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Home My WebLink AboutAgenda - 03-13-2012 - 4bORANGE COUNTY BOARD OF COMMISSIONERS ACTION AGENDA ITEM ABSTRACT Meeting Date: March 13, 2012 Action Agenda Item No. ~{- ~ {~ SUBJECT: UNC Report on Entrepreneurship Opportunities in Orange County DEPARTMENT: Economic Development PUBLIC HEARING: (Y/N) No ATTACHMENT(S): 1) UNC Report -"Rea/ Estate Analysis of UNC Spin-Off Companies'; Emil Malizia, Principal Investigator 2) Report Proposal - "Proposed Study: Analysis of UNC Spin-Off Companies" INFORMATION CONTACT: Steve Brantley, 919-245-2326 PURPOSE: To present and receive Board comments on a report prepared by the University of North Carolina at Chapel Hill`s (UNC's) Department of City and Regional Planning that summarizes the current state of entrepreneurship activity originating from the University of North Carolina at Chapel Hill and identifies tangible options for Orange County to maximize its ability to retain some of these spin offs. BACKGROUND: As a follow up to a report completed in the Fall of 2010 by a graduate-level class at UNC's Department of City and Regional Planning ("Leveraging UNC to Promote Entrepreneurship and Business Expansion in Orange County, NC"), Dr. Emil Malizia proposed a more in depth study of spin-off companies originating from UNC. As a result, Orange County contracted with Dr. Malizia to prepare a focused study on this topic, with a specific emphasis on the space needs for these companies throughout their life span. Dr. Malizia is Professor and Chair of UNC's Department of City and Regional Planning, holds a professional degree in regional planning and has been a member of the American Institute of Certified Planners for 30 years with expertise in the related areas of real estate development, regional economic development, and urban redevelopment. For over four decades, Dr. Malizia has conducted research, taught graduate-level and in-service courses, and engaged in consulting for private, nonprofit, and public clients. Since 2000, 51 companies have originated from UNC through its Office of Technology Development (OTD), with even more companies started outside the OTD. While approximately 90% of these companies remain in the Triangle region, few of these companies are located in Orange County. To enable Orange County to attract and retain a subset of these companies, a clearer understanding of their space requirements and rent levels is necessary. Dr. Malizia documented the space needs of UNC's spin-off companies, interviewed representatives from current spin offs, documented the existing real estate climate, and proposed recommendations on how Orange County can better position itself to retain these companies. 2 The final report from Dr. Malizia is included as Attachment 1. The proposal outlining the scope of work is included as Attachment 2. Dr. Malizia's recommendations from the attached report include: • Orange County could focus on more specialized niches in the startup landscape. • Until UNC's Carolina North develops to where it can more directly support life science entrepreneurs, Orange County could develop office/flex space for life science companies, particularly in the NC Highway 54 corridor, possibly through a public/private partnership. • The potential for UNC's Odum Village (former married student housing apartment complex) to support campus startups could be evaluated. Odum Village is located on south campus near the UNC Medical School. • At some future point, as Orange County eventually utilizes more of the southern campus properties in Chapel Hill and potentially shifts some operations to that location, the Economic Development Department could evaluate using various available County spaces in downtown Chapel Hill, such as the County-owned "Jobs Link" building at 503 West Franklin Street, as an incubator center. • Orange County could evaluate the potential for Carr Mill Mall to house startups, with short term, reasonable rental rates. ~ Orange County could evaluate the potential to incorporate an incubator in the proposed mixed use project being developed at 300 East Main Street in Carrboro. • Orange County could evaluate the potential for Hillsborough to accommodate product-oriented spin offs in existing industrial/warehouse space (such as Hillsborough Business Center), as well as County-owned facilities in Hillsborough. • Target the County's existing small business loan program to focus on startups, to include incorporating rent subsidies in the program. • Leverage existing County resources by inviting the participation of high net worth residents to support entrepreneurship growth and incubator facility operations. • Evaluate the potential successes of other emerging sectors such as green companies, contract research organization and defense contractors. • Evaluate the export potential of prepared foods. • Form a working group to include representatives from UNC Chapel Hill and Orange County to coordinate partnerships. FINANCIAL IMPACT: The cost of the study ($12,200) was paid from Orange County Economic Development funds in mid-2011. There is no direct financial impact associated with receiving the report. The financial impact of pursuing one or more of the report recommendations will vary. RECOMMENDATION(S): The Manager recommends that the Board receive and review the attached report, and provide comments to Economic Development staff. Real Estate Analysis of iJNC Spin-Off Companies December 2011 Emil Malizia, Principal Investigator Department of City & Regional Planning University of North Carolina at Chapel Hill 3 4 Real Estate Analysis of iJNC Spin-Off Companies Executive Summarv This report presents the real estate needs and preferences of L7NGCH spin-off companies, describes the properties they currently occupy in the Triangle area, and suggests options for Orange County Economic Development (OCED) to attract and retain companies like these. Spin-off companies associated with UNC fall in two market segments. The first is the life- science segment with companies in biotechnology, pharmaceuticals and medical devices. The second segment is broader. It includes IT (hardware, computer services or software), clean/green technology companies and several contract service providers. Life-science companies need sophisticated and specialized facilities. They seek adaptable affordable space that can fulfill multiple uses with expansion potential. Companies cite RTP/Morrisville/Cary as their preferred location. The space needs of the second market segment of tJNC spinoffs are more varied. Few need specialized lab space or access to sophisticated equipment; most occupy "plain vanilla" office space or flex space. UNC spin-off companies occupy either office space or flex space. Class A or Class B office space or high-quality flex space with specialized functions and features located in or near RTP serve the life-science segment. Class B or C office space and lower-quality/less specialized flex space throughout the broader Triangle region serve the IT and clean/green tech segment. One possible conclusion is that OECD should not focus on life-science companies beyond their very early stages. Their needs are complex, they are well served, and rental rates are lower in _ _ southern Durham County and western Wake County. However, most IJNC spin-offs, especially ones coming out of the Office of Technology Development, are in the life-science sector. The majority have principals associated with UNC Medical School. This segment is simply too large and dynamic to ignore. OCED should try to attract and retain the IT, green/clean tech segment. In fact, the net should be cast more broadly for any IJNC-affiliated startup with substantial growth potential. The City of Raleigh has relied heavily on NCSU as the fount of startup companies. NCSU has been commercializing innovations through Centennial campus since the 1990s. Maturing companies move from campus to downtown Raleigh or to locations close to NCSU. Most technology companies draw on innovations generated by the engineering and natural resource expertise on campus. 5 The City of Durham is currently attracting companies in industry clusters identified by the RTRP. It has successful incubators and innovative supportive programs including Bull City Forward, American Underground and Bull City Start Up Stampede. The Council for Entrepreneurial Development (CED) moved from RTP to American Tobacco to contribute to the budding startup scene in Durham. Both Raleigh and Durham have older buildings offering Class B and C office space or flex space in or near downtown. The available inventory is larger and rents are comparable or lower than in Orange County. These downtown areas enjoy good access and several have the right "vibe." The location and space needs of startups depend on the preferences of startup founders in the life-science, IT and broader market segments. The founders of life-science companies tend to be established medical doctors or scientists who live in Chapel Hill with their families. Many would prefer to locate their company closer to home as it grows, especially if employees live in or near southern Orange County. They would be comfortable in less urban locations, but affordable space in the county is limited. Founders of companies in the IT and broader market segment may be generally described as young, college-educated tech-sawy entrepreneurs who are using IT andlor the web intensively to develop new services and products. These entrepreneurs overwhelmingly want to grow their companies in urban places. Across the Triangle area, Durham has central places that are generating the right "vibe" for young tech entrepreneurs. These places offer affordable space, proximity to urban amenities and business and professional services, access to potential investors and reasonable commutes from home to work. Indeed it is ironic that downtown Durham, the least attractive location in the early 1990s compared to Raleigh, Cary, Chapel Hi1UCarrboro and RTP, is now the most vibrant and popular urban center in the region. Downtown Chapel Hill has liabilities including less access, higher rents and less convenient parking. Downtown Carrboro has more affordable space in older buildings, but the potential inventory is quite limited, and available space is in short supply. Like Chapel Hill, it is not central in the region and has limited parking in the core area. Hillsborough is as expensive as southern Orange County and less central in the Triangle. Although less viable for startups, it is the best place in the county to find expansion space. 