Keystone Innovation Zone gives fledgling tech firms a lift

| Sunday, Sept. 28, 2008

Pennsylvania's Keystone Innovation Zone program won't quickly create tens of thousands of new jobs, officials involved with the initiative say.

That's because the four-year-old venture -- referred to by the acronym KIZ -- focuses on helping small start-up technology companies and entrepreneurial ventures with limited staffing.

Even so, the program has generated 2,769 new jobs and 572 new companies, and helped to retain 4,372 jobs -- with more than $440 million put into the companies by investors -- which provides ample evidence the state's $12 million investment to date is helping the effort to develop a technology-based economy in the state, officials say.

"I don't think 2,700 new jobs is anything to sneeze at -- that's a good number of new jobs -- but keep in mind that these are all early-stage companies," said Sheri Collins, KIZ program manager for the state Department of Community and Economic Development.

"While job creation is always a focus of the program, it is not the only, nor is the main focus of the Keystone Innovation Zone program," Collins said. "It's jobs created, jobs retained, new companies formed ... all of those in the aggregate are what really demonstrates the impact."

Keystone Innovation Zones were created in 2004 as part of a $1.1 billion economic stimulus package pushed by Gov. Ed. Rendell -- designed to improve the state's dismal job creation record that at the time ranked 42nd out of the 50 states.

Since then, 29 KIZ zones have been formed, including eight in the Pittsburgh area, mainly centered near local universities.

Results in Western Pennsylvania show 44 new companies and 492 jobs created, and 905 jobs retained through June. KIZ funding helped to attract $60.7 million in additional investment, according to government figures.

Only 10 of the 29 zones came into existence in 2004, including the Greater Oakland KIZ in Pittsburgh and the Greater Johnstown KIZ. The Beaver County KIZ was among six other zones across the state that followed in 2005. Five remaining local KIZs didn't start up operations until 2007.

KIZ's are different than another state program, the Keystone Opportunity Zones, which has produced mixed results in efforts to attract companies to hard-to-market properties, such as older industrial sites, with the lure of tax incentives.

The KIZs offer no tax abatements, but work with communities and local industry, and with colleges and universities to nurture start-up businesses and turn them into successful enterprises.

Michael Gualtieri, CEO and founder of Kiddix Computing Corp., a three-year-old software company on Craig Street in Oakland, is among those who vouch for the benefits of the KIZ program.

"I think the program is great," said Gualtieri, who was able to test and showcase Kiddix's kids-safe and parent-friendly computer software products thanks to a $15,000 grant secured through the Greater Oakland KIZ.

The company partnered in its request for the funds with YMCA of Greater Pittsburgh, which was interested in providing "secure" games and educational computer programs at local Y locations.

"We not only used it to help deploy our software in computers in a number of Y computer labs but also to develop some enhancements that would be necessary to run the software in a couple of their facilities, Gualtieri said.

The company, which has four employees, hopes to use the experience as a step to ultimately strike a deal with a major computer hardware provider that would sell products equipped with its software, he said.

To start up the Keystone Innovation Zone program, the state provided up to $250,000 in start-up grants through the Ben Franklin Technology Development Authority for the each of the 29 zones to fund first-year operations, with follow-up allocations reduced by 25 percent over the following three years.

Nonprofit groups operating the zones raise additional money to run their program and dole out in grants to companies within the zones.

Companies can compete for a statewide pool of $25 million a year in tax credits that can be used to offset income, or sold to more profitable companies in return for cash to run their businesses.

To be eligible, businesses have to be less than eight years old and be doing business in industries selected by local officials. Examples of targeted industries are advanced manufacturing, life sciences, information technology, and environmental or renewable energy.

Kiddix plans to apply for tax credits available under the program.

"The maximum amount you can get is up to $100,000, and that can be quite valuable for not only start-up companies but also up to mid-sized companies," said Gualtieri. "And even large companies can benefit because they are the ones who would buy the tax credits from us to put to use."

Kiddix' $15,000 grant was from a "kick-start" partnership program developed by the Greater Oakland KIZ, said Donald Smith, chairman of that zone's board of directors.

The program was developed after officials discussed the need to fund entrepreneurs, said Smith, director of economic development for Carnegie Mellon University and the University of Pittsburgh.

Economist Jake Haulk, a frequent critic of state incentive programs, noted that the state's $12 million investment in the program equates to about $4,400 per job.

"That appears to be better than most of the state's programs," he said.

Nonetheless, Haulk said he'd prefer general statewide tax reductions instead of piecemeal initiatives targeting specific areas of the economy.

"Why not simply change the tax laws, do something with the tax code that would really please business people?" asked Haulk, president of the Allegheny Institute of Public Policy, a public policy think tank in Castle Shannon.

Businesses would benefit more if the state increases the amount of losses that companies can apply to reduce their state tax bills, known as net operating-loss carry forwards, he said.

Expansion of tax credits for research and development that small, start-up technology companies can sell to generate immediate revenue, and changing laws to reduce the threat of lawsuits are other steps that could help business even more, he said.

The Pittsburgh Central Keystone Innovation Zone, set up in August 2007, used its state money to work with 14 companies in its first year, including nine new start-ups and five existing companies, said William Generett Jr., executive director.

The number of companies assisted has since swelled to 20, he said.

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