How NCInnovation works… 

October 14th, 2023

Thank you for joining us this Saturday morning. Today we’re following up on a piece we wrote in May about NCInnovation.

Since then, the legislature endowed the organization with $500 million and set into law the rules and regulations that will govern NCInnovation’s work.

A lot has been written about NCInnovation, and understandably so: It’s one of the largest economic development investments in state history.

But much of the coverage has missed the mark on the organization’s model and goals. That’s understandable, too: It’s a complex undertaking, and full comprehension of NCInnovation’s work requires some base knowledge about university research, finance, and business development.

Below, we outline the full picture. Thanks for reading.

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NCInnovation exists to translate university research into economic output. But what exactly does that mean?

One key driver of economic growth – meaning new jobs and more successful companies – is “innovation”: better, faster, more efficient ways to do things, or perhaps an entirely new product that changes the game.

As one can imagine, a lot of research usually goes into an “innovation.” And a lot of research usually happens on university campuses – they should be natural hotbeds of innovation. Indeed, many successful companies are born from research that originated on a university campus. One well-known example is SAS, which was created by NC State faculty.

North Carolina is blessed with a world-renowned university system, and our state sees among the highest R&D expenditures in the entire country.

But the commercial outputs of that research funding here in North Carolina are well behind other states. That means there’s a problem somewhere along the way in translating university research into economic output.

NCInnovation’s Chief Innovation Officer, Michelle Bolas, has spoken about this gap often. Bolas is well-versed in this world – before joining NCInnovation, she led research commercialization work at UNC-Chapel Hill.

NCInnovation exists to solve just this problem – to translate university research into economic output, and to focus outside the Triangle. It’s rural economic development via homegrown innovation. The organization does so by entering the picture to support researchers just when other support tends to dry up.

This is where things can get a little complicated for those who aren’t intimately familiar with research commercialization.

The university R&D sequence isn’t simply taking an idea, bringing it to proof-of-concept, and then soliciting investors. There’s much more to it than that.

Government and private investors sometimes use a matrix called Technology Readiness Level (TRL) to define each phase of a research project. Here’s a chart from the U.S. Government Accountability Office explaining each level:

Federal grants largely exist to fund basic research from inception to TRL-2.

But private investors don’t generally consider getting involved until a technology reaches TRL-7 or above.

What happens, then, between TRL-3 and TRL-6? That’s the so-called “valley of death” because it’s where many promising innovations die on the vine. Developing a research product through those phases takes time, and is often very expensive. Some universities may have resources for researchers working at TRL-3 or TRL-4, but funding to get through the valley of death is usually the hardest money to come by, especially outside of mature innovation ecosystems like the Triangle.

It’s in this specific part of the R&D sequence that NCInnovation operates. They provide grants and other support to researchers so they can advance through the R&D process to the point they’re ready to commercialize and attract private investors.

Some have argued that government funding shouldn’t support that kind of work. Such a position invites this question: When, then, should public R&D funding at public universities stop?

Kelly King, who chairs NCInnovation’s board of directors, answered that question this way: “In my opinion, it’s a waste of money to advance a research product to the 10-yard line and see it die there or move to another state. Better to finish the R&D sequence at the point a product can turn into a private business, and that’s what NCInnovation will do.”

He’s right, of course. And there’s more – universities earn revenue from companies and licensing agreements born from work that happens on their campuses. The more university research projects that commercialize, the more return there is for universities.

Some have also alleged that NCInnovation will take equity positions in private startups, allowing it to “pick winners and losers.” But that’s just not true. NCInnovation is permitted to distribute grant funding to higher education research institutions, not private organizations. The funds are part of the university R&D sequence, which state and federal dollars already partially support.

NCInnovation will do all of this without traditional state expenditures. Rather, the legislature applied some visionary ingenuity to NCInnovation’s funding model. The $500 million going to NCInnovation will be invested, like any other endowment or pension fund, and earn returns on those investments. NCInnovation will fund its grants from the interest earned on the endowment, not the endowment itself. The state, then, isn’t “spending” $500 million – it’s putting $500 million into an investment account that will grow, and NCInnovation will use that growth.

The organization is moving rapidly to implement its model. Not 24 hours after the state budget became law, NCInnovation announced four regional directors who will head up operations around the state.

The group expects to complete its grant application rules, governance, and financial compliance in alignment with state law in the coming months and into 2024.

Business leaders in North Carolina and around the country have praised NCInnovation’s model – centered on the public university system, targeting rural areas, and using endowment funds – as one for others to emulate, and it’s easy to see why.