Can state and local governments sow the seed?

Entrepreneurs and small business owners nationwide are feeling the effects of a lack of early-stage (or seed) business funding. The gap for seed funding in Northeast Ohio alone is about $50 million annually, according to an oft-cited 2005 NorTech report.

This means that entrepreneurs may have increasing difficulty in finding necessary money to finish developing and testing products, obtain patents and certifications, prototype commercial products, conduct market testing, hire critical staff and services, purchase capital equipment, and build-out facilities.

Angel investors and venture capital firms rarely invest in very early-stage companies, because investments are too risky. However, state and county governments are coming to the aid of entrepreneurs, implementing investment, grant and low-interest loan programs using both governmental and private contributions.

In response to a study, which showed that less than 2 percent of Indiana investment went to seed funding, the state created its own fund to take equity in and provide oversight to emerging companies while offering investments of $50,000 to $500,000.

The Michigan Pre-Seed Capital Fund, founded in February 2007, has screened 58 technology-based companies in the past 10 months, investing $4 million in 18 of the applicants. According to the fund's website, sponsored companies have attracted $6.5 million in matching funds and retained 87 jobs thus far.

Northeast Ohio counties, including Lorain and Cuyahoga, have also started innovation and small business development funds. The Innovation Fund of the Lorain County Community College Foundation offers technology and business validation grants of up to $100,000 to companies throughout the region. In the first round of funding, Innovation Fund committee members reviewed 15 applications, recommending three for funding.

In addition to a Commercial Redevelopment Fund that supports companies in renovating abandoned or underutilized commercial space, Cuyahoga County's New Product Development and Entrepreneurship Loan Fund offers $10,000 to $100,000 loans to county manufacturing companies on a seven-year repayment schedule. In operation since 2004, the new product fund has awarded $2 million of its $3.3 million budget, approved funding for 75 of its 450 applicants, created 117 jobs, and attracted $12.5 million in follow-on funding.

However, most counties are struggling to find ways to provide this kind of support. Investing public money in for-profit companies is a tricky business. If it works, the officials are heroes. But it is unlikely to provide high returns, which can hurt politicians who need to justify their actions to get re-elected.