6 To provide attractive space for UNC spin-offs, OCED should consider the following recommendations for Chapel Hill, Carrboro and Hillsborough. In general, Orange County locations have limited potential to compete with downtown Durham or suburban areas around RTP/RDU. Instead of competing, Orange County needs to fill more specialized niches in the starlup/expansion landscape. In the long term, the new campus at Carolina North should give LTNC the same capability to capture spin-offs from the life-science and IT sectors, as well as established corporations, as Centennial campus at NCSU. In the medium term, OCED should consider facilitating the development of office/flex space for the life-science companies that want to grow in Chapel Hill. OCED should facilitate development or rehabilitation of space in the Route 54 corridor. Life-science companies should be willing to pay rents above those in RTP in return for shorter and less time-consuming commutes for managers and employees. In the near term, Odum Village which is strategically located on south campus near the Medical School and the Kenan-Flagler Business School could support campus-based startups. Some buildings could be devoted to lab space, office space or live-work units. The university is quite interested in opening discussions with the county about alternative uses of buildings at Odum Village, and OCED should respond to this opporiunity. In early 2012, LTNC is making a major investment in an incubator at 505 West Franklin. The details of the project are not yet finalized, but the goal is to offer attractive space for early-stage companies and budding entrepreneurs. The 505 incubator is an excellent location midway between downtown Chapel Hill and downtown Carrboro with nearby restaurants and frequent bus service. The county owns 503 West Franklin next door which could become an accelerator for graduates of the incubator and/or house a valuable service provider. Vacant space nearly could serve expanding businesses. On the same side of West Franklin Street, space in The Courtyard could be attractive to incubator graduates. OCED should also explore the use of vacant space at University Mall. The mall is more accessible than downtown Chapel Hill, has convenient and plentiful parking and offers restaurants, retailers and other services within walking distance. The most viable village center in the county for targeted stariups is downtown Carrboro, but space is limited and rents axe relatively high. As a prominent tenant in Car Mill, UNC could help by subletting leased space to qualified startups at affordable month-to-month rental rates. 7 The proposed miYed-use project at 300 East Main Street will contribute to the urban environment preferred by tech entrepreneurs. OECD could wark with the developers of 300 East Main to offer affordable space and urban amenities for stariups. Given the cost basis of 300 East Main, however, OCED is more likely to find suitable affordable space at University Mall. The Town of Hillsborough is not positioned well to compete with downtown Durham or with suburban areas nearer to RDU. OCED should reach out to growing spin-off companies that are product oriented and want to hire employees from Orange and Alamance Counties. Available old industriaUwarehouse space should be attractive to these companies as long as their need for water was not substantial and rents were reasonable. The county also has buildings for sale in downtown Hillsborough near Churton and King that might be used as expansion space. OCED could expand its small business loan program to help startups and young growing companies serving external markets. Companies could receive loans to subsidize rents over some defined time period in return for staying in the county and hiring county residents. OCED could leverage its resources by approaching high net-worth individuals living in the county. Given the low success rate of stariups whether university based or otherwise, OCED should consider locally other emerging sectors including green companies, contract research companies and defense contractors run by retired military personnel living in the county. OCED could also generate export opportunities of prepared foods from local establishments that have national reputations. Finally, OCED should organize additional discussions to refine and expand its agenda. In addition to convening the economic development staff working in the county, OCED should form a group representing LTNC, Chapel Hill and Orange County help coordinate campus-based initiatives. To summarize, Orange County could strengthen its economic base and diversify its tax base by attracting and retaining IJNC spin-off companies. OCED could facilitate the development of office/flex space for the life-science companies in the Route 54 corridor, secure units at Odum Village, collaborate with LTNC on its incubator at 505 West Franklin, identify expansion space on West Franklin and at University Mall, assist startups seeking affordable space in Carrboro, help growing companies transition to office or flex space in Hillsborough, and expand its loan program for new business development. 4 8 Real Estate Analysis of IJNC Spin-Off Companies Overview This report presents the real estate needs and preferences of LTNC-CH spin-off companies, describes the properties they currently occupy in the Triangle area, and suggests options Orange County Economic Development (OCED) could pursue to attract and retain companies like these given their evolving space, facility and location requirements. Real Estate Context Although the national recovery continues and the Triangle area's performance is better than the national norm, commercial real estate markets here are oversupplied.l Office vacancy rates have doubled in the past 10 years to over 12%. Full service rents have remained flat for the same period at about $18.50/SF reflecting a decline in real terms. The market for flex spacez is similar with vacancy rates increasing to 12% and rent remaining flat at $9.15/SF. At mid-year 201 l, Orange County had 3.26 million SF of office space in 219 buildings. The vacancy rate was 12.5%, and the average quoted rent was $22.20/SF. Comparable figures for flex space were 675,592 SF in 48 buildings, 13.5% vacancy and $7.97/SF average rent.3 Office construction activity in the Triangle area is minimal reflecting the down cycle. Only 417,000 SF of office space is under construction this year compared to average annual deliveries of 2.0 million SF of office space for the past 30 yeaxs. No office or flex space is currently under construction in Orange County. Although forecasts point to an economic recovery, many believe that less space will be needed per office employee in the future. The long-standing rule of thumb has been 200-300 SF per office-using employee. Some predict that this standard will fall as space is organized in more open formats and as employees are given more flexibility to work outside the workplace. One particulaxly important question pertains to the location preferences of companies using office space. In the pre-2008 economy, most established companies preferred office space located in suburban business parks. As innovation, entrepreneurship and sustainability become increasingly important in the post-2012 economy, office space in urban areas is increasingly attractive, especially to knowledge-oriented companies. Urban environments offer the critical 1 The Triangle area includes the counties in the Raleigh-Cary metro area and the Durham-Chapel Hill metro area. This study focuses on the three core counties of Durham, Orange and Wake. Z Flex space is usually configured in four or more adjacent one-story bays combining office space (30%) in front and warehouse space (70%) to the rear. The warehouse space which can include lab space has at least 16-foot ceilings and a ground-level or elevated delivery platfonn. 3 All rental rates cited in this report are annual. CoStar Group is the primary source of data used in this section. 9 mass of business firms needed for rich communication and interaction that lead to positive externalities called knowledge spillovers. Innovation is expected to be richer when entrepreneurs working in different sectors with different technologies are able to interact frequently and informally. Startups are formed that combine technology and creativity in new ways. Urban places have the additional advantage of sufficiently large markets to attract business and professional services, restaurants, bars, entertainment venues, etc. When adequate housing and public transit are added to the mix, pedestrian traffic amplifies the urban scene and further increases the demand for retail and personal services. Firms providing maintenance, repair, catering, conference/meeting space, entertainment and fitness will also tend to locate near theseplaces. Furthermore, employees find greater job security in urban areas. Talent working for startups knows its employer could fail or fail to grow. Such talent is far more comfortable working around similar companies that could offer alternative employment opportunities. Current sta.tistics for the Triangle area already reflect the preference for urban locations. The lowest office vacancy rates are in downtown Durham (7.2%) and downtown Raleigh (4.3%) compared to 13.5% vacancies in suburban areas. The ULI reported that office markets in core areas are recovering faster than suburban areas. In 2011, the vacancy gap between CBD and suburban areas widened, and rents rose in CBDs but remained flat in the suburbs. Interestingly, the trend is driven by large corporate entities consolidating space downtown to accommodate young knowledge workers who prefer urban places.4 Furthermore, most young growth companies appear to prefer urban locations more than suburban office parks.s OCED intends to serve any company interested in the county from large established ones to startups and meet their different space requirements in both urban and suburban areas. These companies would increase the commercial tax base which is a high priority in Orange County. Se~mented Demand - Spin-off companies associated with UNC generally fall in two market segments. The first is the life-science segment with companies in biotechnology, pharmaceuticals and medical devices. The second segment is broader. It includes IT (hardware, computer services or software), clean/green technology companies and several contract service providers. Life-science companies have large appetites for funding, need sophisticated and specialized facilities and require many years to move from basic research to marketable products. If their technology and products achieve success in the market, they are often purchased by larger companies and consolidated outside the Triangle area. Their facility requirements can include 4 Jeffrey Spivak, "Urban Office Momentum," September 14, 2011 from ULI. 5 Cities axe relatively dense places fostering interactions and communication among diverse firms that accelerate knowledge generation and diffusion. The spatial concentration of firms also reduces their carbon footprint. 