Interim Report of VA Governor's Technology Subcommittee

Technology Subgroup Interim Report: After hearing presentations and reviewing materials, subgroup members determined that the Commonwealth has many programs in place to help small businesses, but it lacks significant programs and policies directed specifically at early stage high growth, tech-based companies. These are the type of 21st Century companies that will drive innovation and future economic growth, and sustainable jobs, in the Commonwealth.

Presentations from VEDP/SRI and material from the Commonwealth Innovation Index being conducted by the ten Regional Technology Councils and CIT identify unique and common industry clusters. For instance, energy and green technology industry clusters are being pursued in about all of the regions, while an industry like bioscience has greater emphasis and opportunities in Richmond and Charlottesville because of the early investments in those areas. At the same time, each region has a unique opportunity for many of the same reasons. For instance, the Lynchburg area, or Region 2000, is focused on the nuclear and wireless industries. Again, these studies are exploring many innovative opportunities within these clusters; however, they are also surfacing many gaps that are impeding these regions, and in turn, the Commonwealth, from taking full advantage of the greater benefits of a tech-based Innovation Economy.

The two primary gaps that need to be addressed are the access to capital, including investments and tax credits, and commercialization of research and technology, the two areas in which the subgroup is investing most of its time discussing. The aforementioned industry clusters, coupled with the economic downturn or transformations in some areas, are attracting energetic entrepreneurs of early stage, innovative, high growth companies. These are companies with unique intellectual properties on the early stage of the innovation continuum between an angel investment and more serious institutional, or Series, investments. Because of their unique nature, even in good economic conditions, these entrepreneurs have difficulty finding seed investments from the private and public sectors in Virginia. Today, the flat economy and frozen capital markets have only exacerbated the problem.

Vision Strategies:

Virginia must deploy existing and develop new technology industry and resources to position itself to create future technology-based economic development opportunities that spur sustainable job growth. We must promote the use of technology to help us solve many of the challenges we face as a Commonwealth, such as smart transportation solutions, a cleaner environment, more efficient health care delivery and increased educational opportunities for all citizens and the lasting effect on long-term economic stability.
Approach:
I. This subgroup will examine existing programs and initiatives currently offered within the Commonwealth, while analyzing potential changes and enhancements, using best practices from industry and other sources inside and outside the Commonwealth.
II. This subgroup will focus their evaluations and recommendations in those areas that foster innovation and technology-based economic development strategies.

Strategies:
I. Reaffirm financial support for sustainable or increased funding for CIT GAP Fund and tax credits for early stage companies.
II. R&D Strategy - look at ways to establish a statewide research and development strategic plan that clearly articulates the research direction, investment requirements, expected quantitative and/or qualitative returns and obstacles to resolve.
III. Assess which sectors of biotechnology and information technology Virginia is currently positioned to develop and consider strategies to maximize opportunity within those sectors.
IV. Accelerate Broadband Deployment: Update the Commonwealth Broadband mapping and
development plan to address the gaps in coverage in all localities.

V. One major area that can and will lead to job creation is the implementation of electronic medical records. This is a major initiative that should be considered to see how Virginia can position itself to take full advantage of updating these records.
VI. Consider how we can attract advanced technology early stage investors to Virginia.
VII. Examine how Virginia can implement a refundable R&D tax credit targeted at advanced technology companies, especially those that sponsor research with Virginia universities.
VIII. Increase the number of investors who apply for the Angel Investor Tax Credit through effective marketing of the program.
IX. Consider how increase biotechnology infrastructure including additional Bioscience "wet-lab" development.
X. Examine the Technology Business Commercialization Programs (Business Incubator Program).
XI. Streamline and simplify the technology transfer process at Virginia institutions.
XII. Provide outline for all-up Chief Executive marketing/public relations campaign to promote Virginia’s assets around job creation and viability for formation of new, organic businesses.
XIII. Modeling and Simulation: Examine ways to grow the modeling and simulation center at Old Dominion University, review opportunities and complementary research that will expand additional centers throughout the Commonwealth.



Initial Ideas and Recommendations:

Capital Formation

The Commonwealth has some limited programs with limited funding available to assist these entrepreneurs, but the subgroup agrees that it needs to do more. Specifically, members are reviewing:

