by Brian Balfour
Senior Vice President of Research, John Locke Foundation
Few things invite political corruption more than when government gets in the business of doling out taxpayer dollars to select businesses. And that’s exactly what NCInnovation plans to do.
The nominally nonprofit organization is slated to receive $1.4 billion in the Senate’s budget plan, part of which would be used to “invest” in startup companies hoping to take to market new technology developed on UNC campuses.
One of the “success stories” cited by NCInnovation to justify this endeavor is Texas, which in 2005 created the “Texas Emerging Technology Fund” (ETF).
Unsurprisingly, Texas’ ETF fund was found to be “scandal plagued” and lacking transparency, and the “investments” suffered from a high rate of failure.
The ETF was created during former Governor Rick Perry’s tenure and was described as “an investment fund to accelerate the commercialization of applied research from lab to market and provide start-up capital for scalable businesses,” a description virtually identical to NCInnovation.
However, it didn’t take long before the ETF was discovered to be rife with political cronyism.
This 2015 article explained, “For example, more than $16 million from the tech fund was awarded to companies with investors or officers who were large campaign donors to Perry.”
Moreover, the organization Good Jobs First reported in 2011 that “six former members of the fund’s board had close ties to eleven companies that received $27 million in subsidies,” adding that “The Dallas Morning News has now established that at least six members of the board had been working for or investing in companies that eventually got subsidies.”
Indeed, this 2011 white paper on ETF noted that some of the group’s decisions appeared to be “politically motivated.”
It is worth noting that the makeup of ETF’s leadership differed from that proposed for NCInnovation. As described in a 2011 audit, “The Governor, Lieutenant Governor, and Speaker of the House of Representatives are the trustees for the ETF. After receiving recommendations from an Advisory Committee, the trustees make the final decision about which applicants will receive funds.”
NCInnovation would be headed up by a board of 13 members, eight of whom would be selected by legislative leaders: four each by the House Speaker and President Pro Temp of the Senate. The remaining five would be elected per the bylaws of the organization.
While NCInnovation’s leadership may have marginally less direct political ties, its board will nevertheless be dominated by political appointees.
Another criticism of NCInnovation is its lack of transparency. Under the Senate proposal, the organization would not be subject to open meetings and public records laws. This would be another aspect that NCInnovation would share with Texas’ ETF. Media reports highlighted how ETF’s “operations were kept from public scrutiny even as some of the companies receiving awards touted questionable job-creation claims.”
The lack of transparency arguably contributed to a lack of controls and due diligence. The 2011 audit reported that “ETF recipients did not submit the majority of the annual reports required in calendar years 2007 through 2009,” adding that there was “no evidence” that ETF followed up on these missing reports.
This 2014 AP article highlighted the case of one ETF recipient whose “rural address listed for its Texas headquarters is actually a weedy horse pasture.”
When reached for comment, that company’s founder said her company ended up leaving Texas “because Perry’s office withheld additional funding, a complaint echoed by other recipients.” Many of the jobs “created” by the ETF funding, the founder noted, “were short-term hires outside Texas.” She concluded by stating her regret of ever having dealt with ETF, saying, “Not for any money in the world would I do business with ETF.”
Finally, and unsurprisingly, the Texas program had a poor track record of picking financial winners. “Texas lost tens of millions of dollars investing in failed startups,” noted one news article.
The 2011 white paper observed that – six years deep – that ETF was not yet “self-sustaining.” This 2015 article reported that ETF doled out “more than $480 million over its eight years. However, almost half of the funds went to 17 startups that eventually failed.”
In 2015, Governor Greg Abbott signed a bill to disband Texas’ troubled ETF program to the approval of the state’s business groups. Bill Hammond, the CEO of the Texas Association of Business, voiced his support for disbanding the organization, saying, “There’s little or no support for the Emerging Technology Fund.”
This is the program NCInnovation props up as a “success story”? A “scandal plagued” venture that lost taxpayers millions of dollars and was eliminated after only ten years to the fanfare of the state’s business community?
Is that what we could expect from NCInnovation?