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editor's note-Wake Up and Smell the Ginseng-July 2011
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editor's note-Wake Up and Smell the Ginseng-July 2011

If we don’t better support our early-stage companies, China soon might.

One of the many strange but interesting things to happen in Wisconsin over the years was the quick takeover during mid-1980s of one its most prized assets—central Wisconsin farmland. 

As farmers found it increasingly difficult to make money raising traditional crops for American buyers, they decided to grow ginseng, a perennial herb with scarlet berries and an aromatic root valued in Asian medicines, for Chinese buyers. While Wisconsin had always grown this crop in small batches, demand for it from Asia increased nearly tenfold within a few years. What had for decades accounted for less than a few hundred acres of production became several thousand almost overnight. 

Could the same fate be in store for those cultivating American intellectual property?

Similar to Wisconsin farmers in the 1980s, owners of capital-hungry businesses with innovative products and services are finding American support scarce. Meanwhile, China is positioned to lend a hand, and in the process, begin purchasing our nation’s most promising intellectual property at bargain prices.  

This would of course be great for entrepreneurs, who would finally receive a financial reward for their hard work. Investors who previously backed their companies also would receive a return on their investments. But would it be good for our country? Would we grow the innovations only to see another country purchase them and reap the benefits from our toil, both in terms of ROI and job creation?

The question has already popped up a few times, most recently with Cirrus Industries in Duluth. Freshman U.S. Representative from Minnesota Chip Cravaack claimed earlier this year that the company’s pending purchase by a Chinese aviation firm would hurt employment, and that its technology ultimately would be used against us by the Chinese military. He went so far as to ask a federal committee to block the sale.  

Others have raised similar concerns regarding how China might use our own technology to its advantage, and to our disadvantage. And the U.S. Committee on Foreign Investments does keep an eye out for activity that could potentially weaken national security. I haven’t heard much discussion yet, however, over what would happen if China began to purchase our latest advances in pharmaceuticals, medical technology, and biotechnology.

The Chinese government allows for much faster testing of new medicines and medical devices than does the U.S. Food and Drug Administration. A company such as New Brighton’s Acorn Cardiovascular—now defunct due to FDA issues—would have made it in China. Concerns over the stem cell research? Not there. And when it comes to patent protection, guess who’s leading the charge: China. (See the story on page 57.) As things stand today, it’s plausible that China could soon acquire our more promising medical technology and biotech startups, or at least their intellectual property, and eventually become more advanced in health care than we are. 

Dialogue about how to better support early-stage companies must now include at least some consideration of who’s ready to come in and take over if we don’t get our act together. Another U.S. Representative from Minnesota, Erik Paulsen, touched on this point on June 2 when he told a House Government and Oversight subcommittee that the medical technology industry is at risk of drying up and moving overseas to Europe and China.

China’s the one with all the cash. With $2.3 trillion in foreign currency reserves, it has cornered the worldwide debt market. After investing billions of dollars in the last 10 years into dozens of nations including Italy, Greece, India, the Philippines, and several in Africa, China is the largest investor in other countries’ infrastructure needs. And it is increasingly becoming the largest trading partner with other nations. A recent study from the Asia Society reported that China might invest $1 trillion in markets outside its borders before 2020, with much of it possibly going toward U.S. interests.

All this brings up the nagging question batted about for more than a decade in the Twin Cities—how can we rebuild what was once a robust environment for early-stage companies? In keeping with Twin Cities Business’s policy of always looking for solutions, I’ll toss out this suggestion: What if we created our own local stock exchange? We could call it the Twin Cities Exchange, or TCX.

Academics, executives, and money managers are on the verge of establishing such a local exchange in Lancaster, Pennsylvania. State legislators are examining doing something similar in Hawaii. In both instances, the idea is to create full-fledged electronic exchanges where companies would pay relatively small fees to have their shares listed.

Our previous strength as a financial center and incubator for start-ups was due mostly to the fact that we had an active micro- and small-cap stock market in the Twin Cities. A few investors could provide seed capital to a company. Next, a dozen or two other investors would buy into its private placement offering. Then a hundred or so would buy into its initial public offering. And later, thousands would trade in and out of the company’s newly minted stock. 

Along the way, investors in each of the earlier rounds of financing received a return on their investments, and they poured at least a portion of these returns into new opportunities. The system worked well for more than three decades. But due to regulatory and industry changes, the local market for small-cap stocks died in the late 1990s, and with it, the means through which investors could make a return on their pre-IPO investments. 

TCX could help bring this back, providing local companies with the capital they need but aren’t getting right now. And under U.S. securities laws, companies wanting to keep costs down and avoid registering an offering with the SEC could still go public if they agreed to incorporate in Minnesota, sell shares only to Minnesota residents, and do most of their business in this state.  

This, by itself, is of course not enough. But combined with other efforts and support from public and private leaders, it could become the cornerstone to a new approach for supporting our state’s most promising companies, cultivating intellectual property, and generating financial returns for entrepreneurs and investors. 

And it would be far better than continuing to simply whine about the problem, while our overseas competition methodically and quietly prepares to beat us at our own game.

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