INNOVATION AND ENTREPRENEURSHIP MEASUREMENT SYSTEM

Transcription

1 INNOVATION AND ENTREPRENEURSHIP MEASUREMENT SYSTEM January 16, 2018

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3 Table of Contents Introduction... 1 Talent Pipeline... 3 FIRST Participation... 3 STEM Degrees... 4 Knowledge Worker Migration... 6 Workforce Education Level... 7 Science and Engineering Employment... 9 Academic Entrepreneurship Experience... 9 Research and Development State R&D Intensity Federal R&D Corporate R&D SBIR & STTR Awards Academic Science and Engineering R&D Expenditures Patents Awarded Access to Capital Private Investment Public Sector Investment R&D Tax Credits Commercialization University Licensing University Startups University Environment Business Dynamics Startups Establishment Churn IPOs Fast Growing Firms Broadband Access Outputs High-Tech Employment Share High-Tech Payroll Share High-Tech Export Share Market Trends Data Sources and Definitions Appendix A. Data Tables iii

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5 Introduction The Commonwealth Innovation and Entrepreneurship Measurement System (IEMS), uses key metrics and outcomes to track the performance of Virginia s innovation economy. Innovation is widely recognized as the premier path to economic expansion both domestically and globally and it is clear that the drivers of innovation in our domestic economy are entrepreneurs of emerging, high-growth technology companies. According to the Kauffman Foundation, a leader in advancing innovation and entrepreneurship: Entrepreneurs who launch new businesses are the driving force behind a vibrant society when they create new jobs, renew the economy and expand human welfare. 1 The IEMS was established by the Virginia General Assembly to further the work of the Commonwealth Research and Technology Strategic Roadmap, which links funding for research commercialization projects to Virginia s strategic technology priorities. It creates a dashboard and strategic path to new opportunities in the innovation economy using key indicators that can assist lawmakers, industry leaders, and other stakeholders with determining public-private investment priorities and policies. This year s IEMS report shows the most recent year reported for each indicator based on data availability as of January 4, Some indicators rely on reports that are issued only every two years and have a longer reporting cycle, while others are available each year and have a shorter reporting cycle. The older data are included here because they are key indicators; can be used in conjunction with information provided by other indicators to support a narrative regarding overall trends; and show Virginia s performance relative to other states. Interstate comparisons are made with reference to a group of six technology benchmark states (benchmark states), which were chosen based on economic similarities to Virginia and success in stimulating innovation and entrepreneurship. They include: California, Maryland, Massachusetts, North Carolina, Pennsylvania, and Texas. When a non-benchmark state leads on the particular indicator, that state is also identified. Lastly, a United States average is provided. Virginia intra-regional comparisons are made using ninevirginia regions. These regions are defined using the regional model of Go Virginia and are: Region 1 (Southwest Virginia), Region 2 (Roanoke/New River/Lynchburg), Region 3 (Southside), Region 4 (Greater Richmond), Region 5 (Hampton Roads), Region 6 (Greater Fredericksburg), Region 7 (Northern Virginia), Region 8 (Shenandoah Valley), and Region 9 (Greater Charlottesville). More information about which counties and cities are included within each region can be found on the Go Virginia website: The latest indicators demonstrate Virginia s continued strength in many areas essential to a thriving innovation and entrepreneurship ecosystem. These include Workforce Education Level, STEM Degrees, and Fast Growing Firms, along with University Commercialization, Entrepreneurship Experience and University Environment. Virginia s universities are providing vibrant environments for faculty and students to pursue entrepreneurism and innovation and complement those in many communities and regions around the Commonwealth. The Kauffman Foundation s 2017 Index of Growth Entrepreneurship ranked Virginia as #1 among large states based on the rate of startup growth, share of scaleups, and high-growth company density. The indicators also reflect that access to capital remains a challenge in Virginia

