Northern Virginia Technology Council and CIT Committee Report: Technology, Innovation and Startups. Blueprint Virginia

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1 Northern Virginia Technology Council and CIT Committee Report: Technology, Innovation and Startups Blueprint Virginia Virginia is a global technology center with a strong and diverse technology industry. We have the highest concentration of technology workers in the country and we rank near the top in many other technology-related metrics including the size of our high tech payroll, employment in computer systems design, our number of private sector scientists and engineers, engineering services employment and Internet and telecommunications services. While technology employment represents about 16 percent of all employment across Virginia, high-tech wages represented about $14.19 billion, or 31 percent of all wages paid in Virginia during the 3 rd Quarter of In fact, the average technology wage is about 93 percent more that the average wage across all industries in Virginia 2. Since 2004, employment growth nationally in the hightech sector has outpaced growth in the private sector as a whole by a ratio of three-toone 3. While technology s impact on economic growth, job creation and revenues is critically important, Virginia policymakers should support and promote technology for other reasons too. In the public sector, technology can be leveraged to enhance state government operations, efficiency and effectiveness while reducing costs. Technology products, services and innovations are used by every industry to grow margins and stay competitive. Also, technology and innovation helps address and solve problems that are important to all Virginians. Virginia s government has embraced technology and integrated it in its public policymaking infrastructure. Virginia is home to the nation s first cabinet-level Secretary of Technology. The Center for Innovative Technology (CIT) is widely recognized as a major catalyst and driver for entrepreneurship, R&D, broadband and technology business promotion across the Commonwealth. Virginia employs a professional CIO who oversees the Virginia Information Technologies Agency (VITA) to provide information technology and services that enable government to serve the citizens of the Commonwealth. The General Assembly has legislative committees and commissions focused on technology and technology-related issues and opportunities. 1 Virginia Economic Trends, 3 rd Quarter 2013 Report, Chmura Economics & Analytics. 2 Id. 3 High-Tech Employment and Wages in the United States, A Bay Area Council Economic Institute Report, Commissioned by Engine Advocacy December 2012

2 Virginia policymakers also have built a strong fabric of laws and policies that support technology and technology-driven economic growth including aggressive computer crimes laws; innovative e-government initiatives; commercials law to support electronic commerce; policies and investment to support broadband availability and accessibility; telework adoption and expansion; targeted incentives to attract and grow technology businesses, investments and jobs across the Commonwealth; and policies and investments to support research, innovation, commercialization and entrepreneurship. Key to Virginia s success has been a dual emphasis strategy that focuses on i) enhancing the tools available to attract companies seeking to relocate, expand, move corporate headquarters or establish major research operations in the Commonwealth and ii) employing a comprehensive Grow Your Own /new company formation strategy that positions Virginia as a leader in next-generation tech company formation and innovation and a top destination for technology entrepreneurs, researchers, investors and innovators. The U.S. Small Business Administration reports that startup businesses accounted for about 40 percent of the private sector s net new jobs over the past two decades 4. Helping these firms launch and succeed in Virginia is essential to growing our economy. A recent study by the Kauffman Foundation reports that, nationally, new companies with 1 4 employees accounted for 86 percent of new firms and more than 1 million jobs annually 5. These entrepreneurs account for more than 1/3 of our economic growth 6. Recommendations Today s economic and budgetary constraints present many challenges but also many opportunities. States and state leaders must look beyond the policies and models of the past, and embrace innovation and creativity. Those states that fail to embrace and leverage innovation moving forward will quickly find themselves falling behind. Virginia s rich history is built on innovation, and innovation will be key to the Commonwealth s future. Over the long term, Virginia must continue to build a two-track economic development strategy. The Commonwealth cannot compete globally by relying solely on an economic development strategy that targets relocation and expansion opportunities from mature companies launched outside the Commonwealth. Virginia must also focus on making the Commonwealth the top place in the world in which to launch and grow a business organically The Return of Business Creation, Kauffman Foundation Research Series: Firm Formation and Economic Growth, July Id.