6 yo sophisticated equipment, special refrigeration, clean rooms, wet lab space, areas for human or animal clinical trials, facilities for animal boarding, air quality controls, high power/energy capacity, etc. Life-science companies also seek adaptable space that can fulfill multiple uses (administration, lab space, storage areas, shipping/receiving, etc.), space that represents good value for the rent paid. The location should be accessible to local collaborators which usually means within 30 minutes of one of the area universities and RDU airport. Companies with more than 10 employees cite RTP/Morrisville/Cary as central for employee recruitment and reasonable commuting times. The ability to expand in place is also quite important; most RTP-based companies locate near comparable space. RTP carries prestige value with potential international clients or investors, and companies located near RTP often get an RTP post office box. The space needs of the second market segment of UNC spinoffs are more varied. Few need specialized lab space or access to sophisticated equipment. Most occupy "plain vanilla" office space or flex space; high-quality internet access is expected. Differentiated Supplv The office space or flex space currently occupied by UNC spin-off companies varies by market segment. Class A or Class B office space or high-quality flex space with specialized functions and features serve the life-science segment. Class B or C office space and lower-quality/less specialized flex space serve the IT and clean/green tech segment. Concentrations of high-tech companies are found in downtown Raleigh, downtown Durham and in the RTP, especially around Meridian Parkway and Page Road. Office space and flex space located in the RTP and surrounding areas attracts life-science companies. Some are in three specialized facilities: the Hamner Institute accelerator, Alexandria Real Estate Equities, Inc. facilities and the state-owned First Flight Venture Center.6 The Hamner Institute is a unique model that involves selecting life-science companies with considerable growth potential to come to its campus as startups with the hope that the company will eventually require a new building to be constructed on the campus. Alexandria claims to be the leading real estate firm serving life-science companies. Surveyed companies were very pleased with the services and flexible arrangements but do expect to pay high rent at some point ($30/SF). First Flight is cheap functional space for up to 25 startups that want to be in RTP. 6 Scientific Properties is another developer serving the life-science sector with buildings in Durham although none of the surveyed compaiues are in their facilities currently. 11 The second more diverse segment occupies office space and flex space throughout the Triangle area. Most companies are in RTP, Morrisville, Cary or Durham; several are located in Chapel Hill, Carrboro or Hillsborough. Rental property locations include Eastowne office buildings in Chapel Hill, upstairs space in Carr Mill and the Hillsborough Business Center located in a closed mill west of downtown. Competitive Position of Orange Countv The entrepreneurial scene in the Triangle region has blossomed over the past 15 years driven by adversity as well as opportunity. Early-stage life-science companies want space in Chapel Hill when connections to the campus are vital or advantageous. These companies face long odds to garner funding and usually move away from campus as they grow. When growth occurs, they seek more affordable larger floor plates with specialized facilities, better access to potential employees and proximity to RDU airport. Class A office space in Chapel Hill from Glen Lennox to Interstate 40 could serve growing life-science companies willing to pay rent premiums of at least $5/SF compared to RTP rents currently in the $15-18/ SF range. Most will prefer to be in or near RTP and garner the prestige value of an RTP address or post office box.~ The Hamner Institute, Alexandria Real Estate and other RTP-based property managers are aggressively courting the life-science segment. One possible conclusion is that OECD should not focus on life-science companies beyond their very early stages. Their needs are complex, they are well served, and rental rates are lower in southern Durham County and western Wake County. However, most IJNC spin-offs, especially ones coming out of the Office of Technology Development, are in the life-science sector. The majority have principals associated with UNC Medical School. This segment is simply too large and dynamic to ignore. OCED should try to attract and retain the IT, green/clean tech segment. In fact, the net should be cast more broadly for any iJNC-affiliated startup with substantial growth potential. Attractive companies are ones that export services to external markets, primarily through the internet. Target sectors beyond IT and green/clean tech include web-oriented advertising and public relations, digital music production, unique food products, web-enabled business and professional services and even social ventures with major potential impact. The City of Raleigh has relied heavily on NCSU as the fount of startup companies. NCSU has been commercializing innovations for some time. Many promising ideas are tested on Centennial campus which was developed in the 1990s. Maturing companies move from campus ' Although RTP's employment base and reputation are considerable, the RTF Board realizes that entrepreneurship and innovation are increasingly attracted to urban locations whereas RTP is a suburban location. RTP now wants to compete with downtown Durham which represents a complete role reversal since mid-1990s. 12 to downtown Raleigh or to locations close to NCSU. Most technology companies draw on innovations generated by the engineering and natural resource expertise on campus. Raleigh and NCSU recently announced an initiative to focus Raleigh's economy on innovation. The plan is to have an "Innovation Summit" in January 2012 and to sponsor an incubator jointly under the direction of Springboard at NCSU. This initiative directly responds to the progress made in Durham to become the region's hub for innovation and entrepreneurship. The City of Durham is currently attracting companies in industry clusters identified by the Research Triangle Regional Partnership (RTRP). It has several successful incubators and innovative supportive programs. Bull City Forward is a unique incubator in downtown Durham that effectively serves social entrepreneurs with flexible arrangements including month-to-month leases. The Durham Chamber has begun a highiysuccessful program called Bull City Startup Stampede. Companies apply and the selected ones occupy space on Main Street free of charge for 60 days. They have access to free advice and interact with other entrepreneurs. American Underground located in basement space at American Tobacco is home to new companies that could grow to become tenants on the campus. All of this space is currently occupied.g Launch Box Digital funded 7 internet-oriented stariups in the past year but is not currently active. The Council for Entrepreneurial Development (CED) moved from RTP to American Tobacco to contribute to the budding startup scene in Durham. CED sponsors events at American Tobacco in shared classroom space. CED is also allowing Blackstone Entrepreneurs Network to use its facilities at American Tobacco as Blackstone ramps up its operations. The American Tobacco campus is well located adjacent to the Durham Freeway which makes it easily accessible from RDU and other areas in the Triangle. Public parking is readily available and free. Both Raleigh and Durham have older buildings offering Class B and C office space or flex-space in or near central areas. The available inventory is larger and rents are comparable or lower than in Orange County. These downtown areas enjoy good access and several have the right "vibe" (American Tobacco, Main Street in Durham, several areas near Fayetteville Street in downtown Raleigh, etc.). OCED needs to find its proper niche in the region and by its example discourage Durham and Raleigh from directly competing for startups and seed capital. Oran~e Count~Locations and Space for Startups The location and space needs of startups depend on the preferences of startup founders in the life-science, IT and broader market segments. The founders of life-science companies tend to be 8 One tenant that moved from Carrboro is paying $20.80/SF plus utilities which is comparable to Carr Mill but is much more satisfied in Durham both with the space and interaction with similar companies. Tenants also pay for internet access and telephones. 