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7 TALENT PIPELINE Goal: Expand and enhance Virginia s high-quality and highly skilled workforce. Talent pipeline indicators measure the state s success at attracting, retaining, and producing human capital and the state s current availability of highly skilled workers. A skilled workforce is associated with higher productivity and is one of the most important inputs for fostering innovation and entrepreneurship. Talent pipeline indicators show trends for various educational levels, beginning with programs for primary school students and continuing through graduate school. They also examine degrees awarded in science, technology, engineering, and mathematics (STEM) fields and entrepreneurship training outputs. Enrollment in Virginia s FIRST (For Inspiration and Recognition of Science and Technology) program, which is designed to stimulate primary and secondary school interest in science and technology, increased slightly from the year before. This was primarily a function of higher participation in the FIRST Tech Challenge and FIRST Robotics Competition programs. The number of degrees awarded in STEM fields at the postsecondary level has steadily increased. Interstate migration provided a net outflow of college-educated adults from 2012 to Virginia continues to perform at or near the top among U.S. states in terms of college attainment rates and the percentage of its workforce in science and engineering occupations. Post-secondary entrepreneurial experience opportunities are also expanding. Several universities surveyed now offer either formal degree programs or concentrations in entrepreneurship as well as entrepreneurship centers and experiential learning programs. Why is the talent pipeline important? An educated workforce is more productive, thereby improving economic growth and wages. It is also more adaptive, open to new ideas, and entrepreneurial. In order to further improve the skills of its workforce, the state must train, retain, and attract skilled workers. Demand for skilled workers is high and expected to increase rapidly in the future, especially for workers in STEM occupations. Virginia s K-12 and public higher education institutions will play a key role in satisfying this demand. Higher education institutions are also providing more and varied entrepreneurship education and experience opportunities, which will help ensure that the Commonwealth has an expanding pool of potential entrepreneurs with the skills and experience needed to create startups and introduce new products and services. The state s impressively high percentage of STEM-prepared workers provides a key competitive advantage for future economic growth in high-tech industries. How has Virginia performed over the last five years? FIRST Participation FIRST is a non-profit organization that offers programs to stimulate primary and secondary school student interest in STEM education and career opportunities. Four FIRST programs are offered in Virginia: grades K-3 (Junior FIRST Lego League or Jr. FLL), grades 4-8 (FIRST Lego League or FLL), grades 7-12 (FIRST Tech Challenge or FTC), and grades 9-12 (FIRST Robotics Competition or FRC). Total FIRST participation in Virginia increased from 2012 to 2014, decreased in 2015, and increased again in In 2011, an estimated 8,677 students participated in FIRST programs. This had increased to 9,529 students in Participation rate increases over the period were highest in FTC, which increased from 648 in 2012 to 1,584 in 2016, a 144% rate of increase. FRC increased 16%, from 1,675 in 2012 to 1,950 in Participation in FLL decreased from 5,412 in 2012 to 4,785 in 2016, a rate of decrease of 7%. Jr. FLL decreased over this time period as well, from 1,230 in 2012 to 1,210 in 2016 for a 2% decrease. 3

8 4 STEM Degrees High-technology and innovative enterprises have a large and growing demand for workers with STEM degrees. The number of STEM degrees produced by state institutions of higher learning provides a measure of how well they are helping to meet this demand. The number of STEM degrees awarded by Virginia public, private non-profit, and private for-profit colleges and universities has generally increased over the last five years. Associate s degrees awarded decreased from 4,489 in 2012 to 3,787 in However, bachelor s, graduate, and professional degrees have been on a steady upward path from 14,256 in 2012 to 17,551 in On a population-adjusted basis, Virginia awarded 45 Associate s degrees in STEM fields per 100,000 residents in This rate compares to 34 per 100,000 residents nationwide. Virginia s rate was seventh highest

9 in the nation and was higher than all benchmark states except for California. The nation s highest rate was in Arizona with 77 degrees per 100,000 residents. Virginia awarded 209 STEM field Bachelor s and higher degrees per 100,000 residents, ranking it 20th highest among states in the nation. This rate compared to a national average of 192 degrees per 100,000 population in Massachusetts was the leading state with 374 degrees per 100,000 residents. Among benchmark states, Virginia was lower than Massachusetts, Maryland (265), and Pennsylvania (262). 5

10 Knowledge Worker Migration Virginia has experienced a net outflow of college-educated adults to the rest of the nation for four of the last five years. There was a net surplus 2013, but net deficits in other years. Over the entire 5-year period , the state experienced a net loss of 12,431 college-educated adults with 10,303 of those occurring in 2016 alone. State migration rates for college-educated adults can vary in response to regional economic conditions and the relative size of the higher education sector. Virginia s net migration rate of college-educated adults was -4.7 per 1,000 population in 2016, which ranked 34th highest among U.S. states. This rate was lower than all benchmark states. 6

11 Workforce Education Level The percentage of Virginia s workforce (defined here as anyone between the ages of 25 and 65) with at least a Bachelor s degree has steadily improved over the last five years. In 2012, 37.5% of the workforce had a Bachelor s degree or higher and 15.4% had a graduate or professional degree. By 2016, these percentages had improved to 39.9% and 16.8% respectively. Virginia ranked sixth among U.S. states in the percentage of the workforce with Bachelor s degrees and third for graduate or professional degrees. Among benchmark states, only Massachusetts (45.3% for Bachelor s degree or higher and 19.3% for graduate/professional degrees) and Maryland (40.8% Bachelor s degree or higher and 18.6% for graduate/professional degrees) were higher. 7

12 8 Workforce educational achievement percentages vary widely within Virginia. Ranking highest in 2016 was the Northern region, where 58.8% of the workforce had a Bachelor s degree or higher and 27.2% had a graduate or professional degree.