• A refundable R&D tax credit targeted at advanced technology companies, especially those that sponsor research with Virginia universities. This tax credit is used in 38 states.
• An advanced technology jobs convertible loan fund for high-growth, advanced technology companies based in the Commonwealth.
• Increase the angel investor’s tax credit.
• Increased funding for the CIT GAP Funds, which has invested $3.8 million since 2004 to help 39 companies that then attracted another $51 million in private investments – a 13 to one leverage.
• A “VentureVirginia” program to increase venture capital investment that generates funds with tax credits to insurance companies that expedite payment of their state taxes due in 2015. The concept is being advanced in Maryland, Tennessee, and Texas, and is similar to the Small Business Investment Company Credit offered by Delegate Merricks in the 2010 Session.
• Programs to attract advanced technology early stage investors to Virginia by investing in a special life sciences, clean energy, medical devices, or other technology services venture capital fund or “fund of funds” that would be matched by private venture capital.
• A relocation fund to attract innovative, high growth technology companies from other states to Virginia.
• The need to audit and improve existing marketing programs to increase the number of applications for the Angel Investor Tax Credit.
R&D Strategy, Commercialization and Tech Transfer
In addition to addressing the capital formation “gap,” the subgroup is also focusing on the need to improve the Commonwealth’s Research and Development strategies and investments, as well as the commercialization of university research. In 2008 Virginia ranked 16th nationally in R&D expenditures. To improve this national rank, Virginia must execute on its recent decision to develop a long-term strategic R&D plan that is integrated with a capital investment plan that is not limited to just new facilities, as has been done in the past. For instance, as the Commonwealth’s Chief research Officer, the Secretary of Technology must establish a comprehensive strategy that includes
• The work being conducted by the Innovation and Entrepreneurship Investment Authority to establish a statewide research and development strategic plan.

• Streamlining university developed intellectual property licensing and commercialization to reduce inherent barriers to university/industry collaboration.

• Establishing an immediate emphasis on energy research, commercialization and new company formation.

• Coordinating existing transportation-sector initiatives and encourage development of alternative product and service offerings through research, commercialization and new company formation.

• Reprogramming and investing in the Commonwealth Research and Commercialization Fund (CRCF) to serve as an incentive for new and improved commercialization programs.

As this new approach to R&D planning generates innovation and marketable solutions, the Commonwealth will need to improve technology commercialization to enhance the transition of these discoveries from the research lab to the market place. Specifically, the subgroup is reviewing:
• The need to streamline and simplify the technology transfer process at Virginia institutions by creating incentives that reward policies and programs that simplify contractual and financial negotiations while providing reasonable remuneration for researchers and value based pricing for industry.
• A Virginia version of “San Diego CONNECT” to link entrepreneurs, capital, talent and technologies available for commercialization in the Commonwealth.
• A strong focus on research and investments in alternative energies and green technologies, and the expansion of modeling and simulation activities across the Commonwealth.
Wetlabs and Incubators
Another primary focus of the subgroup is the expansion of wetlabs and incubators has long been supported by previous state commissions and policy groups to enhance Virginia’s competitiveness in life sciences. It recognizes the unique profile and nature of this industry, its specialized facility needs and reality that without state participation to mitigate risk, Virginia will be unable to create the product (i.e., commercial facilities) necessary for creating viable life science industry clusters. Expanding wetlabs would allow Virginia to attract companies by having product “in place” rather than just showing prospects raw land which will add 12-15 months to the occupancy timeline. It also allows Virginia to compete with other states implementing various types of loan and lease guarantee or grant programs for biotechnology facilities.
The subgroup is also reviewing the idea of a comprehensive program to create a network of “knowledge-based” industry incubators and commercialization centers around the Commonwealth – both university-affiliated and independent. Oftentimes, knowledge-based businesses are often founded by scientists, engineers and other technology-oriented individuals who may have had little or no experience in starting a business or in dealing with business challenges. This is frequently in contrast with companies started out of general business incubators which often are founded by individuals who have either started businesses before, or who have been in the business world for some time. While the recommendations and principles advocated apply to both types of incubator programs designed to foster high technology business formation and growth in the Commonwealth, subgroup members strongly recommend targeting any new funds to those incubators with sound business plans that demonstrate a strong return on investment.
Broadband
To get to the Innovation Economy, broadband access is crucial. While there continues to be a focus on Southside and Southwest Virginia, the Virginia Tobacco has invested more than $100 million for broadband infrastructure build out in those areas. In addition, recent grants from the America Recovery and Reinvestment Act (Stimulus Funding) will expand broadband infrastructure in Allegheny, Page and Nelson Counties, Blacksburg and Bedford, Buggs Island Telephone, and the Mid-Atlantic Broadband Cooperative in Southside Virginia. Currently, CIT is investing $1.8 million of stimulus funding in broadband data collection and mapping activities and $500,000 for broadband planning activities over a two-year period in Virginia, bringing the total grant award to approximately $2.3 million. CIT is the designated entity for the state of Virginia. Twenty-six proposals have been submitted to the National Telecommunications and Information Administration for Round II funding. The subgroup will continue to work with Karen Jackson, Deputy Secretary of Technology, to determine additional recommended actions.
Health IT
The subgroup fully supports recommendations by the McDonnell Administration transition to invest more in health information technology. According to transition documents, a first step is to begin to digitize all medical records. As a start, the Governor should require that all state employees’ health records be digitized. This would send a signal to the private sector that Virginia is ready to engage in public-private partnerships to expand the use of health IT, lowering the cost of healthcare delivery while creating economic development opportunities and jobs.
Already, an initiative is underway to expand the use of electronic health records (EHR). Earlier this year, the Virginia Healthcare Quality Center and CIT won a $12 million co-operative agreement from the U.S. Department of Health and Human Services and its Office of the National Coordinator for Health IT to implement the expansion of electronic health records (EHR) for nearly 2300 priority primary care providers in Virginia by February 6, 2012. These providers are defined as urban and rural practices with less than 10 healthcare providers. Currently in Virginia these practices have less than a 10% adoption of EHR. This program will help improve healthcare and reduce costs in Virginia, while creating Health IT jobs across the State.

