Pa. cuts scarring Ben Franklin
Friday, May 14, 2010
by Peter Key
The cut in state funding for Ben Franklin Technology Partners of Southeastern Pennsylvania has hurt the area’s system for developing entrepreneurial companies and its impact will increase the longer it continues.
That’s the view not only of people within the organization, which is one of four such state-funded economic-development nonprofits in Pennsylvania, but also of others who work with the young technology companies it provides with financing and other assistance.
“The more funding they have, the better it is for us,” said Ellen Weber, the executive director of Robin Hood Ventures, a Wayne-based group of the wealthy individual investors called angels.
In the 2008-09 fiscal year, the Ben Franklin Technology Development Authority, which is the part of the Pennsylvania Department of Community and Economic Development charged with spurring technology-based economic development, received $50.7 million from the state of Pennsylvania. It passed on $27.6 million to the local Ben Franklin Technology Partners of Southeastern Pennsylvania and three other similar organizations in other parts of the state, meaning each got $6.9 million.
Last year, legislators reduced state funding for the Ben Franklin authority to $20 million for the fiscal year that ends June 30. The authority, in turn, cut funding to the local Ben Franklins and its three sister organizations to $16 million, or $4 million apiece.
The agencies were hoping the cuts wouldn’t be permanent, but the budget submitted by Gov. Ed Rendell for the 2010-11 fiscal year has the local Ben Franklin and its sibling agencies each receiving $4 million again.
RoseAnn B. Rosenthal, the local Ben Franklin’s president and CEO, just hopes the legislature doesn’t cut that amount further.
“We would love to be brought back to the $6.9 million, but the political realities are the political realities,” she said.
The cut has been mitigated somewhat by Pennsylvania’s Alternative Energy Investment Act of 2008, which steered $10 million apiece to the four Ben Franklin organizations to support early-stage development of alternative energy technologies.
For example, the local Ben Franklin’s board recently gave its approval to invest a little more than $2 million in eight early-stage companies, provided they can raise the same amount of money from the private sector. Four of the companies, which were approved for investments totaling $1.35 million, are being funded with money from the Alternative Energy Investment Act.
Still, the cut has affected the local Ben Franklin’s investing, which is its most prominent activity.
In its 2009 fiscal year, Ben Franklin committed $7.4 million to 35 companies. In its 2010 fiscal year, which concludes at the end of next month, it projects it will commit $5.7 million to 35 companies. The number of companies is the same, but the amount it’s investing in them is projected to fall by $1.7 million, reducing the size of its average investment by almost $50,000 to nearly $163,000 from a little more than $211,000.
Bruce Luehrs, a partner in Emerald Stage2 Ventures, an early-stage venture fund that counts Ben Franklin as a limited partner and is housed in its headquarters at the Navy Yard, said the reduction in funding has already discouraged some would-be entrepreneurs.
“When an entrepreneur says, ‘I’ve got a critical mass, I’ve got this great idea, I’ve got some early customers and I need half-a million-bucks,’ and they find the best they can get is $150,000 … it becomes for some a nonstarter,” he said.
Having less money to invest also has forced Ben Franklin to change its investment strategy somewhat. It still only invests in early-stage companies, which are inherently risky, but it won’t take a chance on some in which it might have been willing to invest before its funding was cut.
“If there are more dollars, you can take a longer-term higher risk on a larger portion of the portfolio,” Rosenthal said.
The funding cut has affected Ben Franklin in areas besides investing.
For example, its Technology Commercialization Group funds technology commercialization engagements in which colleges and universities work with companies to help them develop products or solve other problems they may be having. In its 2009 fiscal year, the group paid $474,000 to fund 25 engagements; this fiscal year, it projects paying $366,000 to fund 10.
Ben Franklin also has cut back its sponsorship of events designed to promote the region’s entrepreneurial community. Rather than help fund them, as it often did in the past, it now limits its support to in-kind contributions.
Area efforts funded directly by the Ben Franklin Technology Development Authority also have had their funding cut.
For example, the Nanotechnology Institute, an effort by Ben Franklin, the University of Pennsylvania, Drexel University and others to promote nanotechnology research and commercialization in the area, received $3.5 million for two years from the authority in fiscal 2008. It received $1.5 million for two years from the authority this fiscal year.
The funding cuts to the institute and the technology commercialization engagements may not have the same immediate impact as the funding cuts to Ben Franklin’s investments. But Rosenthal said their effect will be felt down the road.
“It’s not just about the number of companies that are ready to [get funded] now,” she said. “It’s about what you’re doing to the infrastructure and what you’re doing to the companies that will be ready to [get funded] five years from now.