13 Science and Engineering Employment Virginia has an impressively high percentage of skilled workers, reflecting the state s knowledge-intensive industries. Virginia ranked first in the nation in the percentage of its workforce (7.5%) in science and engineering (S&E) occupations for 2014, up from 7.3% in Maryland (7.4%) and Massachusetts (6.9%) were the closest benchmark states. The national average was 4.7%. Academic Entrepreneurship Experience Virginia s public institutions of higher education stimulate interest and develop skills in entrepreneurship through training, experiential learning, formal degree programs and concentrations, entrepreneurial centers, student clubs and organizations, and entrepreneurial student living arrangements. Many colleges and universities have started or scaled up resources and programs in these areas in recent years. The University of Virginia and Virginia Tech provide formal degree programs in entrepreneurship, while the College of William and Mary, George Mason University, James Madison University, and Virginia Commonwealth University offer concentrations at the Master s or Baccalaureate levels. Centers for Entrepreneurship have been established at most institutions; the following offers examples of the many centers in place. They include the Alan B. Miller Entrepreneurship Center at the College of William & Mary; the Center for Innovation and Entrepreneurship at George Mason University; James Madison University s Center for Entrepreneurship; the Strome Entrepreneurial Center at Old Dominion University; the Batten Institute for Innovation and Entrepreneurship at the University of Virginia; the da Vinci Center at Virginia Commonwealth University; and the Apex Systems Center for Innovation and Entrepreneurship at Virginia Tech. At least seven graduate-level public universities offer clubs and experiential learning programs and entrepreneurship training programs for students and members of the public. Total headcount in student and public entrepreneurial training in FY2015 was estimated at 25,521 in FY2015, up from an estimated 8,469 in FY2014. In addition, the College of William and Mary, Old Dominion University, Virginia Commonwealth University, and Virginia Tech offer student entrepreneurship living arrangements, which provide a livinglearning community for learning, networking, and mentoring. Virginia Tech offers two separate entrepreneurship living options: the InVents Living Learning Community (a residential hall featuring spaces for students 9

14 to create and discover) and Innovate Living Learning Community (a residential space linked with additional student programming, including entrepreneurial networking opportunities and startup company experiences). State legislation signed into law in 2016 provides additional support for student entrepreneurs by clarifying higher education rules under which students own intellectual property. This new law was adopted to foster a welcoming culture for student entrepreneurship in the state s public colleges and universities and encourage more student innovation and commercialization. What are the implications? The talent pipeline shows how well the state continues to build the human capital needed for innovative industries. FIRST participation, an indicator of K-12 interest in STEM learning that may lead to future increases in STEM college degree program enrollment, remains at high levels. Virginia higher education institutions continue to increase overall STEM degree production, suggesting that the state is responding to the increasing demand for scientific and technical workers. Virginia universities are also ramping up efforts to cultivate student entrepreneurship. Virginia has a consistently impressively high concentration of workers in science and engineering occupations, and workforce educational attainment levels continue to improve. However, the state has been less successful in four out of the last five years in adding to the skilled labor supply by attracting highly educated workers from elsewhere in the U.S. Additionally, some regions have significantly lower concentrations of higher educational attainment. Overall, Virginia has been successful in stimulating student interest in STEM from an early age and training and expanding the number of skilled workers needed for innovation- and entrepreneurship-driven growth. 10

15 RESEARCH AND DEVELOPMENT Goal: Increase support for the research and development activities that provide a foundation for high-tech growth. Research and development (R&D) is the wellspring of innovation and consists of basic research, applied research, and development. Measures of R&D activity include both inputs, such as money spent on research and development, and outputs, such as patent activity. Most R&D expenditures originate from industry and private investment, primarily for the purpose of applied research and development with more immediate product commercialization possibilities. Federal and state governments also invest substantial amounts in R&D, often in basic research, which results in significant discoveries that are so diffuse that they are difficult for any one business to capture, yet importantly feed into applied research. Virginia s universities, hospitals, and laboratories are important players in the discovery and dissemination of new ideas. Although some R&D measures rely on data that is a few years old, they may be included in the IEMS. The Research & Development category is central to the IEMS, as it represents the idea-generation phase that results from combining intellectual with financial capital to develop technologies that have potential for commercialization. The value of overall R&D performed in Virginia declined in 2012 from the prior year, the most recent year of data available for this measure. This measure in particular is dated, though is retained because it is the sole comprehensive indicator of overall R&D in Virginia. More recent data below on various R&D components present a more current picture. Corporate R&D, a component of that, declined as well in 2012, and again in Federal R&D obligations also form an important part of Virginia s overall R&D expenditures.federal R&D obligations have decreased in four of the last five years. The total number of combined SBIR/STTR awards have dropped in recent years, although dollar amounts have fluctuated. Colleges and universities also perform a significant amount of science and engineering R&D. These expenditures increased slightly in 2015 due to an infusion of institutional funds. However, federal and state funding continued to decrease. Patents awarded to residents of Virginia decreased in 2015 after four years of increases, and Virginia continues to lag behind the national average and benchmark states on a population-adjusted basis. Intellectual property created through trade secrets and copyrights are also important for Virginia. Why is Research & Development important? R&D investment is a key input in the innovative process. It is necessary but not sufficient for innovationdriven growth. Not all R&D investments will result in an innovation output such as a commercially successful product or service; however, R&D expenditures provide an indication of the state s overall investment climate and capacity to create and disseminate knowledge. Likewise, although not all patents awarded to residents of Virginia will be licensed or utilized in products or services, they are intellectual property that businesses and individuals believe have commercial value. How has Virginia performed over the last five years? State R&D Intensity Research and development is a key input to the innovation process. State R&D intensity measures spending attributable to federal and state government, businesses, higher education institutions, non-profit organizations, and other entities as a percentage of state gross domestic product (GDP). Although this data is available only through 2012, it can be used in combination with more recent federal and corporate research expenditures to 11

