Supercharge every board meeting in the state. Crazy times call for crazier ideas.

We should incubate a rapid innovation program across the state. Think of it as a series of 72-hour, continuous improvement design thinking cycles. Short and quick bursts of idea creation from radically different perspectives.

Step One: Create an epiphany strike team. Perhaps that team is ten insanely bright interdisciplinary thinkers and practitioners from diverse fields. Agencies groom them. Have boards invite this strike team of lateral/design thinking people into their board rooms to bring adjacent thoughts and ideas to established businesses. Create demand for this “intervention.” Pay the strike team fairly with state innovation funds. Think of them like a football team. A team, B team, kick-off team, cheerleaders, managers, coaches, recruiters.

Step Two: Create a common framework for change. The framework should be evaluative and dimension-based. The team further creates and evaluates ideas on something like the following;
a) open systems
b) localization
c) platforms
d) revenue
e) sustainability
f) manageability
g) novelty

Step Three: Open every session outcome to a larger group (100 subscribers) to vet the ideas in a second cycle.

Step Four: Publish each session in an open-innovation forum to the broader public. Harvest the ideas in publishable format. This is the third cycle.

Step Five:Reward the boards, epiphany strike teams and other participants for their involvement. Never let the process get bogged down. Make each cycle happen within 72 hours.

Step Six: REPEAT.

We know, for example, what the impact is when a university based company starts hiring people. But can you compute, for example, the impact of decreased use of social services we know follows attainment of a degree? Might be worth a conversation…

This relates to the culture of innovation differently than amending tax breaks. There is no IP patenting or license agreements. This is recombining resources to solve social needs – mental health care, prison-to-work transitions, and special needs youth – with economic needs – redeployment of idle farmland and diversity of income sources for farming-dependent communities. Innovation by achieving solutions to existing problems with new services, not new products.

Eligibility for the proposed North Carolina Founders Credit would be limited to founders and investors supporting companies qualified under North Carolina’s existing Qualified Business Venture (QBV) Tax Credit. In addition, the exclusion would be available only for stock issued after the effective date of the proposed legislation. The exclusion would provide for recapture of QBV credits taken by investors at the time of their initial investment. The exclusion would not be available for securities purchased in connection with certain redemptions or after transactions substantially limiting risk of loss to the investor. A factsheet describing the proposed exclusion, its advantages and potential economic impact can be found at http://ncbioscience.net/ncbio-advoacy/

Recommendation. The Innovation Council should recommend that the General Assembly enact Governor Perdue’s proposed Founders Credit in 2010.

If we define “innovation” (IN) as a function of “invention”(I), “economic potential”(EP), and/or “social value” (SV) where IN = I(EP+SV), then the Innovation Council will best be served by considering all aspects of the term. Don’t seek solutions that do not address the basic issues.

Furthermore, if we consider our educational institutions as a primary source of invention in NC, though not the sole source, we may look to stick to the basics rather than seeking some exotic new formula that, at best, will only enhance our ability to turn invention into innovation and then into economic and community development.

The three basic components for transforming innovation to positive outcomes are (1) the idea, (2) the funding, and (3) the leadership. The idea must provide utility and have a return comparable to the risk involved. The funding must be available at an acceptable cost. The leadership must evoke confidence and competence equal to the requested investment and the task at hand.

I offer this “#1 idea” to the Council as it convenes its first session. Look to recommendations that address any or all of these basic components and save the quick fixes for others. Using this basic formula as the litmus test will improve results and deter mistakes.

My best wishes to the Council and to this very important effort that they embark upon this week.

1) Exempt higher ed from the Umstead Act. Too many great faculty/staff/student initiatives are never pursued due to potential repercussions.
2) Create IP Free zones (idea courtesy of our friends at ECU). Even better, make NC an open source state and watch businesses knock each other over trying to get in the door. (Talk to our friends at Red Hat about how to make money selling free software…)

Together, these two changes could really unleash innovation and creativity across the state and provide incentives for universities and businesses to work together, resulting in significant job creation and new private funding sources for important university programs.

Qualified Business Venture Corporate Income Tax Credit. The State’s existing Qualified Business Venture Tax Credit for individual income taxpayers could be expanded to apply to corporate income tax. Such an expansion would allow businesses with tax liability in North Carolina to become more active in supporting commercialization of new discoveries through entrepreneurially-driven start-up companies.

