The changing role of public-private partnerships in a talent economy

As part of my ongoing research into the making of high-performance entrepreneurial ecosystems, I’ve begun spending more time with folks at the intersection of the private + public sectors: city and state economic development professionals, university commercialization offices, public finance experts and the like.

My first lesson from these conversations is the how critical public-private partnerships have been to the development of some of our country’s leading centers for technology innovation — including Silicon Valley.

From defense-related R&D investment, to state and federal support of research universities, to public bond financing for innovation clusters, and even to local land use and zoning support for innovation-centric development, the public sector has played — and continues to play — a massively important role as a partner to private-sector entrepreneurs.

My second big takeaway is how slow these institutions have been to adapt to the ongoing shift from an asset-based economy to one based on talent.

I first encountered this disconnect in my interaction with the commercialization offices of major research universities.

University commercialization offices — like the University of Washington’s C4C — have made a ton of money over the years licensing intellectual property from their academic labs to the private sector. The grandaddy of these programs, the Wisconsin Alumni Research Foundation (WARF), began in 1925 and now manages a $2 billion endowment funded principally by licensing of inventions like Vitamin D and Warfarin (a rat poison formulation now in wide use as a human blood thinner).

Thanks to their long and successful history in the traditional asset-based economy, university commercialization offices are optimized to extract IP, not people. But many of the most important scientific breakthroughs are now being won through information technology, not new devices or molecules. And — as any software investor will tell you — value capture in software innovation isn’t just about ideas, it’s about how those ideas are put into practice and refined over time through interactions with customers.

In other words, it’s very hard to commercialize a software idea without the ongoing support of the team that created it.

Universities — who fight hard to attract and retain key research talent — are understandably reluctant to see their best people walk out the door along with their ideas. But unless they develop new strategies for commercializing “soft”, talent-centric software innovation, they will increasingly find themselves cut out of the most exciting — and valuable — faculty software inventions.

My next surprise came when I began to explore the role of public financial and regulatory support for innovation.

The public sector has a long history of using its low cost of capital and regulatory power to subsidize (directly or indirectly) the creation of innovation centers. From tax credits, to zoning amendments, to direct investments in public infrastructure, government economic development entities are constantly making deals with local entrepreneurs to fuel job growth and long-term economic benefits for their tax base.

The underlying theme that ties most of these public investments in private sector innovation is real estate — usually the construction of new buildings to house some type of commercial activity. 

As just one example, Seattle’s South Lake Union neighborhood — where Founders Co-op is located — was first envisioned as a biotech hub. Developers extracted major zoning concessions from the City of Seattle to build in the neighborhood, plus hundreds of millions more dollars in state and federal support for surface transportation improvements to ease access to the neighborhood. Similar allocations of public funds to commercial real estate development have been made by every major American city to foster “job growth” and “competitiveness”.

But as the global real estate bust of 2008 made abundantly clear, the United States commercial real estate market is massively overbuilt — we don’t need any more office buildings. And as software infrastructure moves to the cloud — and developer productivity accelerates due to relentless improvements in software tooling — physical office space plays an ever-smaller role in the creation of business value in a knowledge economy.

More real estate development can no longer be suggested as a primary enabler of innovation. In a talent economy, the limiting reagents to growth are human skills and the pace of new venture formation.  And if public financing of innovation is to be applied anywhere (which I believe it should), it should be to developing human capital and creating startups, not building more empty office buildings.

The public sector can — and should — continue to play a pivotal role in supporting private sector innovation. But for that role to be constructive, the focus needs to shift from asset-based investments to investments in human capital and entrepreneurship. This won’t happen overnight, but the conversation needs to start right now.