9 13 established medical doctors or scientists who live in Chapel Hill and have families. Many would prefer to locate their company closer to home as it grows, especially if employees live in or near southern Orange County. They would be comfortable in less urban locations, but affordable space in the county is limited. Founders of companies in the IT and broader market segment may be generally described as tech-sawy entrepreneurs who are using IT and/or the web intensively to develop and market a range of new services and products. These college-educated, under 35, predominantly male entrepreneurs have chosen to build their own company rather than attempt to join the corporate sector. They are willing to trade long hours working with interesting people in lively places for the greater security of scarce "resume" jobs. These entrepreneurs overwhelmingly want to grow their companies in urban environments.9 Across the Triangle area, Durham has central places that are generating the right "vibe" for young tech entrepreneurs. These places offer affordable space, proximity to amenities (restaurants, bars, convenience retail and personal services), access to business and professional services, nearby space for expansion and reasonable commutes from home to work. As more companies co-locate, the place should begin to attract funding from various informal and formal sources as well as additional service providers (attorneys, accountants, PR and marketing specialists, etc.). Indeed it is ironic that downtown Durham, the least attractive location in the early 1990s compared to Raleigh, Cary, Chapel HilUCarrboro and RTP, is now the most vibrant and popular urban center in the Triangle area. Old unoccupied well-designed buildings and strategic public/civic investments became the assets that were exploited through public-private partnerships. American Tobacco stands as the flagship project. Downtown Chapel Hi11 has several liabilities: downtown is less central and accessible in the region; rents are high - above $20/SF and over $30/SF in some areas; convenient parking is not reliably available; and, according to several principals interviewed, employees working late feel unsafe. Downtown Carrboro has more affordable space in older buildings, but tfie potential inventory is small, and available space is in short supply. Like Chapel Hill, it is not central in the region and has limited parking in the core area.lo 9 It is important to recognize that most tech-sawy college gaduates not pursuing resume jobs are not destined to become entrepreneurs. Instead, they are likely to be self-employed consultants who will provide local services but will hire few if any employees. On the other hand, tech-sawy entrepreneurs are driven to build growth companies. lo The interviews indicated that many entrepreneurs, funders and service providers avoid both downtown Chapel Hill and Carrboro when meeting in Orange County. They prefer Cafe Carolina in Meadowmont 10 14 Downtown Hillsborough has Weaver Street Market, new office space, additional restaurants, growing street life and events, and attractive historic areas. The town is attracting creative self- employed persons who are serving the local market, but it is unlikely to attract entrepreneurs growing spin-offs from iJNC. Hillsborough is as expensive as southern Orange County, less urban than downtown Carrboro and less central in the Triangle. Although less viable for startups, Hillsborough is the best place in the county to find expansion space. Also, the county owns or leases underutilized or vacant office space in Hillsborough and in the other two towns. Recommendations 11 To provide attractive space for LTNC spin-offs, OCED should consider the following recommendations for Chapel Hill, Carrboro and Hillsborough. In general, Orange County locations have limited potential to compete with downtown Durham or suburban areas around RTP/RDU. Instead of competing, Orange County needs to fill more specialized niches in the startup/expansion landscape. Chapel Hill In the long term, the new campus at Carolina North should give LTNC the same capability to capture spin-offs from the life-science and IT sectors as Centennial campus at NCSU. Equally important is the potential to attract well established corporations to Carolina North. The combination of large corporate entities and entrepreneurial companies is a potent mix for innovation often catalyzed through centers of excellence. In the medium term, OCED should consider facilitating the development of office/flex space for the life-science companies that want to grow in Chapel Hill. These companies have options on campus during their very early stages but usually head for RTP when growth occurs. OCED should facilitate development or rehabilitation of space in the Route 54 corridor. A 3-4 story building with 20-30,000 SF floor plates would work well. If developed as a public-private partnership, rents could be negotiated on a case-by-case basis. Life-science companies should be willing to pay some premium above rents in RTP in return for shorter and less time-consuming commutes for managers and employees. Clearly, companies drawing from the Durham or Wake County labor markets would not be attracted to this space. In the near term, Odum Village is a 30-building complex strategically located on south campus near the Medical School and the Kenan-Flagler Business School. Although currently used for student housing and generating about $lOK per unit in annual revenue, some buildings could be devoted to lab space, office space or live-work units for campus-based startups. This space is which has convenient access, proximate free parking and an easily identified location. One Durham location serving this function is Beyu Cafe on Main Street. 11 Some of these recommendations were stimulated by the Working Group for Economic Development which met on November 16, 2011. After this research was presented, the group was asked to generate recommendations for OCED. 11 15 well located for collaborations with scientists at the medical school and to receive supportive service from the business school. Orange County will have an Odum Village presence in 2012. Orange County EMS will occupy one floor of a 4-unit building which will locate emergency services closer to UNC dormitories. The university is quite interested in opening discussions with the county about alternative uses of buildings at Odum Village, and OCED should respond to this opportunity. Older space eventually slated for demolition is ideal for the targeted companies. In early 2012, iJNC is making a major investment in an incubator, and OCED should determine the best way to participate. The privately owned facility at 505 West Franklin is scheduled to open next spring. It will have offices and wet lab space on the first floor and common areas and meeting space on the second floor, 7,000 SF total. The university plans to rent desk space in the upstairs common area. The Town of Chapel Hill has purchased the lot across the street to mitigate parking problems. Although the details of the project are not yet finalized, the goal is to offer attractive free or affordable space with services and events of interest to early-stage companies and budding entrepreneurs. Firms in the Renci Launch Pad at the Europa Center that achieved certain milestones could graduate to space in the 505 incubator. The 505 incubator is in an excellent location. It is between downtown Chapel Hill and downtown Carrboro and gaining its own identity in an area called Midway. Many restaurants are nearby; Panera and Chiplotle are only 031 miles to the east. The proposed hotel at 303 East Main will be one quarter mile to the west. The Franklin Hotel is even closer to the east. The incubator site is frequently served by two buses (F and J) and is less than 5 minutes to Weaver Street Market and less than 7 minutes to Franklin and Columbia Streets by bus. The county owns 503 West Franklin next door. The tourism bureau occupies the front portion of this building. The larger space behind the tourist bureau is devoted to employment training. There are also srnall suites on one side occupied by Terra Dotta, an educational-software company, and the Guardian Ad Litem office which serves the district court. In the next 2-5 years, the county could decide to relocate this training facility to more auto-accessible county- owned or leased space.12 If available, classrooms in the Durham Tech building at Waterstone would be ideal.13 The vacated space could become an accelerator for graduates of the incubator and/or house a valuable service provider.la 12 Most trainees drive to this training facility. For those without cars, the county should offer transportation service similar to what is provided for public health and social service clients. 