How the Digital Revolution (and Uncle Sam) Can Revive the Economy

As the nation slowly emerges from the worst recession since the Great Depression, entrepreneurs are going to be the key to the nation’s recovery. With millions of people out of work, the Obama administration needs to find ways to encourage new businesses that will create the 21st century jobs the president talks so much about.

For instance, Neato Robotics, based in Mountain View, Calif., with just 18 employees, shipped its first product at the end of June and aims to revolutionize the way the world vacuums its homes. The product is a self-programming automated vacuum cleaner that uses technology originally developed by the military, where a laser radar maps a room based on triangulation. The vacuum cleaner stores the data internally and is able to find its way around furniture and other objects. The map is so precise that the robot doesn’t clean the same area twice.

If sensors indicate that its batteries are getting low, the vacuum automatically returns to its base station to recharge itself. Then it goes back to where it left off to continue cleaning. What’s more, the map is updated each time it runs, so new objects in the room can be added.

“Fundamentally, the way people vacuum their houses is going to be a thing of the past,” says Max Saffai, who heads Neato Robotics.

For four long years, Neato Robotics was in a constant battle to secure funding. They went to venture capitalists and heard the same thing: Their product was interesting but outside the VCs’ areas of concentration, mainly the Internet, social media, and biotechnology, says Saffai.

“It was very, very difficult to raise money,” he says.

While the recession has played a part in drying up venture capital funding, Saffai says a generation gap he perceives among venture capitalists has also made it difficult for his company to raise money. “The younger crowd is only interested in dot-coms. Nobody wants to invest in consumer electronics hardware,” he says.

Indeed, according to a study of VC funding in 2009 by chubbybrain.com, the lion’s share of money (33 percent) when to health care companies, followed by Internet companies (27 percent). The next biggest slice (9 percent) went to software firms, while only 1 percent of VC funding was targeted at consumer products and services.

Although private venture capital has been a major source of funding for high-tech startups, the amount of money available has been dwindling for years. What’s more, venture capital firms are backing off from funding early stage research. Instead they are focusing on late stage research when projects are closer to commercial sales and profits.

The gap in availability of funds between early stage and late stage research has come to be known as the “valley of death.”

The venture capital industry has also been devastated by the collapse of financial markets. VC funding has fallen from a peak of $100 billion in 2000 to $17 billion in 2009. This year, venture funding is shaping up to be better than 2009, but first quarter 2010 investment, $4.7 billion in 681 deals, fell 9 percent in terms of dollars and 18 percent in number of deals compared to the fourth quarter of 2009, when $5.2 billion was invested in 832 deals. Yet the quarter was better than last year’s first quarter, when venture capitalists completed 635 deals for $3.4 billion.

With such a dismal outlook, something clearly needs to be done. The government needs to step in with a massive funding program. It would not only create jobs and spur technological innovation but fund the future economy.

The program could be the 21st century equivalent of President Roosevelt’s Works Progress Administration, the largest New Deal agency of the Great Depression. It employed millions of people to build public buildings and roads and operate large arts, drama, media, and literacy projects. Except the thrust here would be technology.

The $700 billion Troubled Asset Relief Program, also known as TARP, created to help banks get back on their feet and restore credit markets, is a model of the type of effort that’s needed.

The program would make direct government investments in business startups, much like a venture capital firm. It would take an equity interest in companies just as the government did with firms such as Citigroup, American International Group, and General Motors. In the long run, it could actually make money for taxpayers as companies go public or become established and pay back the funds.

Best of all, the infrastructure to make investments is already in place. A number of established business incubators, mainly at universities, are already positioned to find promising companies.

Teresa Bridwell, a spokesperson for Idealab, a Pasadena, Calif., technology incubator, says one of its clients, Evolution Robotics Inc., will launch an automatic floor cleaner this summer called Mint, for hard-surface floors, using a different technology than Neato’s.

This cleaner, 10 years in development, is based on GPS technology. The cleaner is guided by a beacon from a device placed in a room, and is intelligent enough to stop before falling off the edge of a table. The product also will go on sale this month for under $250, she says.

In addition to capital, Idealab provides a full range of resources to support startups, from office space and office services to graphic design, marketing, financial advice, human resources, legal, accounting, and business development support and services. Idealab provides advice on strategy, branding, and corporate structure.

Over its 13-year history, Idealab has assisted in the development of 75 businesses including Overture, an early Internet search marketing company that was bought by Yahoo!, and Picasso, a digital photo organizer that Google purchased. The incubator is currently assisting in the development of other robotics companies, renewable energy companies based on solar technology, and companies developing electric car technology.

Bridwell says the recession has also affected Idealab’s ability to raise money, which right now is its biggest problem. A TARP-like program would solve that problem.

Businesses such as Neato Robotics, which eventually raised about $15 million from a select few VCs, and Idealab are part of what’s seen as a second phase of the digital revolution and are highlighting the role they can play as the nation struggles to recover from the worst recession since the Great Depression.