16 ascertain likely trends in overall research and development activity and to determine the Commonwealth s relative position with respect to other states. Virginia ranked 21st on R&D expenditures as a percentage of state GDP in 2012, at 2.3% of state GDP, below the U.S. average of 2.7%. This percentage is lower than 2008 s 2.9%. New Mexico led the nation with 6.7% in 2012, largely because of the Los Alamos and Sandia national laboratories located there. Among benchmark states, Maryland (5.6%), Massachusetts (5.6%), and California (4.6%) R&D spending was higher. Federal R&D The federal government invested $136 billion in R&D in 2011, approximately 32% of all national R&D spending. However, these obligations have decreased in recent years as a result of the expiration of fiscal stimulus programs and budget sequestration. Federal investment plays a large role in Virginia. Federal research obligations were $7.5 billion in 2015, which is 1.6% of state GDP. This percentage is well above the 12

17 national average of 0.6% and ranked the Commonwealth fourth among U.S. states. This amount was down from $7.7 billion in Maryland ranked first with federal R&D obligations of 4.6% as a percentage of GDP in All other benchmark states were lower. Corporate R&D Corporate R&D measures research and development activities conducted by private businesses. Private businesses accounted for 69% of total R&D activity performed at the national level in Virginia cor- 13

18 porate R&D expenses declined from $6.16 billion in 2009 to $4.66 billion in Outlays rebounded in 2011 to $5.56 billion but decreased again to $4.45 billion by Corporate R&D intensity as measured by expenditures as a percentage of private industry output is somewhat lower in Virginia than in the nation. Expenditures represented 1.2% of private industry output in 2013, ranking Virginia 27th in the nation and below the 2.2% national average. All benchmark states, with the exception of Texas (1.1%), were higher. The state of California led the nation with 4.6%. SBIR & STTR Awards The Small Business Innovation Research (SBIR) program offers competitive research grants to small businesses to conduct R&D that has a high potential for commercialization. A related program, the Small Business Technology Transfer program, offers similar incentives for small businesses that partner with non-profit U.S. research institutions. SBIR/STTR offer grants for two phases: Phase I offers seed funds to determine the scientific, technical and commercial merit and feasibility, while Phase II follow-on funding is awarded to support prototyping and demonstration of the most promising Phase I projects. Virginia businesses were awarded a total of $ million in SBIR/STTR funds in This amount is higher than the 2014 total of $126.5 million. SBIR funding increased while STTR funding declined from previous year levels. The total number of combined SBIR/STTR awards decreased for the fourth year in a row. Virginia firms received the third highest amount of SBIR/STTR funds among U.S. states. Only benchmark states California ($450.9 million) and Massachusetts ($288.2 million) were higher. Adjusting for state size, Virginia firms received $15.7 in SBIR/STTR awards per capita in This was substantially above the U.S. average of $7.1 in 2015 and ranked fifth highest among all states. The leading state was benchmark state Massachusetts at $42.4 per capita. Only one other benchmark state, Maryland, ranked higher with $19.8 per capita in SBIR/STTR awards. 14

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20 16 Academic Science and Engineering R&D Expenditures University R&D activities are an important source of basic and applied research discoveries and also provide technologies for commercialization. Virginia higher education science and engineering R&D expenditures increased from $1.3 billion in 2015 to $1.4 billion in In recent decades, academia in Virginia has relied on the federal government for more than half of its R&D funding. However, over the 2012 to 2016 period, an increasing percentage of funding has originated from other sources, principally the higher education institutions themselves. During this period federal funding decreased by 5.5% and state and local government financed R&D decreased by 38.5%. In contrast, institutional funding increased by 34.5%, and business financed R&D rose by 44.4%. Other funding sources (including non-profit organizations) increased by 34.8%.

21 Like many other states, Virginia s academic science and engineering R&D expenditures decreased as a percentage of state GDP from 2012 to 2016, dropping from.29% to.27% of GDP. Moreover, the 2016 percentage is lower than the U.S. average of.37% and ranked 37th among U.S. states. It also ranked lower than all six benchmark states. Maryland was the nation s leader at 0.99%. Patents Awarded Virginia s rate of patent formation steadily improved from 2011 to 2014 before experiencing a dip in The total number of patents awarded in Virginia was 2,057 in 2015, a significant increase from 1,600 in Adjusting for population, Virginia received 24.5 patents per 100,000 residents in 2015, which was significantly lower than the U.S. average of 43.8 per 100,000 residents and ranked 29th among U.S. states. It 17

22 was also lower than all benchmark states. California led the nation with patents per 100,000 residents. Patents are one element of intellectual property (IP); IP created through trade secrets and copyrights is also an important economic driver for Virginia. Patent rates vary widely within Virginia. The Northern region had the highest patent rate at 43.4 patents per 100,000 residents in The West Central region also was higher than the state average with 30.8 patents per 100,000 residents. 18

23 What are the implications? Research and development inputs and outputs are some of the most tangible and traditional innovation measures. Virginia firms and institutions do well in attracting federal government R&D investment, but with the expiration of the fiscal stimulus and onset of budget sequestration, this funding became more tenuous. Overall R&D performance in Virginia declined in 2012, indicating that other sources of R&D investment such as private firms had not filled this void. Academic science and engineering R&D expenditures have stabilized, but this is due to institutions assuming a greater burden of self-funding these activities. Virginia performance remains mixed on the limited output measures available. The number of patents awarded decreased in 2015, and it continues to lag behind benchmark states and the national average. Overall, Virginia s performance on these measures deteriorated in recent years, although it can be difficult to ascertain the most current situation because some metrics are reported with substantial time gaps. Also, relative to the benchmark states and the U.S., Virginia lagged in areas of R&D intensity and outputs, with the exception of federal government support represented by R&D obligations. 19

