NC lawmakers weigh big swing on economic development, using $1.43 billion from taxpayers

A state budget proposal with bipartisan support would give more than $1.4 billion to a nonprofit organization with high-powered leadership that says it wants to boost North Carolina’s economy by ramping up innovation.

If approved it would be the largest infusion of taxpayer money into a non-state entity in North Carolina history.

It’s a big bet on the state’s future. Supporters see it as a way to spur economic growth through high-tech companies. Opponents see it as a money-suck and argue that the proposed funding could be used for other priorities.

The debate has heated up as top state leaders negotiate a state budget already two weeks overdue.

The funding would help university researchers turn ideas and discoveries into companies that would have to stay in North Carolina at least five years, potentially bringing more jobs and tax revenue to the state.

The cash infusions would flow as grants. NCInnovation would also help researchers through the process of building a business. Neither NCInnovation nor taxpayers wouldn’t get an equity stake in return, though state universities typically get a slice of the profits their researchers see. That would stay in place, though those percentages vary.

Without this sort of help, supporters say, too many ideas whither in what’s known as the “valley of death” in investment circles — the space between the laboratory and venture capital markets looking for polished ideas to invest in.

“If you think of this as a relay race, we’re trying to fill the second or third leg,” said Bennet Waters, the chief executive of NCInnovation.

The state Senate earmarked $1.425 billion for the project in its budget proposal, which cleared the chamber on a bipartisan vote. The House of Representatives and Gov. Roy Cooper have blessed the idea as well, albeit with far less money, calling for $50 million to start.

Waters said $1.425 billion is the “minimally acceptable amount” because it will create an estimated $106 million a year to spend on grants. With a smaller investment, he said, the program would go bankrupt in about a decade.

“It does not grow over time,” Waters said. “… You’re forced to spend significantly out of the corpus.” The full $1.425 billion, he said, “funds the endowment in perpetuity.”

But the big number and questions about whether this model can really fuel economic growth in rural counties have some lawmakers questioning the plan.

The proposal is one of several major issues holding up passage of the annual state budget.

“Lot of questions that members have,” Speaker of the House Tim Moore said last week. “It’s a large number. … There is support in the House for the concept. The question is how much money do we put into it.”

Big-name backers

NCInnovation’s board of directors is full of movers and shakers.

The group has nine lobbyists registered for this legislative session, including some of the General Assembly’s better known power brokers.

Waters, a long-time businessman with a track record in startups, established corporations and consultancies, has also spent 20 years as an assistant professor at UNC-Chapel Hill. He said some of the state’s top business leaders have been working on this concept for seven years.

Legislation to fund the group says it has to raise $25 million in private donations. Waters said NCInnovation already has $23 million in hand or committed from major banks, Duke Energy, Blue Cross Blue Shield of North Carolina and other businesses. Capitol Broadcasting Company, the parent company of WRAL, is among those that have donated.

Waters said the group plans to raise more money from individual donors to go beyond the $25 million requirement, with the goal of funding administrative costs.

The state’s money would be used to generate profits, though Moore said there is some discussion of letting NCInnovation spend the endowment itself.

Entities that get grants would need to have their headquarters in North Carolina and operate in the state for at least five years “to ensure that the benefit to the state outweighs the cost of support,” the budget proposal states. NCInnovation would help these groups develop university research out of at least four hubs, with the initial locations centered around Western Carolina University, East Carolina University, North Carolina A&T and UNC Charlotte.

The state’s top research universities, UNC-Chapel Hill, Duke University and N.C. State, already have internal programs dedicated to turning applied research into commercial successes.

Waters said the plan is to require grant recipients to keep their businesses in the region around these four universities and others that are added to the plan, but the regional boundaries would be drawn later by NCInnovation’s board.

The budget language requires routine reports to the legislature detailing how the money is invested, the number of jobs the group creates, overhead and administrative costs and a number of other metrics that must be tracked.

NCInnovation would contract with an independent investment manager to invest the state’s money for compensation that “may not exceed a commercially reasonable amount,” the budget proposal states. Board members would decide where the money is deposited and who manages it.

Board members and NCInnovation employees would have to abide by a to-be-written conflict-of-interest policy that would forbid them from holding equity in businesses supported by the fund.

If NCInnovation dissolves it would have to pay the remaining state money back at 1.5% interest, the budget states.

Other states

NCInnovation points to other states that have spent hundreds of millions of dollars on similar commercialization efforts and warns North Carolina is falling behind.

The group says North Carolina is second, behind Massachusetts, among U.S. states when it comes to academic research and development, though 87% of that money gets spent at UNC Chapel HIll, Duke University and N.C. State.

NCInnovation wants to focus on other universities by building infrastructure around them to shepherd discoveries into companies, and says The state is well below the U.S. average when it comes to venture capital funding to turn research into jobs.

“How can we be so good at bringing research money in and just middle of the pack in commercializing that?” Waters said.

“Even with NC State, Duke, UNC, we’re 20th,” Waters said. “Even with Research Triangle Park, we’re 20th. … We are punching below our weight class.”

Similar NC efforts

The state has funded several entities over the years with goals similar to NCInnovations, albeit at far lower funding levels.

During former Gov. Pat McCrory’s administration the state started its Venture Capital Multiplier Fund, tapping unclaimed property for funding. It was a $60 million fund overseen by the Treasurer’s Office, but it’s fully invested, meaning there’s no money for new investments.

It’s managed by a consulting firm called Hatteras Venture Partners, where Bob Ingram, a well known North Carolina businessman who died in March, was a general partner for more than 15 years. Ingram was also a founding board member for NCInnovation.

The Treasurer’s Office also oversees the pension plan for state employees, which has almost $114 billion in it. Within that there is a $500 million innovation fund targeting companies with connections to North Carolina, but it is also fully invested. It’s also managed by an outside firm, GCM Grosvenor.

The state also created a nonprofit organization in the 1990s called NC IDEA, which was seeded by a $29 million return on a start up the state invested in previously. That fund targets rural and underserved businesses with an annual budget of about $4.5 million, according to president and chief executive Thom Ruhe.

Ruhe supports NCInnovation’s plan and said it would keep North Carolina “on par” with a half dozen states “doing things at similar scale and greater.”

“The opportunity and the need is far greater than the capacity that we have right now,” Ruhe said. “We turn away so much opportunity with every grant cycle.”