agency-Energy (ARPA-E) at the Department of Energy complement SBIR funding. Roughly 700 public companies have their roots in SBIR funding (source), and success stories include names like Qualcomm, Jawbone, Symantec, iRobot and 23 and Me. Arkansas doesn’t do a great job at accessing this funding which is targeted at our most significant gap. When compared to states of a similar population, it is evident that we can do better. We secure roughly 1/4th the funding per capita of Utah.
Identifying and executing on a strategy to close this gap would add upwards of $20m annually into our high-risk, high-reward companies while giving us 10-20 additional shots each year at another APEI. Imagine a state-wide ecosystem that 1) efficiently connected our world-class researchers to challenges within our leading industries and connected them with new industries where their work creates value, 2) recruited additional world-class talent to Arkansas, and 3) included a model – a Venture Studio – to support innovators in efficiently accessing federal grant funding. A lot of the pieces to enhance the commercialization of our university research already exist through Innovate Arkansas, the University of Arkansas Office of Economic Development, the Arkansas Research Alliance and many more entrepreneurship support organizations. We need to be efficient with what we already have while thoughtfully expanding the programs that get results. A unifying thread that brings these initiatives together would expedite our next “Zero to One” moment.
Douglas Hutchings is an entrepreneur best known for his work in the solar industry. He is a passionate advocate for programs and policies that enable all graduates, regardless of background, to find or create a job in Arkansas. Stan Green is a native Arkansan and has been an executive in the energy industry for more than three decades, most recently in a company he formed.