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25 ACCESS TO CAPITAL Goal: Improve access to capital for new and expanding high-tech enterprises. The success of companies depends on adequate access to different types of capital during various stages of growth. Entrepreneurs rely on debt and equity financing to start and grow their businesses. These resources are used by entrepreneurial ventures to support fundamental business functions such as marketing, manufacturing, and sales as well as innovation-boosting research and development and commercialization activities. Access to capital here encompasses risk capital used to fund innovation in early-stage companies, including private investment funds, public sector investment programs, and state R&D tax credits. Virginia s venture capital investment surged in 2016, continuing an upward trend that started in The number of deals was stable; the dramatic increase in venture funding was largely associated with one investment. Private angel investment decreased in Investments by public sector programs, which included CIT s GAP Funds, the Commonwealth Research Commercialization Fund (CRCF), and the Virginia Tobacco Region Revitalization Commission (Tobacco Commission), also increased in aggregate due in large part to the reinstatement of the Tobacco Commission s R&D grant program in FY Private sector leverage is also an important consideration. When funds leveraged from other sources are included, the total investment impact of GAP was $134.1 million in FY2017. R&D tax credits, which include the R&D expenses tax credit, the qualified equity and subordinated debt investments tax credit, and the newly created major R&D tax credit increased markedly from taxable year (TY) 2015 to TY2016 as a result of the new program and an increased cap for R&D expenses tax credit. Why is access to capital important? Access to a variety of sources of capital is important for business startup, expansion and investments in research and development, and commercialization of research. Many promising entrepreneurial ventures fail because of the difficulty of securing funding to cover negative cash flow during an early stage. Private investment provides the largest source of funding for innovative companies. The public sector plays a facilitating role by offering tax credits and providing funding to innovative companies to support applied research and commercialization activities in high-risk areas and leverage additional private investment. How has Virginia performed over the last five years? Private Investment Angel investment typically provides seed capital for the earliest stage of business startup activity. Angel investment in Virginia increased from an estimated $14-20 million in 2011 to a peak of $18-35 million in In 2015, angel investment dropped to $10-20 million. The number of deals financed follows a similar path. There were an estimated 50 to 100 angel investments in 2011, increasing to in 2013 and The number of deals decreased to in Nationally, angel investment has been relatively flat over the last three years. Although angel investment increased slightly from $24.1 billion in 2014 to $24.6 billion in 2015, the number of angel investment deals decreased from 73,400 to 71,110. Virginia attracts a relatively small amount of national angel investment, with approximately 0.06% of national angel investment and 0.15% of angel investment deals in Venture capital investment is an important source of capital for more established early- and later-stage start- 21

26 22 ups that need funding to accelerate growth. Venture capital has increased markedly in each of the last four years, surging from $527.0 million in 2012 to $2.143 billion in A significant cause of the 2016 increase from 2015 s $1.017 billion was a $1.2 billion venture deal for Arlington-based telecommunications firm OneWeb. Venture capital investment has expanded for both seed- and early-stage investments, and expansion and later stage investments. The former grew from $49 million in 2012 to $205 million in Expansion and later stage investments leapt from $478 million to $1.937 billion over the same period. The number of venture capital deals has decreased slightly. There were 99 venture deals in 2012 and 80 in Seed- and

27 early-stage venture deals decreased over the period from 54 to 41, while expansion- and laterstage deals decreased from 45 to 39. Venture capital spending as a percent of 2016 state GDP has also increased. Virginia ranked 4th among U.S. states in venture capital spending as a percentage of state GDP (0.43%) in 2016, This rate was higher than the national average of 0.32%. Virginia s rate was lower than two benchmark states: California (1.21%) and Massachusetts (1.20%), but higher than North Carolina (0.12%), Maryland (0.08%), Texas (0.08%), and Pennsylvania (0.08%), California was the national leader. 23

28 As a result of the growth of the Internet and social networking in recent years, several new financial technology tools have arisen that offer additional funding options for entrepreneurs. Crowdfunding provides startup funds through monetary contributions provided by numerous investors over the Internet in return for initial batches of the startup product or firm equity. Peer-to-peer electronic platform business lenders take advantage of big data processing capabilities to rapidly assess firm credit risks and serve as a broker for small loans. These new financial technologies will likely provide new avenues for entrepreneurial funding in the future as government restrictions are eased. Public Sector Investment The goal of public sector investment is to stimulate private investment. Diversifying the sources and expanding the pool of private seed and venture capital for entrepreneurs in the Commonwealth generates more innovative startups and creates jobs. The Commonwealth of Virginia promotes innovation and entrepreneurship through various incentive programs. The CIT GAP Funds, the CRCF, and the Tobacco Commission s R&D Grants are among the most important programs. CIT GAP Funds provide seed- and early-stage near-equity and equity investments in Virginia-based technology, life science, and clean technology firms that exhibit a high potential for achieving rapid growth, generating significant economic returns, and leveraging private investment. Over the past five years the program has seen a significant increase in leveraged dollars. In FY2013, $2.80 million was invested in 15 GAP projects, which attracted additional private funding of $36.0 million. In FY2017, CIT invested $2.4 million in 27 projects, which leveraged $134.1 million in additional funding. The CRCF promotes science- and technology-based research, development, commercialization, and company formation and growth. The Fund, which was initiated in 2011, makes awards to projects that align with sectors 24