3 Recommendation 1: Virginia Must Grow Its Targeted Innovation Funding Initiatives Across the country, states and regions are aggressively investing in programs that accelerate research, commercialization and new company formation to create highgrowth, high-paying jobs. Close to home, Maryland used pre-paid tax credits to fund $84 million for venture financing; North Carolina has committed $232 million of pension funds for local venture financing; and Pennsylvania announced a $100 million prepaid insurance tax program similar to Maryland s program. In a less than three years, and at just a fraction of the cost of the aforementioned programs, Virginia has used a public-private model to boost 50 startups and make over 90 commercialization awards that position the Commonwealth for future company and job creation. However, in a 2011 seed capital study conducted by Jeffrey Sohl, director of the nationally recognized Center for Venture Research, the gap between available capital and required capital for Virginia startup companies is an additional $150 - $250 million per year. Virginia must further stimulate private investment to close this gap. Virginia policymakers must build on past successes targeted at intellectual property commercialization, entrepreneurship and new company formation. They must clearly articulate that Virginia will compete to be the top state for entrepreneurs and a preferred location for those looking to engage in translational research, commercialize intellectual property, launch cutting-edge businesses and attract early-stage investment funding. Specifically, they must boldly signal their intention to increase investment to targeted innovation funding initiatives to boost Virginia s competitiveness in promoting innovation, emerging technologies and technology-based economic growth, and job creation. The initiatives outlined below are targeted and tailored to the promotion of collaborative research, innovation, entrepreneurship and the launching of new cuttingedge technology businesses in the Commonwealth. Some of these initiatives have suffered in the past from sporadic, unpredictable and insufficient funding. It is critical that Virginia signal to entrepreneurs, researchers, investors and innovators that they will receive the full value of tax credits and other incentives they earn when they invest in Virginia and not a pro-rated value due to oversubscription or underfunding. Ensure the CIT GAP Funds Are Funded at Sufficient Levels The CIT GAP Funds, operated by the Center for Innovative Technology (CIT), provide seed-stage equity investments in Virginia-based technology, clean tech and life science companies with a high potential for achieving rapid growth and generating significant economic return for entrepreneurs, co-investors and the Commonwealth of Virginia. Through a public private partnership, CIT validates

4 the science behind next-generation technology, biotechnology and energy startups across the state and leverages a modest public sector investment with private sector investments at a rate of 13 times the public outlay. The GAP Fund's search areas include software, telecommunications, semiconductors, media and entertainment, e-commerce, networking and equipment, electronics/instrumentation, industrial/energy, computers and peripherals, biomedical and life science applications. Since 2005, the CIT GAP Funds have underwritten critical and immediate first financing for more than 80 tech startups with high potential for achieving rapid growth and generating significant economic return. Leveraging private investment in research through new company formation is the only cost-effective funding model for achieving a self-sustaining innovation ecosystem. To date, the CIT GAP Fund has achieved a leverage ratio of $13 private dollars for every $1 invested by CIT, essentially delivering $130 million of private investment capital to Commonwealth startups. Virginia must develop an investment strategy that doubles the amount of seed stage investment capital available to startups. Fund the Angel Investment Tax Credit (aka Virginia Qualified Equity and Subordinated Debt Tax Credit) at $7.5 Million Per Year Virginia's Angel Investment Technology Tax Credit encourages early-stage investment in technology, biotechnology and energy startups. While Virginia is one of 27 states that have an angel tax credit, ours is among the most competitive. The growth in investor applications for this credit is a positive indicator that the credit is succeeding in growing and diversifying Virginia's technology economy by encouraging entrepreneurs to locate in Virginia and by encouraging investors to invest in Virginia startups. This credit is often oversubscribed on an annual basis. North Carolina caps funding for their credit at $7.5 million and Virginia should match this funding level to remain competitive. Extend the Sunset for Virginia s Capital Gains Tax Exemption to 2020 Entrepreneurs and investors who make qualified investments in early-stage technology, biotechnology and energy startups in Virginia beginning April 1, 2010, through June 30, 2015, are exempt from paying state income tax on their long-term capital gains throughout the life of the investment. If and when investments in these qualified companies are successful over the life of a company, any long-term capital gains attributable to the investment will be exempt from Virginia's income tax. The capital gains tax exemption should be extended to encourage entrepreneurs who launch technology businesses over the next several years to choose to locate them in Virginia.

