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Innovation

New ideas and technologies help produce high-quality goods and services that keep metropolitan Chicago competitive in today's global marketplace.  Innovation is spurred by both the private sector and local academic institutions.

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Venture Capital

What
The number of venture capital deals conducted in the State of Illinois (the majority of which are in metropolitan Chicago), as reported by PricewaterhouseCoopers.  

Why it matters
Innovation in new goods, services, and technologies drives economic growth. For newly-created firms, the cost of conducting research, creating new products, and marketing them can be substantial. In these instances, investors can support high-risk, high-growth startup companies through venture capital funding. Leading venture capital regions such as New York, northern California (which encompasses the Bay area, including Silicon Valley and portions of the California coastline), and Los Angeles are all accounting for a growing share of the nation's venture capital deals while venture capital deal making in the state of Illinois has remained stagnant. Startup businesses in industries such as software, biotechnology, information technology, and media/entertainment receive the bulk of venture capital funding.

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Venture capital plays a key role in the new business startup process by providing support to businesses before they are financially sustainable or able to secure traditional funding streams.  Venture capital investing is often a high-risk, high-reward endeavor as startup companies can fail at high rates. Venture capital investments tend to fund innovative ideas and companies in high-growth sectors.  In the first quarter of 2014, over 40 percent of national venture capital investment funding went to software startup companies.  Outside of software, no other venture capital target industry accounts for more than 15 percent of total venture capital funding. 

Investment in venture-backed companies only equates to between 0.1 percent and 0.2 percent of U.S. gross domestic product each year, yet venture capital backed firms employ over 10 percent of the private sector workforce. The National Venture Capital Association estimates that, for every $1 of venture capital invested between 1970 and 2010, $6.27 in revenue was generated. This underscores the sizable economic benefits that venture capital investment can bring to regional economies. 

The venture capital funding process occurs in four discrete stages over a period of several years.  Each stage provides funding for different purposes.  Investment in early startup stages poses higher risks for investors while later stage funding carries less risk since the startup company is more stable.  The first stage of the venture funding process, known as the "seed" stage, occurs when a new concept or product is under development, but not fully functional or vetted.  Companies in this stage generally seek financing from angel investors or venture capital firms to conduct further product research and development. 

After a startup company develops a prototype product or service, a stage of "early" funding is sought to help the firm continue development.  Companies seeking early stage funding generally have a proven prototype, along with promising initial sales, but require additional funding to expand production.  Early stage funding is usually followed by expansion funding, which can be used to support major product revisions or marketing expansion.  Later stage funding is generally used to finance firm expansion or prepare the business for an initial public offering.

Nowhere in the U.S. is the value of venture capital more apparent than in northern California.  The region's concentration of tech workers has made it a magnet for venture capital funding. In 2013, northern California captured an estimated $12.3 billion in venture capital funding -- roughly 40 percent of the national total.  The region's dominance in venture capital attraction has prompted many startup businesses to leave their home market and move to the area.  While moving benefits the individual businesses, the outward flow of innovative ideas and technologies from other metropolitan areas to northern California can limit other regions' innovative capacity. 

National Trends

The estimated number of venture capital deals nationwide peaked in the late 1990s before falling substantially during the dot-com bust, which began in March of 2000.  Over 8,000 deals were conducted in the U.S. in 2000.  That number fell by over 60 percent just three years later when, in 2003, approximately 3,000 deals were reported.  In 2013, 4,000 deals were conducted nationwide -- still only half of total number of deals conducted in 2000.

 

Local and Peer Region Trends

Since the mid-1990s, data show that the State of Illinois has steadily accounted for roughly two percent of U.S. venture capital deals (Due to data limitations, metropolitan level data are not available for the Chicago region, however the vast majority of venture capital deals in the state originate in the region.).  Since 1995, peer regions such as northern California, Los Angeles, and New York City, have increased their respective shares of national venture capital deals while deal activity in Illinois and Massachusetts has remained stagnant.  

About the Data

Since venture capital deals are conducted as agreements entered into between two private parties, no public data source exists which reports venture capital activity.  The data presented in this analysis are produced by Thomson Reuters and published by PricewaterhouseCoopers (PwC) and the National Venture Capital Association.  The data reported represent a "best guess" of venture capital activity by region and state.  The analysis presented here focuses on the number of venture capital deals conducted rather than total funding amounts since a small number of high-value deals can distort trends.  PwC does not track data for the Chicago region.  This analysis uses State of Illinois estimates in lieu of regional data.

The data used in measuring venture capital activity presented here should be viewed as a partial snapshot of innovation and venture capital activity.  The data presented here do not address some key questions, such as what percentage of firms receiving funding succeed or fail, or what percentage of firms exceeded their growth expectations.  Furthermore, some regions may experience higher rates of funding and deal activity but also experience higher startup failure rate.  Some regions may excel at producing a large number of "niche" startups, while others may produce a smaller number of startups with greater growth potential. 

Geographies used in this analysis are defined by PwC:
New York City: Metropolitan New York City area, northern New Jersey, and Fairfield County, Connecticut
Los Angeles: Southern California (excluding San Diego), the Central Coast and San Joaquin Valley
northern California: Bay area, including the area known as Silicon Valley, and coastline.

