A critical need for innovation capital

by Sam Taylor, president NC Biosciences Organization, published in News and Observer, December 3, 2013.

North Carolina – especially the Research Triangle Park – is a hotbed for next-generation technology development and is among the nation’s leaders in overall employment and job creation in several emerging technology sectors. Yet despite its education and technology strengths, our state continues to trail national leaders in innovation capital.

Earlier this month, legislation that could help improve access to innovation capital nationally was introduced in Congress by Sens. Robert Menendez and Pat Toomey. Titled the Start-up Jobs and Innovation Act, the legislation would restore and expand federal tax policy designed to support capital formation among small, innovation-based companies. Our state’s congressional delegation should lend its support to the bill, which would create jobs and support R&D here in North Carolina.

Especially in the life sciences, innovative research requires substantial start-up costs and a lengthy experimentation period. The development process for a single breakthrough product, for example, can cost more than $1 billion and take upwards of 10 years. Because of this, R&D-focused companies must rely heavily on private investment, rather than product revenue, to fund their innovative research. For small businesses working to sustain R&D needed to make key breakthroughs, the securing capital is the only way to keep progress moving. The Start-up Jobs and Innovation Act would attract investment dollars to these emerging innovators and help assure their research moves forward instead of gathering dust on a laboratory shelf.

The first key provision of the Start-up Jobs and Innovation Act would restore former federal tax provisions that allow growing companies to partner with their investors on a research project. This collaboration, called an R&D Partnership Structure, would allow the investors to utilize some of the tax losses and credits generated by the project. A second part of the Act would extend and expand the federal tax code’s existing capital gains tax exclusion for investments in qualified small companies. These changes, which would be available only to small innovators, would give investors more of an incentive to support early-stage R&D.

A recent study conducted by Ernst & Young found that the R&D Partnerships provisions of the Start-up Jobs and Innovation Act would, by themselves, increase investment in small, research-intensive companies by an estimated $10.3 billion per year and would result in 156,000 additional jobs.

The federal small business capital gains exclusion was expanded in recent years as part of general economic stimulus measures. It has been performing well, but is set to revert to pre-recession levels at the end of this year. In a state like North Carolina, which has a bioscience sector that already generates $59 billion in economic output and directly employs nearly 60,000 North Carolinians, the Start-up Jobs and Innovation Act will almost certainly have a disproportionately favorable impact on our economy and job market.

Sound state policies that recognize the importance of innovative, research-heavy small companies have helped North Carolina increase employment in the biosciences sector by 24 percent in just the last decade. Congress should launch a similar national strategy by enacting the Start-up Jobs and Innovation Act as soon as possible.

Sam Taylor is president of the N.C. Biosciences Organizations, the state’s leading trade association dedicated to promoting the growth of North Carolina’s life science community.