RD127 - Center for Innovative Technology (CIT) Operating Plan Fiscal Year 2011


Executive Summary:
Fiscal Year 2010 was the fifth consecutive year of execution of an operating plan that did not significantly change from the prior year’s plan. This contrasts to CIT’s history, when plans were annually rebuilt to respond to funding fluctuations and mission re-definition. Achieving plan stability over a five- to seven-year horizon has allowed CIT to maximize program value and return on invested capital.

Operating Environment

Annually, CIT reviews the economic climate for technology and technology company creation. As in 2010, the following observations have been validated:

1. Advanced technology fields including nanotechnology, biotechnology, energy, and health informatics require pursuit of specific market segments in order to establish a market leadership position in research and development and industry cluster density.

2. Changing economic and geopolitical environments create the need to stimulate innovation for new solutions to challenges in energy production and consumption.

3. Federal funds play a significant role in supporting the capital requirements of many early-stage technology companies. The importance of federal funding has increased due to the shrinking venture capital market.

4. There is a significant void in angel and early-stage investment capital for seed-stage companies nationally as well as in the Commonwealth.

5. Early-stage companies and large-scale technology consumers have a difficult time identifying each other, which prevents technology assimilation and young company growth.

6. Access to affordable broadband is mandatory to support rural economic development and facilitate the next generation of Internet-based application deployment.

7. Green technology as a research and market sector provides significant opportunity for market definition and development in Virginia.

In addition to the above observations, management considered the following contemporary issues while shaping the 2011 plan direction.

1. The contracting global economy will continue to provide significant funding challenges for CIT in terms of Commonwealth appropriations.

2. The American Recovery and Reinvestment Act of 2009 represents an opportunity for CIT to secure new federal contracts.

3. The creation of new employment opportunities for Americans is the highest priority of national leadership with equal significance for Virginia’s leadership.

Direction

After carefully reviewing environmental factors that are relevant to CIT’s mission, management determined that the programmatic direction for 2011 should be very similar to the 2010 direction after some fine-tuning. These adjustments are:

• National and Commonwealth leadership has determined that job creation is the top priority for recession recovery. Since 1985, CIT has facilitated the creation of new employment opportunities for Virginians. In 2011, CIT will strive to elevate the Commonwealth’s focus on, and investment in, “organic growth” obtained through new company formation.

• In 2010, the economic downturn placed increasing demands on support services for GAP portfolio companies, shifting CIT’s emphasis from new investments to support for existing portfolio companies. With restored funding for 2011, emphasis will return to new investments while supporting existing portfolio company challenges.

• CIT and the Virginia Health Quality Center successfully secured a federal grant to implement electronic medical records for rural clinicians. The award of this grant represents a new market for Connect services and a giant step forward for healthcare services. In 2011, CIT will aggressively pursue and support this developing market.

• All operating groups in CIT will continue to coordinate and support the pursuit of new funding opportunities provided by the American Recovery and Reinvestment
Act.

Special Emphasis on Commonwealth Job Creation

Traditional economic development programs invest significantly in attracting companies to relocate to their respective geography. While this emphasis is an important offensive strategy it also serves to backfill the loss of jobs resulting from companies that are recruited out of the geography. CIT has consistently advocated for increased emphasis on new company formation based on the scientific discovery and entrepreneurial skills present in the Commonwealth. For 2011, the McDonnell administration and legislature allocated an additional $500,000 for GAP fund investment. This investment, in conjunction with additional funds secured by CIT, will support the creation of 10 new companies in 2011.

CIT believes that a consistent annual allocation of $2 million to its existing CIT GAP Funds Program will provide strong and multiplicative economic development outcomes for the Commonwealth by fostering the next generation of science and technology-based company development to drive Virginia’s economy for generations to come.