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Technology Transfer

What
The number of invention disclosures filed, patents granted, technology licenses issued, and startup companies formed as a result of research conducted at Chicago region academic institutions.

Why it matters
The region's universities play a critical role in encouraging innovation.  Promising research conducted at academic institutions is often patented and licensed to private sector entities.  In 2012, the region's academic institutions filed 702 invention disclosures, obtained 205 patents, and issued 133 technology licenses for private use.  Technology transfer activity also led to the creation of 22 new startup companies.

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While the majority of innovation in the region is fueled by private sector, Chicago's academic institutions also play an important role in spurring innovative development.  The region is home to substantial research facilities and talent. Many of the region's academic institutions receive public funds to conduct research that can be licensed to private businesses.  The "tech transfer" process of discovering, patenting, and licensing university inventions to businesses or startups has multiple stages that can take several years to complete.

The first stage occurs when a researcher files an invention disclosure form with the academic institution's Technology Transfer Office.  The disclosure is an official proclamation that something new has been discovered that could be commercially viable and patented.  After an invention is disclosed, the university's Technology Transfer Office explores the possibility of patenting the disclosure and obtains a patent if the invention is determined to have commercial potential. 

The final step in the university technology transfer process involves licensing the patent out to commercial businesses or creating a startup company and licensing the patent to the new firm.  The licensing stage is especially important to academic institutions as licensing revenues can be used to support the Technology Transfer Office or fund additional research.  Each step of the technology transfer process is designed to identify technologies with increasing commercial feasibility.

Although the technology transfer process is relatively straight forward, its implementation is often complicated, and inventions with high commercial potential do not always reach the licensing stage.  Researchers at academic institutions are often focused on pursuing research that advances their field of study rather than pursuing research which has commercial feasibility.  Often times, academic breakthroughs do not translate into commercial breakthroughs.

Even when a new technology is disclosed and deemed to have commercial potential, inventors face numerous hurdles to commercialization.  University Technology Transfer Offices may have difficulty finding a business to license the invention. In most instances, businesses that license new university research already have an existing relationship with the inventor or the University Technology Transfer Office.   Thus, the commercialization potential of an invention is often limited by the size of the researcher's or Technology Transfer Office's network.  Technology Transfer Offices that find potential licensee businesses must both create an effective marketing plan to license the technology and secure future commitments for further research.  In the instances in which inventors decide to start a new business themselves, they face numerous hurdles, including the process of securing financing, finding staff or resources to design a viable business model, and reaching the intended user or consumer.  In general, the technology transfer process is complex, includes a high degree of risk for inventors and investors, and frequently fails. 

Regional Trends in Technology Transfer

This analysis focuses on data for 2012 (which includes disclosures from the University of Chicago, the University of Illinois at Chicago, Northwestern University, Loyola University Medical Center, and Rush University Medical Center), as well as a time series analysis for three regional institutions (University of Chicago, University of Illinois at Chicago, Northwestern University) that have participated in the Association of University Technology Manager's technology transfer survey since 2002.  These three institutions account for the vast majority of reported technology transfer activity in the region.

In 2012, the region's academic institutions filed 702 invention disclosures.  Technology Transfer Offices obtained 205 patents, and 133 licenses were issued.  Technology transfer activity also led to the creation of 22 startups.  Long-term trends show that the number of invention disclosures filed by Chicago region institutions has risen by nearly 60 percent since 2002.  The region's increase in invention disclosures has also been accompanied by an increase in the number of patents obtained in recent years.  Since 2009, the number of patents issued for inventions has more than doubled.

While an increase in invention disclosures and patents is promising, the number of licenses granted for new inventions has not grown significantly in recent years.  Licensing activity peaked in 2004 with 135 licenses issued.  The number of licenses issued fell below 100 per year between 2005-10, and has only recently recovered to 2004 levels.  Licensing activity is a key metric of technology transfer performance because it brings funds to universities and is indicative of the true commercial viability of academic inventions.

About the Data

Technology transfer data are obtained from the Association of University Technology Managers annual technology transfer survey.  Since survey participation is voluntary, comprehensive technology transfer data are not available for the region or nation.

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Patents

What
The total number of utility patents, also known as "patents for inventions," issued by the U.S. Patent and Trade Office.

Why it matters
High levels of patent production generally indicate an innovative region supported by an educated workforce with a strong capacity to conduct research and development.  In 2011 the Chicago metropolitan statistical area (MSA) produced 3,033 utility patents and accounted for 2.8 percent of national patent production. The Chicago region has the third largest metropolitan population in the U.S. and produced the fifth highest number of patents among all metropolitan areas over the last decade.

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National Patent Production on the Rise

Nationwide, patent activity is at its highest point ever (based on data dating back to the 1960s).  The number of new patents issued annually has increased from roughly 85,000 in 2000 to 121,000 in 2012 -- 42 percent more. A recent report issued by the Brookings Institution notes that increased levels of R&D expenditures coupled with the recent surge in communications technology innovation have fueled increased patent activity.  The vast majority of patent production in the U.S. comes from individuals and businesses located in metropolitan areas.