R&D Tax Credit Income Tax Withholding Grants. Many early-stage companies are not yet profitable and therefore do not have income tax liability against which traditional R&D tax credits can be applied. Several strategies have been suggested to provided for monetization of such credits. One proposal would allow businesses to capture R&D tax credits through retention of a share of employee income tax withholdings. This mechanism would be similar to that used to pass incentive grants to Jobs Development Inventive Grant awardees.

Repeal Sales Tax on R&D Equipment. North Carolina currently applies a special tax rate of the lesser of 1% or $85 per item to purchases of depreciable R&D equipment. This is the same tax rate applied to purchases of manufacturing equipment. The tax is administratively cumbersome and produces relatively little revenue. Repeal of the tax as applied to R&D equipment would provide and incentive to research and development and could be especially meaningful to innovation-based start-up companies seeking to set up new laboratory and other proof-of-concept and product development facilities.

Sales Tax Relief for Research & Development Supplies. As already noted, many innovation-based start-up companies are not profitable and have no tax liability against which the state’s existing R&D tax credit can be applied. Meaningful tax relief could be provided to these companies by eliminating, reducing, or making refundable the state’s sales tax as applied to research and development supplies.

Three innovation policy elements requiring reauthorization by the North Carolina General Assembly in 2010 are: (1) the Qualified Business Venture Tax Credit, and (2) the One North Carolina Small Business Innovation Fund.

The QBV Credit is currently scheduled to sunset for investments after December 31,
2010. The credit must be reauthorized by the North Carolina General Assembly during the legislature’s 2010 short session in order to be available for investments in 2011.

The QBV Tax Credit provides a 25% credit against personal income tax for individual investments in qualifying small businesses. Credits are capped at $50,000 per individual investor per year, and at $7.5 million per year for all investments statewide. To qualify for the credit, businesses must have less than $5 million in revenues annually and be engaged primarily in manufacturing, processing, warehousing, wholesaling, or research and development.

The QBV credit effectively stimulates angel and other early-stage investments that are critical to moving new technologies from universities and other research laboratories to commercialization and, ultimately, to profitability. The credit has become especially important in recent years as venture capital funds have shifted emphasis to later-stage start-up companies. The resulting void in funding opportunities is often called the “valley of death” for entrepreneurs launching new businesses.

A factsheet summarizing the QBV Credit and its economic impact between 1989 and its last reauthorization in 2007 is available here. NCBIO is in the process of updating these economic impact estimates to address the period 2008-09 and will provide this information to interested parties as soon as it is available.

Recommendation: The Innovation Council should recommend that the General Assembly adopt legislation in 2010 to reauthorize the QBV Tax Credit through at least 2012 and expand the global cap for the Credit to $10 million annually.

One North Carolina Small Business Fund. North Carolina’s existing One North Carolina Small Business Fund helps innovation-based start-up companies by providing matching grants of up to $100,000 for Phase I SBIR and STTR grants from the federal government. These funds are crucial stepping-stones between initial company start-up to funding by venture capital firms. In addition, the availability of the state match is considered by federal agencies in selecting SBIR and STTR grant recipients, thereby making North Carolina applicants more attractive to federal agencies participating in the SBIR Program. The Fund also provides stipends of up to $3000 to support qualifying companies that submit SBIR matching grant applications to federal agencies.

As noted above, institutional investors have in recent years shied away from providing start-up capital for small firms. Such small investments, which typically range from $500,000 to $5,000,000, are essential to companies’ ability to prove the value of new products and bring them to market. Without these investments, commercialization of many promising discoveries is made more difficult or even impossible. Without adequate early-stage funding, many innovative technologies will remain bottled up in university laboratories and other research institutions. The One North Carolina Small Business Fund provides essential support for small innovation-based companies to conduct proof-of-concept and early product development activities required to secure start-up capital from institutional investors. A factsheet on the ONCSBF can be found here.

Cost of full funding for the One North Carolina Small Business Fund was originally estimated at $5 million. It is likely actual demand has increased in recent years. The Fund has received non-recurring appropriations of between $5 million in FY 2006-07 and $700,000 in 2009-10.

Recommendation. The Innovation Council should recommend that the General Assembly establish recurring annual funding for the One North Carolina Small Business Fund of at least $5 million per year.