On June 15, Virginia HIT, the federally designated Regional Extension Center for Virginia, in partnership with the Center for Innovative Technology, announced its preferred partners to work with primary care physicians across the Commonwealth (including pediatricians and obstetricians/gynecologists). These three partners — Allscripts, athenahealth, and MDLand — will provide a Software as a Service (SaaS) solution to approximately 2,300 physicians to meet EHR certification requirements for Meaningful Use. Additional services will include education, technical, and implementation resources.
As important as this initiative is, the subgroup strongly believes that the Commonwealth should pursue so many of the other opportunities inherent in a strategic health IT program. Given the cluster of many large and small businesses, as well as non-profit organizations, that are engaged in health IT, coupled with their proximity to and strong contractual relationships with federal agencies, Virginia is well positioned to be a leader in this field. To further explore this area, members will consult with the Secretary of Health Services, VEDP and others on additional health IT and telemedicine initiatives and opportunities, such as personalized medicine, point-of-care diagnostics, computational technologies, data interchange and other innovations that are revolutionizing the healthcare industry.
Modeling and Simulation
The subgroup recommends the continued development of modeling and simulation technologies in the Commonwealth. Since its founding in 1994, the industry has seen significant growth take place, becoming a $640 million industry employing over 5,000 people with an average salary of $83,000 each year. The subgroup advocates a number of action items, such as examining opportunities for pilot and/or demonstration projects using modeling and simulation with Virginia state government agencies as well as working to attract a federal Modeling and Simulation Lab in Virginia.
Marketing
Although the subgroup is advocating these additional measures, members agree that much more needs to be done to market existing tools to entrepreneurs and investors. Members will recommend suggestions on ways that the Governor’s office can celebrate entrepreneurs and innovation, and also initiate an audit of existing materials and tools to enhance their efficacy.
At its last meeting on July 9, the subgroup heard reports from officials from VEDP and the Secretary of Technology’s office on programs and initiatives covering tech-based economic development and broadband.

Members also reported on areas in which they were charged with developing ideas, again, primarily capital formation; R&D and commercialization; wetlabs and incubators; health IT and broadband; and marketing. The initial ideas and recommendations are mentioned above, and the group agreed to further refine ideas in the coming weeks.

Next Steps:

In addition to honing overall ideas and recommendations, the subgroup agreed that more information is needed in the areas of Health IT and broadband access. In addition, the subgroup began discussing the use of local technology zones that use tax breaks and other incentives to attract innovative high growth technology companies. Qualified businesses locating or expanding operations in a zone may receive local permit and user fee waivers, local tax incentives, special zoning treatment or exemption from ordinances. Once a local technology zone has been established, incentives may be provided for up to 10 years. Each locality designs and administers its own program.

A preliminary review shows that technology zones have been adopted in the counties of Arlington, Bedford, Caroline, Culpeper, Frederick, Halifax, Henry, Roanoke, Rockingham, Russell, Smyth, Spotsylvania, Stafford and Warren; the cities of Buena Vista, Charlottesville, Falls Church, Franklin, Fredericksburg, Harrisonburg, Lynchburg, Manassas, Newport News, Roanoke, Suffolk and Winchester; and the towns of Front Royal in Warren County, Kilmarnock in Lancaster County and Marion in Smyth County. Members and staff will conduct additional research into the use of the technology zones and how they can be linked to other federal and state programs, and consult with staff from the Secretaries of Health and Technology to determine what needs it can best address in the areas of health IT and broadband. These issues will be the primary points of discussion at the subgroup’s next meeting on August 11.

The four members of the subgroup are:

• Anne Gavin - State Government Affairs Regional Manager, Microsoft
• Mark Herzog - Executive Director, Virginia Biotechnology Association
• Caren Merrick - Co-founder, Webmethods
• Bob Skunda - President and CEO, Virginia Biotechnology Research Park

Since the initial meeting of the Commission, members have met twice – June 2 and July 9 in Fredericksburg - to review transition and other documents that outlined statewide technology-based economic development programs and gaps. They also heard more detailed presentations from VEDP, CIT, and the office of the Secretary of Technology on the history and status of broadband activities across the Commonwealth. The subgroup identified several areas on which to focus that will have the greatest impact on tech-based economic growth. Members are very cognizant of the economic and budgetary challenges facing the Commonwealth, and therefore, they are reviewing existing programs that need greater coordination, marketing, and enhancement. The Subgroup is also reviewing successful tech-based economic development programs from other states that could be adopted for use in the Commonwealth.

Subgroup members also recognize the value of reaching out to stakeholders for comments, and have identified the following organizations:

The Virginia Technology Alliance and the Ten Regional Technology Councils; Virginia Biotechnology Association ; Association of University Technology Transfer Managers (AUTM); Virginia Business Incubation Association; Virginia Active Angel Investor Network; Mid-Atlantic Venture Association; National Venture Capital Association