29 in the Commonwealth Research and Technology Strategic Roadmap and works in tandem with other federal and state programs to leverage matching funds. A significant portion of the funded activity occurs in partnership with Virginia universities. Between FY2013 and FY2017, 221 awards have been announced. In FY2013, $3.0 million was awarded for 43 projects. In FY2017, 40 projects received $2.7 million in funding. The Virginia Research Investment Fund was established in the 2016 General Assembly session; the General Assembly appropriated $12 million from the general fund and authorized an additional $24 million in bond funds for the VRIF. In May 2017, the State Council of Higher Education for Virginia (SCHEV) issued the VRIF s first request for proposals. Award announcements are planned for late CY2017 and may include approximately $4 million from the general fund and an unspecified amound of bond funding. The Virginia Tobacco Commission established the $100 million R&D fund in 2009 to provide grant funding to public and non-profit organizations and educational institutions in support of conducting research and development and commercializing technology. The funded projects are selected to maximize the economic development impact on the 41-locality tobacco-dependent regions in Southern and Southwest Virginia. FY2012 saw the largest project outlays with $13.5 million for 7 projects. Project awards and funding totals dropped in 2012 but recovered to similar levels in FY2013 and FY2014. The program was put on hold in FY2016 while new guidelines for awards were developed, and thus no awards were made in FY2016. The program resumed in late FY2017 and awarded $5.6 million to 6 projects. R&D Tax Credits The Commonwealth of Virginia offers three R&D tax credit/exemption programs to eligible firms and private investors. The Research and Development Expenses Tax Credit, established in 2011, provides a refundable individual and corporate income tax credit for qualified R&D expenses. The amount available for this program was recently boosted from $5 million to $6 million in TY2014. The Qualified Equity and Subordinated Debt Investments Tax Credit offers angel investors a 50% tax credit for pre-qualified small business ventures involved in technology fields. The cap has been adjusted from year to year within a range of $3-5 million. 25

30 In 2016, this annual cap was raised to $7 million. The state also offers individual and corporate income tax subtractions for long-term capital gains attributable to qualified investments in early stage technology, biotechnology, and energy startups. In addition, the state established a new tax credit program in Called the Major R&D Expense Credit, it is targeted for companies that spend more than $5 million per year on research. The annual cap for this credit is $20 million. The Virginia Research and Development Expenses Tax Credit saw increases in approved applications and tax credit amounts from TY2012 to TY2016. In TY2012, 135 applications were approved for a total amount of $4.5 million. Approved applications increased to 440 in TY The total approved amount was $7.0 million, which was $1 million more than the year before and the maximum amount allowed by the program. The Major R&D Tax Credit approved 38 applications in its inaugural year and approved $20,000,000 in credits, the maximum allowed. Qualified Equity and Subordinated Debt Investment Tax Credit use has fluctuated from year to year, in part because of changing program caps. In TY2012, 65 applications were approved for $2.5 million. In TY2013, 140 applications were approved for $4.5 million, the program cap for that year. TY2014, TY2015 and TY2016 saw 127, 162, and 132 applications respectively and reached each year s program cap of $5.0 million. In TY2011, 13 corporate investors claimed $10.0 million in deductions based on the capital gains tax exemption for technology businesses, with a general fund impact of $8,732. In TY2012, 30 corporate investors claimed $172.3 million in deductions for a general fund impact of $27,379. The number of corporate claims and deductions fell to 17 and $16.0 million in TY2013, while the general fund impact increased to $150,000. TY2016 saw 17 claims and subtractions totaling $10.3 million for a general fund impact of just $10,000. The large fluctuations observed in general fund impact over time occurs because of differences in the applicant pool, volatility in the corporate income tax deduction liability, and differences in the extent to which applicants are able to utilize the subtraction to reduce their tax liability. Individuals could also claim this deduction but those data are not yet available. It should also be noted that because the deduction is for any long-term capital gains resulting from a qualified investment and may be claimed in the future, the total general fund impact is unknown and may be higher than the reported tax year General Fund impacts. What are the implications? Capital investment is a key input in building innovative companies. Early-stage companies, academia, and research institutes use seed investment to transform applied research into commercial products and services, while later-stage companies use expansion capital to boost growth. Private investment is a critical catalyst for innovative companies and entrepreneurs and accounts for most of the funds invested in new ventures. Public sector investment is smaller but is made in innovative companies that stimulate additional private investment and add value to the state economy. In recent years, the Commonwealth has created additional R&D investment tax credits and deductions to expand capital access. In the future, business startups may be able to more fully utilize additional private investment channels though new financial technology tools such as crowdfunding and peer-to-peer business lending. 26