Background – CIT launched CIT GAP Funds and GAP Fund I to close the “capital gap” challenging the next generation of Virginia’s most innovative companies. A “double-bottom-line” fund, CIT GAP Funds places equity investments in Virginia’s high-potential technology and life science companies at the earliest stage of company formation in order to produce superior outcomes for portfolio company stake-holders and the economic benefit of new company formation and new job creation in all parts of Virginia.

How CIT GAP Funds Works – Managed through CIT’s Entrepreneur service line, CIT GAP Funds has been capitalized by CIT and an ongoing grant from Johnson & Johnson. At present, CIT manages two seed funds – GAP Tech and GAP BioLife – which make seed-stage investments in technology and life science companies throughout the Commonwealth. With allocation of new funds, CIT anticipates focusing on green/cleantech and alternative energy as additional targets of investment. In the course of a typical year, CIT GAP Funds assesses 300-400 proposals from across the Commonwealth, placing eight to ten $100,000 investments. CIT GAP Funds employs a two-level approach to investment actions with all deal sourcing and initial due diligence performed by CIT’s internal Investment Team and final investment decisions made by an independent Investment Advisory Board. Post-close, CIT plays an active role in portfolio company development as a board observer and advisor and maintains a rigorous portfolio reporting process, rolling up key accomplishments and risk areas of all companies on a quarterly basis.

Investment Advisory Board – Critical to the success of CIT GAP Funds has been the strong and independent role of CIT GAP Funds’ Investment Advisory Board (IAB). Composed of leading regional venture capitalists, angel investors and entrepreneurs, the IAB membership draws upon its professional expertise to make final investment decisions for CIT GAP Funds. Unaffiliated with either Virginia government or CIT’s governance structure, the IAB provides the professional validation to the CIT GAP Funds investment process requisite to concurrent and downstream participation in CIT GAP Funds portfolio companies by the private investment community. Membership on CIT’s IAB has included: New Enterprise Associates, Grotech Ventures, Intersouth Venture Partners, HIG Ventures, Johnson & Johnson, Valhalla Venture Partners, and New Vantage Associates
.
Evergreen Investment Model – CIT developed CIT GAP Funds to follow an “evergreen” investment model. As a result of this model, CIT anticipates that funding capacity will replenish over time as proceeds from initial cash outlays, converted to equity positions in portfolio companies, are returned to the fund for future investment.

Private Dollars Leveraged – The CIT GAP Funds investment model serves as a powerful example of a public-private partnership. Through this model, CIT deploys Commonwealth funds at the earliest stage of company development and helps grow the companies to the point at which private capital market participants will invest and carry company growth forward. Following this model, CIT has helped secure significant downstream financing for its portfolio companies, leveraging private sector investment – across its portfolio – at a rate of 11X Commonwealth dollars deployed.

New Job Creation - Consistent with expectations placed by CIT GAP Funds on portfolio companies, CIT has taken a structured and empirically-based approach to estimating new job creation resulting from CIT’s investment. Historical rates of job creation by Virginia’s high-growth potential companies indicate that 4.2 jobs are created for every $1 million of revenue generated by those companies. Based on this rate of job creation and revenue information provided by current CIT GAP Funds portfolio companies between 500 and 2000 jobs could be created by $2 million of new investment activity.

Mission Emphasis

For 2011, the CIT mission of “accelerating the next generation of technology and technology companies” coupled with the objective to “achieve national recognition as the premier services provider engaged in technology company creation and company growth” will place special emphasis of job creation initiatives that will make the Commonwealth the next innovation hub in the United States.

2011 Goals

CIT’s 2011 goals and corresponding service lines are as follows:

Research and Development service line

Goal 1: Create new industry clusters in advanced technologies.
Goal 2: Solve national technological challenges through world-class R&D solutions.
Goal 3: Establish and maintain a statewide university research and development plan.

Entrepreneur service line

Goal 4: Secure global leadership in the development of entrepreneurial technology ventures.

Connect service line

Goal 5: Secure global leadership in the identification and assimilation of innovative technologies.

Broadband service line

Goal 6: Expand the use and application of broadband technologies in rural and underserved areas.