13 The county should not consider new construction at this time. The office and flex markets are oversupplied. With a good tenant rep, the county should be able to negotiate favorable 3-5 year leases for county programs needing space in the near term. 14 For example, the SBTDC currently occupies office space in a university-owned building at Timberlyne. It could become the new occupant at 503 and provide technical assistance to the startups next door. 12 16 Vacant space nearly could serve expanding businesses. On the same side of West Franklin Street, for example, space in The Courtyard could be attractive to incubator graduates. OCED should also explore the use of vacant space at University Mall. The mall is more accessible than downtown Chapel Hill, has convenient and plentiful parking and offers restaurants, retailers and other services within walking distance. Increasing the number of startups in close proximity and accommodating ones that begin to grow in accelerator space could improve everyone's business prospects. It will take committed and sustained efforts to keep successful growth companies that have started at 505 in Chapel Hill or in Orange County. Collaboration among the county, Chapel Hill and ITNC is needed to have positive outcomes. Carrboro The most viable village center in the county for targeted startups is downtown Carrboro. A bus trip from the Weaver-East Main junction to the Varsity Theater in downtown Chapel Hill is only 7 minutes. Full service rent of about $15/SF for about 1,000 SF of space would be attractive to many startups but such space is very difficult to find. Buildings in the vicinity of Lloyd Street range from relatively new space beyond Rice's Glass in two properties to older commercial space on both sides up to and extending along East Main Street. Rents in the newer buildings are too high for most starlups, but this space could accommodate some companies that grow. The second floor of buildings near East Main and Weaver Street were also examined as potential space for startups. Only four second-story spaces exist on East Main Street (108, 110, 118 and 120 addresses), and availability is limited at present. The Daniel Building at 103 West Weaver Street near North Greensboro Street is relatively new attractive space organized as a business co-op. Members share common facilities and equipment. Rent is expensive at $36/SF plus $9 monthly for the DSL connection. However, 100 SF offices costing $300 per month appear to be affordable for some startups. - Expansion space in Carrboro is also scarce.ls The best option to retain growing companies is to focus on the niche of companies ownedJstaffed by LJNC students, recent graduates and/or Carrboro residents. OCED should work with the town to help these companies find suitable space in Carrboro that can be leased for 3-5 years. The upstairs space in Carr Mill is too expensive at $21/SF for most startups, but the more serious constraint is the 3-5 year lease term which is far too long. However, UNC is a prominent tenant ls One of the only properties with space that could attract growing companies is 605 West Main Street. This multi-tenant building offers 25,000 SF of office space on a half acre lot with 25 parking spaces below the three-story construction. Apparently this development is politically unpopular in Carrboro making similar projects unlikely. 13 17 in Carr Mill and could decide to sublet leased space to qualified startups at affordable month-to- month rental rates. UNC would need clear criteria for selecting which startups to subsidize as well as permission from Carr Mill management to enter into sublet agreements. The proposed mixed-use project at 300 East Main Street will contribute to the urban environment preferred by tech entrepreneurs and could offer amenities to startups in the area. The development is expected to include apartments, office space, retail space and hospitality space, about 350,000 SF in all. The increased square footage and location will expand downtown Carrboro towards Chapel Hill. The project will generate demand for and offer additional downtown housing that should be developed at relatively high densities. Bus service is another location advantage of this site. For tech entrepreneurs, the hotel could accommodate prospective clients and collaborators as well as offer catered meeting and conference space. The office space should attract business and professional service providers. The retail space would increase the dining and entertainment options available downtown. Aparkments could house these entrepreneurs and employees of companies in the area. With encouragement from OCED, the Town of Carrboro could consider supporting this project by providing the needed structured parking or by creating a synthetic TIF to fmance the proposed deck. Easily accessible parking would enhance the project just as its combination of commercial and residential uses should reduce auto dependence. In return for subsidized parking, the town could propose that the developer include additional urban amenities in the project and make them available at reasonable cost.16 OCED could help expand the supply of affordable space in Carrboro significantly by working with the developers of 300 East Main Street. For example, the upper floors in one building could be left unfinished and made available to young tech companies at affordable rents.l~ -The county could provide surplus furniture and moveable partitions to minimize upfit costs. Tenants would have to be willing to trade "bare-bones" office space for proximity to the amenities downtown Carrboro affords. Given the cost basis of 300 East Main, however, OCED is more likely to find suitable affordable space at University Mall. 16 These amenities should be accessible 24/7 and leased by the week or month. Such amenities could include weight room with aerobic equipment and swim lanes; game room with ping pong, darts, pool table and Play Stations; shower stalls plus shaving/grooming products; break room with refrigerator, microwave, vending, etc.; hair care and massage services as provided in major airports; and temporary offices and meeting space. 17 OCED could consider subsidizing rental payments of tenants that were particularly attractive. 14 18 Hillsborough The Town of Hillsborough is not positioned well to compete with downtown Durham or with suburban areas nearer to RDU. Although close to I-40 and I-85, Hillsborough is over 30 miles from the airport, about 35-40 minute drive. OCED should reach out to growing spin-off companies that are product oriented and want to hire employees from Orange and Alamance Counties. Available old industrial/warehouse space should be attractive to these companies as long as their need for water was not substantial and rents were reasonable. The county also has buildings for sale in downtown Hillsborough near Churton and King that might be used as expansion space. The Hillsborough Business Center is one asset. Although near capacity, the owner/manager wants to finish additional space in two former mills. The properties have received historic designation which will make redevelopment more feasible. The owner is working with a developer of historic properties to figure out the best way to redevelop the properties and make them more economically viable. With improvements to adjacent streets, the redeveloped buildings could serve call center, light manufacturing, laboratory and office uses as well as back- office support for the new LTNC hospital facility at Waterstone. OCED should learn more about these plans.lg OCED could expand its small business loan program to help stariups and young growing companies serving external markets. For example, companies could receive loans to subsidize rents over some defined time period in return for staying in the county and hiring county residents. Funds from the sales tax approved by voters in November 2011 are an attractive source of new revenue. Still resources are limited. OCED could approach high net-worth individuals, for example retired executives living in or near Chapel Hill (at the Governor's Club). Contributors could be asked to give $50-100,000 with the goal of raising $2-5 million for the loan program. These contributors could help in other ways. They could provide coaching and mentoring to young founders and even become angel investors. They could give seminars to budding entrepreneurs at the 505 incubator. The combination of experienced business persons working with energetic young entrepreneurs could be very powerful. Given the low success rate of stariups whether university based or otherwise, it would be prudent to consider other sectors that appear worthy of consideration. These sectors include green companies associated with the business school's Center for Sustainable Enterprise accelerator, the contract research companies associated with the Schools of Pharmacy and Public Health and defense contractors run by retired military personnel from Fort Bragg currently living in Orange County. OCED could also leverage the growing local food movement in the county to generate 18 The Gold Family has owned and operated the Hillsborough Business Center (HBC) for over 20 years which includes over 700,000 SF of historic mill space in the former Eno River Cotton Mill and the Belleview Mill. The properties are in good condition and receive municipal services. Some space in both mills is vacant, and much space is underutilized. 15 19 export opportunities of prepared foods from local establishments that have national reputations (A Southern Season, T'he Lantern, Mama Dips). Finally, OCED should organize additional discussions to refine and expand its agenda. One established avenue is to convene the economic development staff in the county which includes those working for the towns of Chapel Hill and Carrboro. This group is best positioned to build public support in Chapel Hill and Carrboro for capturing and retaining UNC spin-off companies. Another avenue is to form a group representing IJNC, Chapel Hill and Orange County help coordinate campus-based initiatives that impact the town and county such as discussions about Odum Village. After pursuing these avenues, OCED should be positioned to articulate how to promote entrepreneurship and innovation in the county. This focus would align well with the one getting legs at IJNC. The group should be able to formulate relevant activities that could foster innovation and capture entrepreneurial companies in southern Orange County. Revenue from the sales taY could be combined with resources from the university and towns to support these activities. Conclusions Orange County would strengthen its economic base and diversify its t~ base by attracting and retaining iJNC spin-off companies. OCED could facilitate the development of office/flex space for the life-science companies in the Route 54 corridor, secure units at Odum Village, collaborate with LJNC on its incubator at 505 West Franklin, identify expansion space on West Franklin and at University Mall, assist startups seeking affordable space in Carrboro, help growing companies transition to office or flex space in Hillsborough, and expand its loan program for new business development. The entrepreneurial environment being fostered at LTNC should generate more startups over time, and OCED can increase their chances of success. Although many companies will fail or fail to grow, some will succeed, add employees and generate property and sales tax revenue. A few will become major contributors to the regional economy, representing the next generation SAS, Quintiles, Cree and Red Hat. 16 20 Appendig A presents the