31 COMMERCIALIZATION Goal: Accelerate the introduction and growth of new technologies and products derived from research in Virginia. Commercialization is the process of taking intellectual property resulting from research and development to market and generating financial value through licensing and sales. Products and services based on new technology are introduced to the market to determine if they meet a market demand or otherwise add value to the company. Commercialization here refers specifically to licensing, startup, industry collaboration, and consulting connected to university research and development. The number of licenses issued by Virginia s universities and licensing income received increased in The number of startup businesses based on university intellectual property decreased. These numbers do not include other university startup activity, including faculty and student business startups that are not based on the institution s intellectual property. Virginia universities support commercialization through other avenues as well, including research sponsored by business, financial support for seed and proof-of-concept funds, incentives for faculty to engage in entrepreneurship and commercialization activities, and provision of makerspaces and incubator/accelerator facilities and services. Why is commercialization important? Colleges and universities are increasingly being called upon to commercialize their discoveries in order to boost economic development. One method is through nurturing university startups, which account for a relatively small but growing number of high-growth, entrepreneurial ventures. Technology transfer from universities also boosts the growth of firms in the state through new commercial products and innovative business production processes based on licensed technologies. Commercialization provides revenue that helps support university research and development activities and incentivizes faculty production of translational research. Universities also forge closer links with business and industry that establish mechanisms for sharing knowledge, foster future research collaboration, and create internship and career opportunities for students and graduates. How has Virginia performed over the last five years? University Licensing The number of licenses issued has increased since 2012 when 103 university licenses were issued. In 2016, 145 licenses were issued. The cumulative number of active licenses issued by Virginia s universities was 732 in In 2016, total active licenses increased to 815. Licensing revenue often results from licenses executed several years earlier, and a small number of licenses may disproportionately affect revenue. Total licensing revenue reported by Virginia s research universities declined from $9.8 million in 2012 to $6.2 million in 2013 before rebounding to $8.2 million in Licensing revenue fell in 2015 to $7.3 million and increased once again to $12.1 million in On a per capita basis, Virginia raised an average of $1.44 of licensing revenue per capita in 2016, compared to a national average of $6.58 per capita, ranking it 32nd among U.S. states. This per capita revenue was lower than all benchmark states. The nation s leader was Illinois at $22.44 per capita. 27

32 28 University Startups The number of university startups that begin operations based on licensed technology each year increased from 16 startups in 2012, to 17 startups in 2013 and In 2015, 24 university startups resulted. This dropped to 17 startups reported in The cumulative total number of active startups from current and previously issued licenses increased steadily from 74 in 2011 to 110 in Virginia universities produced 1.90

33 startups per one million residents in This is lower than the national average of 2.99 per million; Virginia ranked 32nd among states. It was also lower than all benchmark states. The nation s leader was Maryland at 8.64 startups per million residents. 29

34 University Environment Many university commercialization and technology transfer activities are unrelated to licensed technology. For example, Virginia institutions reported that there were 96 startups by students; some of these were based on university-licensed technology. In addition, Virginia colleges and universities work closely with business and industry to foster innovation. Virginia institutions had sponsored research relationships with an estimated 927 companies in FY2016. These numbers are likely under-reported, as reporting these activities is not always required. Virginia s higher education institutions have increased institutional support for innovation and commercialization. Most public research universities have tenure policies that recognize faculty accomplishments in entrepreneurship and commercialization. Eight Virginia public universities that responded to a 2017 survey reported establishing makerspaces that provide technology and equipment and collaboration/learning space for students, faculty, and the public to experiment and invent products for commercial use. Seven institutions offer incubation/accelerator programs for startups, including the College of William and Mary, George Mason University, James Madison University, Old Dominion University, the University of Virginia, Virginia Commonwealth University, and Virginia Tech. In addition, three institutions (George Mason University, the University of Virginia, and Virginia Tech) reported seed and/or proof-of-concept funds that provided a total of $2.4 million in available funding during FY What are the implications? Virginia s universities are an important resource for sustaining and growing an innovation-based economy. The number of licenses issued and licensing revenue increased in 2016, although the Commonwealth was significantly lower than the nation and benchmark states on a per capita basis for licensing revenue in Virginia s startup rate lags behind benchmark states and the nation, and the number of business startups decreased from 2015 to However, Virginia s universities continued their increased support for entrepreneurship and commercialization through incubator and accelerator startup programs, seed and proof-ofconcept funds, numerous sponsored research relationships, and additional entrepreneurial activities of faculty, staff, and students. 30