5 Ensure the Commonwealth Research Commercialization Fund (CRCF) is Funded at Sufficient Levels The Commonwealth Research Commercialization Fund (CRCF) advances scienceand technology-based research, development and commercialization to drive economic growth in Virginia and to encourage collaboration among our institutions of higher education and partnerships between colleges and universities and business and industry. CRCF awards contribute to the Commonwealth's overall plan to enhance economic development through technology research and commercialization. As such, CRCF awards must further the goals set forth in the Commonwealth Research and Technology (R&T) Strategic Roadmap and align with industry opportunities identified therein. In addition to identifying research areas worthy of economic development and institutional focus, the Roadmap provides a framework for aligning key industry sectors within the state, as prioritized by the private sector, academia, the broader research community and economic development professionals. The $4.8 million in annual funding currently allocated to the CRCF should be sustained and/or increased to reflect trends in quality applications and opportunities in the areas of commercialization, matching research funds, eminent researcher recruitment, facilities enhancement loan program and SBIR/STTR matching fund opportunities. Form Regional Private Investment Funds Leveraged private sector investment in new company formation from multiple resources (public, private and regional funds), combined with traditional angel and venture capital investment, is key to building a model that can compete with Silicon Valley, Cambridge, Boulder, Austin and New York. To double the amount of early-stage capital available to new Virginia companies, the Commonwealth through CIT should form regional private investment funds that operate in conjunction with the CIT GAP fund. The demand for this fund structure has been validated and the first fund of this nature is under development in the Roanoke Valley. Similarly, private industry should be further engaged for multi-year research projects funded through the CRCF, essentially securing leveraged research funding for Commonwealth research projects. Fund Virginia s Research and Development Tax Credit at $7 Million Per Year and Increase the Maximum Qualifying Investment Virginia s Research and Development Tax Credit is a targeted tax incentive that promotes innovation and job creation across Virginia, enhances Virginia's competitiveness as a preferred location for research and boosts industrysponsored research and collaboration with Virginia's universities. It encourages the more than 18,000 technology firms that make R&D investments across the United States to consider Virginia as a welcoming home for their future investment. Applications for this recently enacted tax credit are growing quickly and Virginia s $5 million cap should be raised to prevent oversubscription and

6 subsequent proration of the benefit to businesses investing in research in Virginia. The Virginia Department of Taxation approved 64 applications totaling $2.1 million in 2011 and 135 applications totaling $4.54 million in Virginia s credit is currently capped at $5 million in funding, while Pennsylvania provided $55 million for their R&D credit in 2012 and Maryland provided $6 million in funding. Virginia s R&D tax credit should be increased to $7 million to meet demand, prevent oversubscription and proration, and ensure Virginia taxpayers receive the full incentive to which they are entitled. Virginia s R&D tax credit currently applies to 15 percent of the first $167,000 in Virginia qualified research and development expenses or 20 percent of the first $175,000 in Virginia qualified research and development expenses if the research was conducted in conjunction with a Virginia public college or university. The maximum qualifying investment amount should also be increased to make the credit more attractive for businesses considering larger research investments in Virginia. Establish Industry-Specific Initiatives Like the MACH37 Cybersecurity Accelerator to Develop the Commonwealth s Leadership Role in Key Emerging Markets MACH37, launched in 2013, is America s premier market-centric cybersecurity accelerator. Initially funded by the Commonwealth of Virginia, the accelerator will leverage private investments to launch new, high growth cyber technology companies in Virginia. MACH37, which is located at the Center for Innovative Technology, is designed to facilitate the creation of the next generation of cybersecurity product companies. Its unique program design places heavy emphasis on the validation of product ideas and the development of relationships that produce an initial customer base and investment capital. Similar initiatives should be established for big data, modeling and simulation, bioinformatics, energy, and other key sectors identified in the Commonwealth s Research and Technology Roadmap to secure national leadership positions. Recommendation #2: Entrepreneurship Must Be a Key Focus of the Next Governor While Virginia is recognized as a top place to start a business, Virginia does not rank high in new business starts. This is especially concerning given that startup businesses accounted for about 40 percent of the private sector s net new jobs over the past two decades (see introduction above). Virginia must do more to attract and nurture entrepreneurs and startup businesses. Get the Message Out to Entrepreneurs Across the Commonwealth and Across the Country Virginia has many valuable initiatives and programs available to entrepreneurs (including those listed in Recommendation 1) that can boost the viability and