research approach and findings on which the report is based. Appendix B lists the qualified and surveyed companies and serial entrepreneurs. Appendix C lists the experts consulted. Appendix A Purpose The purpose of this research is to analyze LTNC-CH spin-off companies and their associated technologies. The study focuses on the real esta.te needs and preferences of these companies. The goal is to help Orange County attract and retain such companies to increase the commercial portion of the tax base and spur economic development. In 2010, that portion was only 12.8%. Scope of Work The recent economic recession and Chancellor Thorp's interest in innovation have combined to make entrepreneurship increasingly important on campus. One well-established activity is housed in the Office of Technology Development (OTD). Ever since Bayh-Dole passed in 1980, universities have been exploiting their intellectual property through patents that lead to business spin-offs. iJNC-CH currently holds 503 U.S. patents including 27 filed in 2010. Most of the patents are in the broad fields of biology and chemistry which correlate to spin-off companies in the life-science industry. Since 2000, 51 companies have been launched with assistance from OTD. The majority of patents have originated in the medical school, and 34 of these companies come from the medicaUhealth side of campus. The other 17 originated in the departments of computer science (7), chemistry (5), physics (3), biology (1) and psychology (1). The comparable figures for NCSU are 738 total U.S. patents held including 139 filed in 2010 and 52 starlups since 2000. The aggregate statistics for NCSU are 81 stariups, 155 new products through commercialization agreements, $1.4 billion of funding and about 3,000 jobs in state. LJNC spin-offs from the OTD are one subset of firms. The much larger subset consists of firms started by UNC faculty, students, staff and alumni. Distinguished Professor Maryann Feldman is building the establishment-level regional data base on high-tech companies that was begun years ago by the late Emeritus Professor Bill Little: The PI was given access to this database to identify and qualify companies that were subsequently surveyed. Most of the OTD spin-offs were in this database. The enterprise-level information includes company name, status (independent, subsidiary, HQ), year established, current location and previous location if applicable, sector, technology, active or closed, and founder information. For the older companies in the database, the PI gathered information on the sequence of the locations they had occupied. 17 21 Research Procedures The research was completed in four phases. In the first phase, the PI identified qualified companies from the regional database and OTD listing that included companies founded by faculty, graduates, current students and staff. The PI acknowledges Professor Feldman for making the data available and Professor Nichola Lowe and RA Daniel Smith for culling out the LTNGCH affiliates. From 140 companies, 33 were not qualified for various reasons. Some were founded by graduates of other UNC campuses or by LJNGCH graduates with no strong affinity to the Triangle area. Another 47 companies were either out of business (25) or acquired (22). The PI did complete an interview with the co-founder of one of the 13 acquired companies still operating in North Carolina. Finally, 18 companies were home based including 9 that were virtual companies. The PI was able to completed telephone interviews or eMail-based surveys with principals in 26 of the 42 qualified independent companies. In addition to company-specific interviews, the PI identified founders who had been involved with multiple startups and could be considered serial entrepreneurs. Six agreed to be interviewed and answered more general questions about real estate preferences and different locations in the Triangle area. Three additional interviews were completed for background information on different spin-offs. Appendix B lists the 42 qualified independent companies and the 26 where principals were interviewed. The six interviewed entrepreneurs are also listed. On the basis of this information, the PI was able to learn about the real estate needs and preferences of these companies. The PI reviewed the information available on the 16 qualified companies that did not participate. Since they were in the same sectors as participating companies, they did not represent a different market segment. The PI was able to examine their locations since their address was in the database. None were in unique locations compared to surveyed companies. Finally, the PI pursued several companies that appeared most interesting wi~h telephone calls and, in two instances for companies in Orange County, visits to their offices. The PI was able to gather enough information to conclude that no critical information was being omitted by their lack of response. In the second phase of the project, the PI analyzed the buildings in which the 42 qualified companies are located. He used Google Earth and the CoStar Group database to examine the physical space virtually. He also visited buildings in Orange County that housed any of these companies. He gathered information on property type (office, industrial or flex), rent, level of finish and typical lease terms. He also interviewed several property managers and tenant reps to gather this information. 18 22 In the third phase, the PI met with experts on the space needs of LTNC-CH affiliated companies. Of the 19 people interviewed, 9 were at UNGCH and the other 10 worked in the Triangle area in various capacities. The discussions served to corroborate findings, gather new information and reality test recommendations. A listing of experts with their affiliation is provided in Appendix C. The PI appreciates their contributions to this report but is fully responsible for its content. The PI conducted interviews or received written responses from over 50 individuals in all. In the final phase, the PI synthesized findings from previous stages to generate this report. He also gathered additional information on entrepreneurial activities at NCSU, at American Tobacco Underground and in downtown Durham and Raleigh. He wants to recognize feedback provided by Maryann Feldman, Nichola Lowe and Jesse White. Findings from Interviews with Principals The independent companies are primarily in the areas of life science or information technology. The life-science companies are in biotechnology, pharmaceuticals or medical devices. The IT companies focus on hardware, computer services or software (business intelligence, analytics, cloud computing, gaming/simulation, computer graphics, etc.). Several clean technology/alternative energy/advanced materials companies and business service companies were also surveyed. The life-science companies need a combination of (wet) lab space and office space in the same building. When funding becomes available, having up to 4,000 SF with 60-70% office space and the rest as lab space is the norm. Most companies have paid $10-15/SF/year plus utilities. Lease terms tend to be three years or less with renewals available. If the company grows, the principals seek space in the 10-20,000 SF range at rents below $20/SF/year. Lease terms are three years or longer. Rent per square foot often does not increase much since rents for smaller spaces are more than rents for larger spaces on a square-foot basis. Several biotech startups were satisfied with the incubator space they occupied in Durham or RTP. The First Flight Venture Center has 16,000 SF of office and lab space for up to 25 companies. The space is flexible and affordable but has inadequate plumbing and no HVAC after hours. NCSU's Centennial campus offers excellent space, but the space is far too expensive for most startups. The Hamner Institute selected one of the companies which is currently in their RTP accelerator facility. Alexandria Real Estate Equities' facility on Kit Creek Road serves several others. The Leggett & Meyers building across from Brightleaf Square provided cheap, bare-bones space for several companies in the 1990s. Office space with specialized features and flex space is the most useful type of space for life- science companies that are growing. Several companies occupying flex space had taken on another bay in the same building or had taken advantage of ceiling height to create mezzanine 19 23 storage areas. Office-space users have been able to expand into office space in the same building or space close by. The space needs of companies in medical devices or clean technology are more varied. Several could be grouped with life-science companies although needing dry-lab space more than wet-lab space. Others found good space in office or industrial buildings. Their preferences can be similar to information technology companies. The qualified information technology companies tend to occupy generic office space. They are best distinguished by years since founding which ranged from 2 to 24 years. The youngest one is in the Launch Pad associated with Renci at the Europa Center. The 5-year old company has good affordable office space in Carrboro ($15/SF/year) but is seeking more centrally located space in Chapel Hill or Carrboro closer to amenities ("a fun location for our young employees"). The amount of rented space is flexible because employees can work at the office, at home or anywhere that provides wifi. The 10-yeax old companies rent space near RTP in Morrisville or Durham. One wanted to expand in Hillsborough where one of the founders lived but could not find space. The flex space near the Sportsplex did not exist at that time. After a few years in the First Flight incubator in RTP, the company was able to find flex space next to a company with whom they conduct lots of business. The second company has grown from 3,000 SF to 50,000 SF of flex space in an office/industrial park. The company pays $13/SF/year on a 5-year lease. The landlord allows the company to move within the park as more space is needed without changing lease terms, a feature much appreciated by the company. The location near RDU is ideal