35 BUSINESS DYNAMICS Goal: Enhance Virginia s business climate for entrepreneurs and high-growth technology enterprises. Business dynamics examines business rejuvenation, growth, and connectivity, taking into account multiple stages of the business life cycle. Indicators measure business startup activity, the rate of business creation and destruction, the number of firms graduating from privately held venture capital incubation, initial public offerings (IPOs), and the number of fast growing firms. Broadband access indicates the state s capacity to facilitate connections through businesses and residents accessing and sharing knowledge online. In 2015, Virginia business startups as a percentage of existing establishments was steady. Establishment churn, which measures the rate of businesses creation and destruction, increased slightly. There was one venture-backed IPO in Virginia during 2016, as had been the case in each of the last four years. The number of fast growing firms defined as a firm listed on the Inc list of fast growing firms decreased by thirtyeight in 2017, although Virginia remained a leader on a population-adjusted basis. Why are business dynamics important? Business dynamics indicators provide a gauge of the entrepreneurship and innovation climate. An increase in business startup activity provides evidence that residents are willing to take on more risk. Establishment churn shows that less innovative or efficient firms are going out of business and being replaced by more innovative and efficient firms. Fast growing firms are among the most successful entrepreneurial endeavors and have a large impact on job creation. Venture-backed IPOs allow early-stage investors to recoup their investments and recycle the funds into other investments. Finally, broadband access enables residents and businesses to better trade, communicate, collaborate, and share knowledge, raising productivity and improving the quality of life. How has Virginia performed over the last five years? Startups Virginia has seen little change in the number of business startups over the last five years. The number of establishment births as a percentage of existing establishments in Virginia was 9.5% in 2011 despite ups and downs in 2012 and 2013 had returned to 9.5% in 2014 and The U.S. as a whole experienced a slight increase in the startup rate over the period. Virginia s startup rate in 2015 was lower than the U.S. average at 10.1% and ranked 23rd among U.S. states. The leading state in business startup activity was Nevada at 12.8%. Virginia s rate was lower than three benchmark states: California (11.4%), Texas (10.8%), and North Carolina (9.7%). 31

36 Establishment Churn Establishment churn represents the degree of resource fluidity that allows labor and capital to be allocated from older industries and firms that use outdated technologies to newer innovative and modern firms and industries. This process is also known as creative destruction, a term coined by 19th century economist Joseph Schumpeter to describe how growing, dynamic economies develop. Establishment churn measures the rate of firm entry and firm exit relative to the total number of businesses in the state (i.e., establishment birth rate plus establishment death rate). A higher churn rate indicates more competitive conditions and signals a more dynamic environment for innovation and entrepreneurship that fosters economic growth. Virginia establishment churn dropped from 18.6% in 2011 to 18.0% in 2015; establishment birth rates were constant while death rates decreased more as the economic recovery continued. However, the business churn increased slightly from 2014 from Nationally, Virginia s 2015 churn rate ranked 21st highest among U.S. states and was below the national rate of 18.9%. 32

37 IPOs An Initial Public Offering (IPO) occurs when the stock of a private company is sold for the first time to the public. This sale allows venture capitalists and firm entrepreneurs to recoup their investments and make the funds available for other investment opportunities. IPO exit activity is related to the overall condition of the economy and the buoyancy of the financial markets. Nationally, venture-backed IPOs declined significantly during the recession and have been gradually recovering since that time. Virginia had no venture-backed IPOs in In , there was one venture-backed IPO each year. Over the period these IPO values grew from $368.4 million in 2012 to $829.7 million in 2013 to $919.1 million in 2014, and $1,168.7 million in Over the period 2011 to 2015, Virginia IPOs post-offer value as a percentage of state GDP was 0.18%, ranking it 9th among the states. This percentage was below the national average of 0.35% and lagged three benchmark states including California (1.85%), Massachusetts (0.69%), and Maryland (0.32%). 33

38 34 Fast Growing Firms The presence and growth of dynamic firms is a key measure of business dynamism. Inc. Magazine s 2017 list of 5000 privately-held fast growing companies included 290 Virginia firms, down from 328 in 2016 but near the average for the period Among U.S. states, Virginia had the second highest number of fast growing firms on a population-adjusted basis for Virginia had 34.2 firms per one million residents compared to less than half that amount (15.4) for the U.S. Utah was first with 35.8 fast growing firms per one million residents. Among benchmark states, Massachusetts was the closest, with 21.3 fast growing firms per million residents.

39 Broadband Access Broadband availability measures the speed and transmission capabilities of the state s telecommunications infrastructure. As more data, knowledge, and market activity migrate online, it is vitally important that the public, private, and non-profit sectors obtain the capabilities and tools for accessing and sharing information for education, commerce, healthcare, public safety, and an array of other sectors. As of May 2017, 91.7% of Virginia residents had broadband coverage defined as a 25 megabits per second (Mbps) or higher download speed. This compared to 90.8% of Virginia residents with a similar speed in 2016 and 81.5% in In January 2015, the Federal Communications Commission (FCC) updated its broadband benchmark to 25 Mbps for downloads and 3 Mbps for uploads, as the prior standard was considered dated. Choice of providers has also improved over time for the 25 Mbps download standard. In 2017, 14.0% of residents had the choice of three or more providers, 45.6% had a choice of two, and 32.4% had just one provider. These compare to 9.2%, 47.0%, and 34.6% respectively the year before, and 3.7%, 39.6%, and 38.2% respectively in Significant disparities persist between Virginia s urban and rural areas in broadband access: 99% of Virginia s 6.3 million urban residents had broadband coverage in 2017, compared to 87% of Virginia s 1.7 million rural residents. 35

40 What are the implications? Business dynamics indicators help to gauge the entrepreneurship and innovation climate, taking into account multiple stages of the business life cycle. These indicators either improved or remained fairly steady for every measure in the most recent year. Business startups were constant statewide in 2015, the most recent data available, and the state lagged behind the national average. Business churn increased slightly. The value of Virginia venture-backed IPOs grew over the previous year and the number of fast growing firms declined slightly. Virginia remains the state leader for fast growing firms but is behind the national and benchmark state averages for venture-backed IPO valuations. Virginia s innovation and entrepreneurship climate is generally improving as the economic recovery continues. 36