7 competitiveness of their new ventures. It is important that the Governor and Secretary of Technology take the lead by leveraging the bully pulpit to build awareness of all we have to offer. Leading a collaborative effort with economic development officials and the statewide business community will be key to success. The state also should fund an entrepreneur ambassador under the Secretary of Technology who can travel across the state and around the country providing boots on the ground support in educating entrepreneurs, investors, bankers, researchers, accountants and other important stakeholders about these targeted programs and incentives. Policymakers should use the new Innovation Entrepreneurship Measurement Systems (IEMS) to benchmark Virginia s entrepreneurial activity and track metrics demonstrating success in boosting that activity. Celebrate Virginia Entrepreneurs and Startups The next Administration should publicly recognize and celebrate the achievements of entrepreneurs and startups across the Commonwealth, including new company launches, significant investments made in Virginia startups, IPOs and acquisitions, and job creation and investment milestones. Improve Virginia s Online Business One-Stop Portal The Commonwealth needs to support continued improvements to Virginia s online business one-stop portal, ensuring that it remains as comprehensive, convenient and user-friendly as envisioned. The State Corporation Commission s systems, forms and active participation should be expedited and implemented prior to the current June 2018 deadline. Enhance the Teaching of Entrepreneurship in Virginia Schools as a Priority While there are currently opportunities for some students across the state to learn about entrepreneurship and the skills and mechanics associated with starting a business, more needs to be done. The next Governor should convene a work group or commission of stakeholders to discuss additional steps that should be taken to ensure Virginia students have the opportunity to learn about entrepreneurship and starting a business. Participants should include K-12 educators and administrators, representatives of the community college and university community, accomplished entrepreneurs and representatives of the entrepreneur support community from across the state. Recommendation #3: Public Resources and Investment Should Focus on Key Strategic Technology Sectors Identified By Stakeholders As Priority Areas To Enhance Virginia s Competitiveness and Grow The Economy Increasing competition between states to become global hubs for cybersecurity, energy, modeling and simulation, life sciences, data centers, health IT, data

8 analytics, and other economic drivers of the future require Virginia to employ an economic development strategy that targets specific industries where we can be competitive and excel. The Commonwealth must focus on sectors where we already have a strong competitive advantage and also those sectors where we need to be stronger to compete in the future. Moreover, state resources should leverage private sector and federal investment and commercialization potential to provide maximum impact. While Virginia has a strong and diverse statewide technology industry, each region in Virginia has its own strengths, assets and areas of focus and growth. The Commonwealth Research and Technology (R&T) Strategic Roadmap is a comprehensive planning tool the Commonwealth uses to identify research areas worthy of economic development and institutional focus broken down by region. Areas of focus in multiple regions are then identified and highlighted as statewide priorities. It provides elected officials and stakeholders with priorities in key industry sectors that have commercial promise, that will drive economic growth in Virginia, and that will be eligible for Commonwealth Research Commercialization Fund (CRCF) awards. Beyond this, the Roadmap also helps inform and align organizations across the state, including public and private universities. The R&T Strategic Roadmap is developed through a collaborative process that relies on individuals and organizations to provide a critical evaluation of industry strengths and strategic priorities, economic development initiatives, and academic and research strengths and strategic priorities. Development of the R&T Strategic Roadmap is overseen by CIT, and participants in the process include regional technology councils and industry stakeholders, Virginia s colleges and universities, executive and legislative branch policymakers, the Virginia Economic Development Partnership (VEDP) and federal labs and other research institutions. While the R&T Roadmap has already proved an effective tool for highlighting strategic priority industries, it is still relatively new. The next administration should embrace the R&T Strategic Roadmap and expand its application as a tool for targeting state investment to ensure Virginia s technology-focused economic development resources are leveraged for maximum impact and effectiveness. Recommendation #4: STEM Education Must Be a Key Focus The long-term growth potential for Virginia's technology industry is limited by an insufficient number of qualified technology workers, and the education system is not graduating enough people with degrees in math, science, engineering and technologyrelated fields. Building Virginia s STEM workforce is a priority for technology businesses of all stages and sizes. Provide Incentives to Hire More Quality STEM Teachers

9 The Virginia Department of Education considers math and science teachers to be at a "critical shortage and more skilled STEM teachers are needed in classrooms across the Commonwealth. The FY12-14 budget provides for a pilot initiative to attract, recruit and retain high-quality STEM teachers in middle and high schools through incentives after the completion of first, second or third year of teaching with a satisfactory performance evaluation and a signed contract for the following school year. Funding for this initiative should be continued and increased as appropriate in future budgets. Streamline Provisional Licensing Requirements for Career Switchers Who Want to Teach Virginia should encourage technology professionals considering a career in teaching to make the transition by streamlining provisional licensing requirements and providing an easy and efficient path to the classroom. Deploy More Technology in Virginia s Classrooms Teachers must have access to technology as a teaching tool and also training to best utilize that technology. Students also must have increased access to technology in the classroom so they can learn how to use technology as tool for learning and working. Continue State Support for the Commonwealth STEM Industry Internship Program (CSIIP) With funding from the Commonwealth in the FY12-14 budget, the Virginia Space Grant Consortium has created the Commonwealth STEM Industry Internship Program in partnership with Virginia s regional technology councils and in collaboration with Virginia s universities, colleges and community colleges. The program offers a centralized, online application system that allows Virginia undergraduate students majoring in STEM fields at colleges and universities the ability to search and apply for paid, STEM-related summer 2013 internships with Virginia companies. It also provides Virginia companies with free access to a large state-wide pool of qualified students for their summer internship opportunities. Funding for this program should be continued as awareness of the program continues to grow in the business community and in the schools. Continue Governor McDonnell s Top Jobs Initiative An April 2012 report by the U.S. Congress Joint Economic Committee entitled STEM Education: Preparing for the Jobs of the Future observes: While the number of students receiving degrees from four year institutions has increased in the U.S. as access to higher education has expanded over the past several decades, the share of students graduating with STEM degrees has declined. The share of bachelor s degrees awarded in STEM fields peaked at 24 percent in 1985; by 2009, the share had fallen to 18 percent. The share of