for recruiting employees seeking reasonable commutes primarily from Wake County. The third company occupied second-floor space in downtown Chapel Hill for 4-5 years before moving to its current location near RTP. The founder left Chapel-Hill to-lower rent by almost 50%, to improve parking availability, and to avoid panhandlers/homeless persons. Female employees leaving work after midnight felt unsafe in downtown Chapel Hill. The 15-year old company has moved three times since starting on the second floor in Carr Mill. After several years of growth, the company found adequate office space in Chapel Hill near I-40. Since the founders and many employees lived in Carrboro, they moved the company back to Carr Mill seven years ago. The 24-year old company is the oldest one surveyed. The company began operations in a Durham office park before moving to the Europa Center where it was located for 16 years. During that time, the company moved four times within the Europa Center eventually leasing 5,000 SF. For five years the owners looked before finding a 6,500 SF building they purchased in 20 24 Eastowne office park. That building has served them well for the past seven years. It is close to I-40 which provides good access to customers in the Triangle and Triad areas and for the 15 employees who live in Wake County or northern Orange County. The final three independent companies surveyed included a startup that had moved from Carrbor~ to Durham to access a more business-friendly environment and proximity to other young companies seeking venture funding. The second is the largest company surveyed with almost 100 employees that occupies space in RTP rented at $18/SF on a 7-year lease. The location is central to employees, and the building has room for expansion. The third company is located in Cary near the founder's home. The company is one of two owned by the founder with each located on one of two floors. The landlord improved the current space to keep them as tenants. Rent is $16/SF for 15,000 SF on a 7-year lease. Another interview was planned with the attorney that worked closely with a LTNGCH faculty member that had founded several companies. As it turned out, the PI spoke with one of the principals instead. He described the original company its recent affiliate as "virtual biotech" companies that conduct most business through collaborative agreements or outsourcing. The younger company used the address of its attorney's office in Chapel Hill. The more established one was in 1,500 SF of cheap flex space off 15-501 just in Chatham County. Rent including utilities is only $3/SF. When meeting facilities are needed, the company rents space in an area hotel or, for more important meetings, at the Hamner Institute. In the future, the company may decide to manufacture product which would make owning a building an attractive option. One serial entrepreneur who helped found five companies provided insights on Chapel Hill as a startup location. The available space is higher quality than what is needed, too expensive and generally lacks expansion potential. Operating costs are higher primarily because of higher property taxes. Employees expect higher salaries if they live in Chapel Hill. In Orange County, he thought Hillsborough could offer better options than Chapel Hi1L The founder of several IT companies endorsed Regency office suites as startup space. His company is now located in a Cary office park and may add warehouse space at another location in the future. He considers Cary an excellent location for employees and for business travel via RDU airport. The third founder runs a company that develops medical device technologies. They start new companies when the technology looks promising. Their objective is to have a portfolio of five such companies at one time. The top executives and front office staff occupy Class A office space in Chapel Hill. Their lab facility is in RTP where pre-clinical testing with animals is conducted. The space includes a wet lab and clean room. The new companies are located within 30 minutes of the anchor RTP lab in Class B space of 3-5,000 SF. If the technology is proven, 21 25 the company moves to larger facilities (20,000 SF then 40,000 SF). These companies are "liquidated" through a sale to a larger life-science company which often consolidates them outside the Triangle area. Another serial entrepreneur thought that the RTP represented an "old economy" model and encouraged learning from the experience of other areas including Princeton, San Diego, Indianapolis, Menlo Park, Austin and Cambridge. Most of these areas offer urban environments to foster entrepreneurship. He was especially impressed by the innovative work at the Broad Institute in Cambridge. The most insightful interview was conducted with an attorney who provided information on one of the pharmaceutical companies but also had over 30 years experience in facilitating startups in the Triangle area. His resume included 28 startups including four in the OTD database. His main point was that the current needs of life-science companies are quite different than IT firms and other spin-offs. In the current economic environment, life-science companies need considerable funding for many years and specialized space before products are brought to market and revenues are forthcoming. He suggested focusing on other high tech companies that generally need Class B or C office or flex space with very few specialized services. His suggestions were a perfect segue to the second phase of the project where buildings occupied by the surveyed companies were investigated virtually and in person. Facilities Occupied bv Surveyed Companies As noted, some companies occupy "plain vanilla" office space in Durham, Wake or Orange Counties. Others occupy space providing very sophisticated equipment, special refrigeration, clean rooms, wet lab space, areas for human or animal clinical trials, air quality controls, andlor high power/energy capacity. Special attention was devoted to incubator and accelerator space and the types of companies these facilities serve. - The PI analyzed more than 30 past or current addresses and established several categories for the 26 surveyed companies as well as additional locations occupied by the other qualified independent companies. One group of companies is in office buildings or flex space in Wake or Durham Counties (3C Institute, 3`d Tech, Channel Advisor, Change & Course, Device Solutions, Novalon and Viamet). Another group of companies is in building clusters in RTP which range from relatively new office space managed by Keystone Corporation and others to smaller older buildings managed by the Research Triangle Foundation (Drug Safety Alliance, Entegrion, Invitrox, Liquidia, Novan and Pharpoint). These spaces are meeting the company's needs but provide no further insights of use for this study. 22 26 Several companies occupy space either in the Hamner Institute accelerator (Chaperone), one of Alexandria's properties (Alpha V~, Gal~y and Micell) or the First Flight incubator that is owned by the State of North Carolina (Dyzen). Considerable information is available about these facilities and the business models they represent on line. The remaining eight companies are located in Orange County. G-Zero is on campus in 200 SF at the Lineberger Center, 450 West Street as is Enci Therapeutics. The company will move next door into 400 SF of wet lab and office space on the tenth floor of the Mary Ellen Jones Building. Rent will remain the same at $27/SF. Theralogics leases space at Franklin Square (1829 E. Franklin St.) in an o~ce building owned by one to the principals. Progressive Computer occupies an office building it owns in Eastowne office park. The Carrboro locations include Webslingerz in Carr Mill over Weaver Street Market and New Media Campaign at 605 W. Main Street. Finally, the Hillsborough locations are N. Churton Street just north of King Street for Inneroptic and the Hillsborough Business Center on Dimmocks Mill Road near the Eno River for MegaWatt Solar. The PI visited all of these locations and the flex space at North Chatham Park where Aslbio is located. The PI completed general reconnaissance of West Franklin Street, downtown Carrboro and various Hillsborough locations. In the process, he visited the county-owned building on West Franklin Street next to the proposed LJNC-CH incubator, numerous buildings in downtown Carrboro, flex space on Eubanks Road in Chapel Hill, several office and flex locations in Hillsborough and other space owned or leased by the county in Carrboro and Hillsborough. Insi~hts from Hi~h-Tech Developments in the Triangle Re~iLon American Tobacco Incubator American Tobacco Underground (ATU) is fully occupied with primarily IT-oriented companies including Two Toasters (see App. B) in the basement of the middle building on the campus. The Council for Entrepreneurial Development moved from its high-quality spacious office building in RTP to cramped, cubicle-divided-B-space in ATU. This move symbolizes the anticipated shift from established corporate-led economic growth based in suburban locations to entrepreneurship-led growth in urban locations. The open question is whether the latter will provide the basis for sustained job creation, earnings opportunities and economic development.19 19 Given the scope and focus of this study, it is easy to exaggerate the economic potential of the high-tech companies like those at ATU. Very few are well established or sources of much new employment. Many are trying to create a business by exploiting one marketing channel (the internet) with convenience services. For example, it is unclear how much upside the startup has that wants to sell subscriptions to help end users manage their social networks. 