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EDITORIAL: More scrutiny of Iowa startup projects

CR Gazette – The Gazette Editorial Board –

We understand the state’s desire to provide a boost to startup firms developing promising technologies. The potential economic payoff makes some risks worthwhile.

But we also believe The Gazette’s Jan. 15 in-depth report about one local startup, AgSugar International, shows that the state’s willingness to take risks must be matched by better oversight.

AgSugar, with the help of local investors, development leaders and city officials, secured a $600,000 package of tax breaks and other incentives from state economic development officials. The company touted technologies that were supposed to revolutionize the production of cellulosic ethanol. It pledged to create 24 jobs here.

But when investors learned that the technology was not as effective as its sales pitch, investors switched gears. AgSugar, a biofuel startup, became Vertecra, a maker of LED office lights. The company’s backers hope to keep the incentives package in place, arguing that promised jobs and investment will still materialize.

We think the state should direct Vertecra to make a fresh application that will be subject to a new evaluation process. This isn’t simply swapping ethanol for LED. The change reflects a significant alteration in the company’s business plan and raises red flags about its original application. And after all, this is public money at stake.

Also at stake is public credibility of economic development efforts.

The AgSugar case should prompt development leaders to review the processes used to evaluate investors and companies applying for taxpayer-funded assistance. Although it may be difficult, in the case of start-ups, to know for certain that an innovation will pay off, it is possible to receive independent, expert assessments of a technology’s feasibility. Our state universities, for example, could tapped for that purpose.

It’s also possible that incentives packages could be in phases, with hurdles to be crossed before full state incentives are made available. If Iowans who volunteer at their local school get a background check, so should investors in companies seeking state funds. And in more instances, funds should be awarded via loans that must be paid back.

To be clear, we’re not suggesting that the state’s development office stop trying to help promising, fledgling firms get on their feet. But the process between an idea and a state incentive must be more rigorous.

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