10 master s degrees in STEM fields dropped from 18 percent to 14 percent over the same period. In , 16,206 STEM degrees were awarded by Virginia institutions of higher education, representing almost 14 percent of the 108,929 total degrees awarded. The next governor should continue efforts to increase the number and percentage of STEM degrees awarded by implementing incentive-driven funding to advance the next stage of Virginia's Top Jobs initiative. The Top Jobs initiative will provide for an additional 100,000 undergraduate degrees for Virginians by 2025, with an emphasis on high-income, high-demand sectors including STEM. Recommendation #5: Promote Commercialization by Encouraging and Incentivizing Collaboration Between Universities, Businesses, Entrepreneurs and Investors In addition to increasing funding for the Commonwealth Research Commercialization Fund, the CIT GAP Funds and Virginia s R&D Tax Credit, policymakers should establish a competitive bonus pool to be allocated among university IP offices based on competitive performance metrics tied to their success in commercializing intellectual property and stimulating private sector job growth and economic activity. This fund might provide a cash incentive to universities that license IP to small companies in exchange for equity in those companies, provided the university agrees to share a percentage of the equity with the Commonwealth. Universities might use this cash incentive to reinvest in their IP offices, to support prototyping initiatives or to provide for additional research activity and equipment. Recommendation #6: The Commonwealth Should Provide Grants and Incentives To Promote Greater Broadband Accessibility Where Service Is Not Currently Offered High speed broadband access is critical to economic development and job creation efforts across the Commonwealth. Extending affordable broadband coverage to unserved areas in Virginia is a topic that has been discussed and studied many times over the past decade. Telecommunications providers have worked closely with policymakers, public officials, stakeholders, and each other to recommend steps the public sector can take to extend broadband coverage and to provide granular information concerning where coverage is available and where gaps continue to exist. In 2008, the Commonwealth Broadband Roundtable created by then-governor Tim Kaine and chaired by former Governor Mark Warner issued a report indicating that capital investment required to serve geographically dispersed communities exceeds the likely private market returns on the sale of broadband access. The report further

11 observed that strategies to improve private sector return on capital investment can stimulate market solutions to close coverage gaps. This remains the case today. Telecommunications providers continue to share coverage information with the Center for Innovative Technology and also try to extend coverage and fill holes to reach their customers wherever they may be. In some cases, however, the capital investment required for providers to reach their customers remains cost prohibitive. Where Broadband Coverage Exists, Government Should Not Compete with Private Sector Providers State and local governments should not compete with telecommunications providers that are offering broadband services. Public agencies are subsidized through public funds, they don t compete on equal footing with the private sector and they distort the marketplace. Where Broadband Coverage Does Not Exist, Government Should Help Defray The Capital Costs for Telecommunications Providers So There Is A Business Case for Investment and Expansion In 2012, The Virginia Tobacco Indemnification and Community Revitalization Commission announced a multi-year investment that will result in the deployment of an advanced wireless communications network in the sevencounty Virginia Coalfield Coalition region. The project is a multi-year undertaking that upgrades existing wireless towers and builds additional wireless towers and backhaul communications facilities to facilitate the provision of 4G wireless access across seven counties by multiple carriers. Carrier-neutral public investments such as this one present a model where public investment can serve as a catalyst for fast and affordable broadband access in unserved and underserved areas. Matching grant programs and tax incentives, including tax credits and sales tax exemptions on equipment purchases, also can help make the business case for investment by telecommunications businesses where costs might otherwise be prohibitive. As Federal NTIA Funding for Virginia Broadband Planning Diminishes, The Commonwealth Should Fund Broadband Planning Initiatives Federal funding through the National Telecommunications and Information Administration to support a State Broadband Initiative in Virginia will end in early The Commonwealth should use general fund resources to ensure the state continues mapping of broadband availability and planning for affordable broadband telecommunications in unserved areas.