23 27 Established corporations are often criticized for being bureaucratic and slow to change, but they play a crucial role when in the innovation-led knowledge economy. Corporations purchase small growth companies that succeed in the market. Indeed, the most typical "exit strategy" for successful entrepreneurs is to be acquired by established companies. NCSU In 2008, NSF created an engineering research center at NCSU with a 5-year $18.5 million grant. Dr. Alex Huang established FREEDM Systems Center with this grant (Future Renewable Electric Energy Delivery and Management). His group has been focusing on ways to make the electric power grid smart primarily by developing smart transformers to accommodate two-way electricity flow. To manage the smart grid, these transformers will have the capacity to receive, reroute and transmit power. MIT Technology Review included the work at NCSU on its 2011 list of the world's 10 most important emerging technologies. FREEDM has attracted industry attention. The center has 50 full, associate or affiliate members; the ten full members include a Swiss company, ABB, Inc., Cisco, Duke Energy, Progress Energy and Siemens. ABB has also begun a Smart Grid Center for Excellence on Centennial Campus. Currently, 15-20 smart grid companies operate in North Carolina with lO located in Raleigh. The Raleigh-based headquarters include Consert, Elster, Sensus and Tantalus Systems. Elster is a German company with a Raleigh subsidiary called Energy Access. Two additional companies are in Cary: SAS and ABB that has been in Cary since 1999.20 These and other entrepreneurial activities in Durham County and Wake County set a high bar for Orange County. They indicate that the other core counties in the Triangle area appear to be on track to capture commercial development based in the new economy. Raleigh and Durham are the major cities of the region. NCSU and Duke University have prominent engineering schools. Orange County must find its niche in the region to increase its attractiveness new companies. This information on activities in Durham and Raleigh is best used for two purposes. First, OCED can use these examples to encourage Orange County stakeholders to make more serious commitments to county initiatives. Indeed, the business climate and approach to property development needs to be improved in Chapel Hill, Carrboro and Hillsborough. Second, OCED can keep track of activities in Durham and Raleigh to gain knowledge that may be applicable in Orange County. 20 Marcy Lowe et al. "U.S. Smart Grid," CGGC, Duke University, April 19, 2011. 24 28 Appendig B Independent Companies Interviewed 3C Institute for Social Development 3rdTech, Inc. AlphaVax LLC Change & Course Channel Advisor Chaperone Therapeutics Device Solutions Drug Safety Alliance Dyzen Enci Therapeutics Entegrion G-Zero Therapeutics Gal~y Diagnostics Inneroptic Invitrox Liquidia Technologies MegaWatt Solar Micell Technologies New Media Campaign Novalon Novan Pharpoint Research Progressive Computer Systems Theralogics Viamet WebslingerZ Katie Garard & Melissa DeRosier Non-Profit Nick England IT Robert Johnston Bio Tech Danvers Fleury Bus Services Scot Wingo IT William Janzen Bio Tech Robert Witter Comp Services Catherine Stokes Bus Services Cam Patterson IT Cam Patterson Pharma Arthur Bode Bio Tech Ned Sharpless Med Devices Amanda Elam Bio Tech Kurtis Keller Med Devices Don Gabriel Med Devices Bruce Boucher Clean Tech Russell Taylor Clean Tech Jim McClain Bio Tech Joel Sutherland Comp Services Holden Thorp Pharma Mark Schoenfisch Bio Tech Arthur Holmes Pharma Lisa Mitchell Comp Services Max Wallace Bio Tech Holden Thorp Bio Tech Ethan Clauset & Jeff Hoffman IT Other Independent Companies Contacted BioMatch iContact Corp. Broadwick Innovative Genetics Bronto Software Inc. MainBrain CivaTech Phytopharmacon Civatech Oncology ICAgen Entrepreneurs/Founders Interviewed Robert Bonczek William Starling Scott McPhee for Preation, Inc. Jude Samulski (Aslbio) Rachit Shukla (Two Toasters) Alan W. Winchester Ben Zenick SciMetrika siXis, Inc. Stat-Tech Services Theragenex TRY Pharma 25 29 Appendix C Experts Interviewed UNGCH Judith Cone Special Assistant to the Chancellor Maryann Feldman Public Policy Department Cathy Innes Office of Technology Development David Knowles Renci Launch Pad Nichola Lowe City & Regional Planning Department Gordon Merklein Real Estate Development Tim Quigg Computer Science Department Don Rose Carolina KickStart Ted Zoller Kenan-Flagler Business School Triangle Area Billy Houghteling NCSU Office of Technology Transfer Kathryn James Council for Entrepreneurial Development Adam Klein Durham Chamber of Commerce Steve Nelson Wakefield Group Kenneth Reiter Belmont Sayre Sherman Richardson Main Street Properties James Rosen Intersouth Partners Brian Russell Carrboro Creative Coworking Laura Van Sant Main Street Properties Tom White NCSU Extension, Engagement & Economic Development 26 Attachment 2 30 Proposed Study: Analysis of UNC Spin-Off Companies Principal Investigator: Emil Malizia, Department of City & Regional Planning, UNC-CH Project Sponsor: Orange County for Orange County Economic Development (OCED) Period of PerFormance: September 1- October 21, 2011 Project Cost: $12,200 Background: Orange County recognizes the economic importance of UNC-CH as the county's primary export industry and economic engine. UNC-CH's economic impacts are varied and significant including payroll, student, visitor and retiree spending, externally funded research, and post-secondary educational services. Collectively, these activities generate significant sales tax revenues that the county receives partly compensating for the university's exemption from local property taxes. Another important economic impact comes from the local companies founded by persons affiliated with or graduates of UNC-CH. Purpose: The purpose of this study is to analyze UNC-CH spin-off companies and associated technologies. These companies will be examined with emphasis on their real estate needs. OCED will be better able to attract and retain these companies in Orange County with a clearer understanding of their space requirements and rent levels. Related Work: The study will benefit fcom on-going work on start-up companies. Distinguished Professor Maryann Feldman and Assistant Professor Nichola Lowe are building the establishment-level regional data base that was begun years ago by the late emeritus professor Bill Little. The OCEDC sponsored an economic development workshop course in fall 2010 that examined official spin-offs from UNC-CH. The chancellor's interest in innovation and the economic recession have combined to make entrepreneurship increasingly important. One well-established activity is housed in the Office of Technology Development (OTD). Ever since Bayh-Dole passed in 1980, universities have been exploiting their intellectual property through patents and business spin-offs. UNC-CH currently holds 503 U.S. patents including 27 filed in 2010. Most of the patents are in the broad fields of biology and chemistry which correlate to spin-off companies in the bio-tech industry. Since 2000, 51 companies have been 31 launched with assistance from OTD. The majority of patents originated in the medical school, and 33 of these companies came from the medical/health side of campus. The other 17 originated in the departments of computer science (7), chemistry (5), physics (3), biology (1), and psychology (1). Almost 90% of these 51 companies have remained in the Triangle region. We have employment data on half of them and case studies on three of them. Additional information about these companies will be compiled in this study. Scope of Work: The enterprise-level data base will be tapped to identify the official UNC spin-offs associated with OTD, companies that were founded by UNC-CH graduates, and companies with founders who had worked at UNC-CH. I will compile the following information: company name, status (independent, subsidiary, HQ), year established, current location and previous location if applicable, sector, technology, active or closed, and founder information. I will use the company's name to find it in the National Establishment Times Series (NETS) database. We have recently acquired North Carolina NETS data from 1989- 2009. I expect to find NETS data on at least half of the companies. With these data, I will be able to add information on the company's employment, sales, NAICS code, current location, and whether the company moved from its original location. One major task is to estimate the amount of space each company occupies and the amount of rent they pay. I will use their address, Google Map and Google Earth to gather information on the building being occupied. I anticipate that the companies will be in buildings devoted to office, industrial/flex, warehouse or retail use. I will assume that the companies are renting space which will be true in most instances. However, a few may own _their space. I expect to-find-that--single-employee firms are operating from residential locations. Another task is to examine the trajectory of selected companies in existence for more than ten years. I will try to trace the space they have occupied over time and try to figure out why they changed location. It may be possible to find companies that occupied a sequence of spaces from incubator to accelerator to small commercial space to larger commercial space. However, I expect that most companies will have remained in one location. I will use knowledge gained about these companies to describe this market segment; the different types of space needed by spin-off companies and the range of rental rates and terms attractive to them. I will recommend ways OCED could attract spin-offs to 32 specific properties and how to keep spin-off companies in Orange County as they mature. I will compile this information in a final report. Proposed Payment Schedule: Orange County is expected to review this fixed-price project on August 23, 2011. DCRP will invoice the county for $6,100 if the proposal is accepted. The $6,100 balance will be requested after the County Manager approves the final report which should occur in October 2011 _ Orange County, North Carolina Dept. of City & Regional Planning UNGCH Frank W. Clifton, Jr. County Manager Date: Emil E. Malizia, Chair Date: This instrument has been pre-audited in the manner required by the Local Government Budget and Fiscal Control Act. Office of the Finance Director __ _ _ - This instrument has been approved as to form and legal sufficiency. Office of the County Attorney