Less than a week after Hewlett Packard's acquisition of Exstream Software offered a glimpse of the potential value of research-driven local start-ups, area leaders fear Gov. Steve Beshear's proposed 12 percent cut to higher education could halt future deals before the Lexington companies ever begin.
University of Kentucky President Dr. Lee T. Todd Jr. knew the harsh reality following Beshear's speech - a $50 million blow to the university's funding distresses the local and state economy's future as much as it does UK's mission, through a tragic domino effect.
"The place where it will affect us if this budget were to go into place would be in continuing to bring in the very productive researchers that we have been bringing in, because if they don't see a continued commitment to the plan we're on, then they're going to make a decision to go elsewhere," Todd said.
"It will curtail our ability to continue to attract those kind of people, and those are the people that generate the students who have the ideas that generate the companies like Exstream Software," Todd said, citing the Lexington-based worldwide software company as the model of business a top 20 research university can help create. Last month, monster computer company HP acquired the 10-year-old, profitable software company, which had an estimated value of more than $900 million.
"We have such momentum in our research," Todd added. "That's the research that is going to build the future companies of Kentucky, and we're not going to be able to go the same way we've been going."
Todd worries the state is simply feeding the beasts of the state's biennial budget and not spending money that can be used to stop them. Instead of providing money to find a way to end the state's reliance on governmental health care, for example, this budget proposal simply meets the rising cost of 722,000 Kentuckians, almost one in five, on Medicaid. Beshear said the administration will look for efficiency in the system. In addition, Kentucky's crime rate has been flat in the last three decades, though in that same time, according to Beshear's budget address, our jail population has gone up tenfold.
"Higher education is hurting in this budget basically because of the Medicaid crisis, and because of some increase in corrections," Beshear said during a budget briefing to reporters. "In both of those areas, we really don't have any control over it in terms of cutting. I cannot in good conscience reduce eligibles in the safety net that the Medicaid program is. I won't propose thatÖWe're going to try our best to hold the increasing costs in that program down and we need to manage it better, but it is not going to go down totally. It is always going to creep up some because of the cost of healthcare. And then in the corrections area, you don't have any control over the number of people right now the justice system is putting in our prisons. Once they're there, you've got to pay for it."
"I don't disagree with Dr. Todd's analysis at all," Beshear added. "I just don't know where the money can come from to put any more in there right now. I wish there were."
Providing higher education the funds can attract a critical mass of researchers whose brain power can help to fight these ills. Todd said it has worked at UK in helping the university bring its annual health care increases under 3 percent, while many private and public sector employers face double-digit increases. More researchers and well-trained students could develop better methods for treatment over incarceration, ending the need to expand prisons too, he said.
On top of ideas to cut costs down the road, investment in higher education today, according to Todd, would bring in higher state revenues later through the same type of economic development that saw Exstream grow from two guys working in a Lexington basement to a company that employs more than 300 people in offices in Lexington and around the world.
"The key thing to building a great company is getting really good employees. You can't just do it based on the founders," said Exstream's cofounder and chief technology officer, Dan Kloiber. "We were able to attract some really great employees both to here and offices around the world."
One of the great pulls for top talent to come work for Exstream rather than head to Silicon Valley, Redmond, Wash., or the East Coast is the region, Kloiber said. For example, a Central Ohio native who worked for Microsoft both in Seattle and Columbus chose to work for Exstream in Lexington, a few hours drive from his family, rather than accept a transfer back to Redmond.
It is a common story at the company started by UK grad Davis Marksbury and Kloiber, an Ivy Leaguer who was convinced by his former coworker to join him in starting enterprises in the Bluegrass.
"A young programmer just out of school, he was going to Centre College, most of his opportunities for advancement were in the West Coast or the East Coast. Ö He had offers from some of the top consulting companies and some of the software companies. He decided to take a position with us because he was from here and we offered him the ability to do the type of work he loved to do and do it here in Kentucky, versus having to move to one of the coasts," Kloiber said.
As top talent has shown itself in Kentucky, Kloiber said Exstream has been eager to snap them up. "We've also tapped into graduates from Morehead, EKU, from Louisville, as well as UK and Centre. Even regionally we've attracted people from Ohio, Indiana and Tennessee," he said.
These are the type of people who help local companies grow, or like Kloiber and Marksbury, will start their own.
"It stalls some of the momentum," David Adkisson, president of the Kentucky Chamber of Commerce, said about the higher ed cuts proposed in Beshear's budget. "We've made great progress in the last few years after the cuts of four or five years ago. But unfortunately, with the ups and downs of the state budget, we surge and then we put on the breaks."
Adkisson places no blame on Beshear, saying, "He can't print money, and he's got to run state government." Still, Adkisson said keeping the momentum of what Kentucky's public universities, especially UK and UofL, have been doing is paramount.
That is foremost in the mind of venture capitalists and other private investors who can be the difference in a company with a good idea failing and a profitable product coming to market, according to Kloiber.
"Reputation is very important. I know that certain other public universities have been working on it for a number of years and have really bumped their viability in the world. Ö From my experience, the credibility level of being a top 20 research university helps attract the type of people you want to have here to become the next generation of entrepreneurs," he said.
In the last year, 55 Central Kentucky high tech companies saw an 82 percent increase in venture funding, with $64.5 million being invested in these local high-tech ventures in 2007, up from $37 million in 2006.
"There is obvious interest in startups with the increase in venture capital this year over last," Kloiber said.
He and Todd feel education has to be a top focus for tax dollars in order to keep the momentum by supplying these burgeoning companies that have added 162 full- and part-time jobs to the local economy in the last 12 months.