The Chicago metropolitan area currently accounts for 2.8 percent of all patents produced nationwide.  This proportion has declined since 2001 when the region accounted for 3.4 percent of all patents.  Patent production trends among Chicago's peer regions has been mixed.  Patent output in Los Angeles was relatively consistent between 2001-11, while New York now accounts for a smaller proportion of total patents.  Peer regions such as Boston and Silicon Valley (San Francisco-San Jose) are now accounting for an increasingly greater proportion of total patent output.

The most active patent producing region over the last decade was the Silicon Valley region, which accounted for over 124,000 total patents between 2001-11. The New York metropolitan area produced just less than half of that, with 50,263 patents over the last decade, followed by Los Angeles (41,324), Boston (34,090), and Chicago (25,669).

In most instances, the total number of patents produced in U.S. metropolitan areas is correlated with each region's total population.  In 2010, for example, the Chicago MSA was home to 3.1 percent of the U.S. population and accounted for 2.7 percent of total U.S. patents.  The New York metropolitan area, which accounted for 6.1 percent of the country's population in 2010, produced 5.9 percent of all patents.  Top performing regions such as San Francisco-San Jose Boston, and Seattle, however, account for a substantially greater portion of total patent activity relative to their total metropolitan populations. In 2010 for example, the San Francisco-San Jose region accounted for 2.0 percent of the country's population in but produced 15.2 percent of the nation's patents.

Boston's high rate of patent output can be attributed to its fledging biotechnology cluster. Seattle's aerospace cluster supports significant patent production, and Minneapolis-St. Paul's specialization in medical devices and technology have led to high rates of patenting.  Other metropolitan regions (such as Miami and San Antonio, for example) produce fewer patents than their respective populations would suggest.

Chicago Region Experiencing Declining Share of Patent Activity

Much of the Chicago region's patent activity originates in the communications sector, and, like other metropolitan areas, a handful of key players account for a sizable portion of the region's total.  In 2011 the metropolitan area's top patent-producing business was Motorola Mobility, followed by petrochemical firm UOP, and Abbott Laboratories.  Individuals accounted for the largest number of patents issued, with 309 granted in 2011.

Although patent activity is at all-time highs nationwide, the proportion of the nation's patents originating in the Chicago region has slowly declined since 2005.  Since 2005 the Chicago metropolitan area's population has remained relatively consistent as a proportion of the country's population, however the region's share of patent production has declined from 3.4 percent of all patents in 2001 to 2.8 percent of all patents by 2011. Given the region's concentration of research institutions and emerging entrepreneurial ecosystem, Chicago has the potential to account for a larger share of national patent production.

About the Data

The Patent and Trade Office maintains a comprehensive database listing the number of utility patents issued by metropolitan area based on the home or business address listed by the primary patent applicant.   Data and analysis on this indicator focus exclusively on utility patents, which are referred to throughout simply as patents. The data include all counties in the Chicago-Joliet-Naperville MSA, which includes several counties in northwest Indiana and Kenosha County in Wisconsin.

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STEM Occupations

What
Employment in Science, Technology, Engineering, and Mathematics fields in the seven-county Chicago region.

Why it matters
The demands of many professions are becoming increasingly complex as technology drives innovation and growth in today's economy.  Workers with training in science, technology, engineering, and mathematics -- STEM -- play a significant role in fostering innovation that leads to economic growth.  Compared to overall employment in the Chicago region, the number of STEM positions has grown faster (or in some cases declined more slowly) in nine of the last ten years. 

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Education and Employment in the Chicago Region

Workers in STEM fields drive the creation of new technologies and ideas, which, in turn, spur economic growth.  Data show that scientists and engineers apply for patents at a rate eight times higher than the national average.  The propensity of STEM field individuals to innovate drives the creation of new jobs and new opportunities for regional economic growth.

In 2013 the seven-county CMAP region was home to 467,000 STEM jobs, which accounted for 11.0 percent of the region's total jobs.  Regional STEM employment has closely followed national economic trends, with employment increasing between 2004-08, followed by a large decline between 2008-10 during the recession.  Since then, STEM employment in the region has grown and now stands at a level higher than its pre-recession peak of 463,000 jobs.  The proportion of Chicago region jobs falling under the STEM category has increased slightly over the last 11 years, accounting for 10.6 percent of the region's total employment in 2002 and 11.0 percent in 2013.

While the U.S. is a leader in the field of scientific innovation, standardized tests show that many students perform poorly in STEM subjects relative to students in other developed nations.  The U.S. also lags behind other nations in producing graduates with core STEM degrees such as natural science or engineering, according to studies.  This mediocre student performance in the STEM field has garnered increasing attention in recent years has led to the passage of education reforms aimed at enriching the STEM curriculum at the federal level.  Many of the fastest growing and highest paying career fields require STEM skills, and providing students with adequate STEM educations will help prepare them for the demands of future occupations.

About the Data

EMSI data are used to estimate total STEM employment in the seven-county CMAP region.  STEM employment reported here includes STEM occupations as classified by the federal Standard Occupation Code (SOC) Policy Committee in 2010

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