The New Jersey Economic Development Authority is well known for its sometimes controversial practice of giving tax breaks to businesses in order to move to New Jersey or stay in the state. Less discussed are its many programs aimed at boosting high-tech startups with an array of tax break and investment strategies and even an accelerator facility that promotes research and development in small companies. The Edison Innovation Fund, the Angel Investor Tax Credit Program, and the Technology Business Tax Certificate Transfer, and the Commercialization Center for Innovative Technologies in North Brunswick together contribute millions in assistance and tax breaks to companies in the Route 1 corridor.
In its latest move, the government-run authority has become a tech investor itself by contributing $2.5 million to a fund raised by Edison Partners, the Witherspoon Street-based venture capital firm. It is an approach to economic development that appeals to Kathleen Coviello, director of the technology and life sciences division of the NJEDA, who was a venture capitalist banker for two years before joining the state authority 10 years ago.
The NJEDA has invested more than $40 million in venture capital over the years, including four previous Edison Partners (previously Edison Ventures) funds.
Coviello will speak at the New Jersey Technology Council’s Innovation Forecast on Thursday, February 11, from 1:30 to 5:30 p.m. at the Princeton Plasma Physics Laboratory. She will be part of a panel with other science, technology, and business luminaries from around the state, who will discuss innovations in different industries, how those innovations are funded, and new product pitches. Tickets are $70. For more information, visit www.njtc.org.
Normally, when technology investors make forecasts, that forecast tells you something about where their dollars will flow next. But Coviello says she is only trying to supplement the work of private sector companies rather than decide where technology research will head. The NJEDA prefers to use an approach that allows the private sector to determine which companies will get the money.
“The Princeton area is booming at the moment,” Coviello said. Between the privately owned Tigerlabs accelerator on Nassau Street, the newly founded Entrepreneurial Hub at Princeton University on Chambers Street, and the Keller Center’s entrepreneurship programs, she sees a surge in startup energy taking place. “Princeton University is taking a new role in entrepreneurship past what we have seen historically,” Coviello said.
Another tech trend is a shift away from big pharma companies and toward earlier-stage biotech companies. “The growth in biotech, particularly on Route 1 and in Central Jersey, has been tremendous,” Coviello said. “New Jersey was recently recognized as the number one state for biotech. What we’re seeing on Route 1 is that our labs have been 100 percent occupied for at least a year and a half.”
She said Deer Park Drive, the privately owned flexible lab space in Monmouth Junction, is fully occupied, leaving few places available for high tech companies to go once they grow beyond a certain point.
In the financial world, Coviello has noticed a growing interest in venture funds that target companies located in New Jersey. “Historically, there has always been a ‘drive-through state’ mentality in New Jersey,” she said, with all the investment money going to firms in New York or Philadelphia. But she says many in the financial world are beginning to notice the untapped potential in the Garden State. “There are early discussions about a biotech fund in New Jersey, and early discussions about a Princeton alumni fund,” she said. “I think this is all indicative of the great entrepreneurs we have here and the realization that this is in an underserved market. It doesn’t have the price inflation that we’re seeing in the New York market.”
Chris Sugden, managing partner of Edison Partners, will also speak at the Innovation Forecast, and he also sees opportunity in his back yard, although his firm funds technology companies all over the eastern seaboard. He said that there are many promising startup companies in the healthcare, financial technology, and health IT fields. “When you look at entrepreneurs, younger entrepreneurs tend to be more consumer app driven, while older entrepreneurs tend to start companies based on solving problems they saw at their old employers,” he said.
Given the strong presence of finance and healthcare delivery companies in the Route 1 corridor, it follows that many of the startups founded by former employees will address issues in those sectors. Another growth area is in companies that deal with compliance with healthcare regulations due to the Affordable Care Act.
“I don’t want to sound overly bullish, but entrepreneurship in New Jersey is as strong as I can remember it being, and I’ve been here for 18 years,” Sugden said.
The NJEDA’s angel investor tax credit, budgeted for $25 million a year, is designed to encourage this kind of investment. The credit rewards angel investors who put their money into local companies. “Everyone is looking at all the opportunity in New Jersey,” Coviello said.
Coviello credited the increased support from universities, including Princeton and Rutgers, with helping to build a nascent startup ecosystem that did not exist when she started her current job 10 years ago.
The NJEDA has sometimes invested directly in companies, using a “warrant” model similar to a stock option that Coviello often used in her banking career. In 2010, for example, the NJEDA made a $100,000 investment in Edge Therapeutics, supplementing an Edison Innovation R&D grant made the previous year to the Berkeley Heights-based biotech company that is developing treatments for neurological disorders. Edge went public in August, netting a positive return on investment for the NJEDA.
Another successful venture for the EDA was CareKinesis, a Morristown-based company that provides and coordinates medication management services. The agency gave CareKinesis $500,000 in 2012 through its Edison Innovation VC Growth Fund. Last summer the company had a $115 million IPO. It also now employs about 190 people and has created an umbrella company, Tabula Rasa, that covers several healthcare IT services.
Because the EDA invested in the companies instead of just giving them a grant, it has been able to claim a share of the return. “We wanted to make sure we didn’t have the next Google in New Jersey and have them use our capital, and we didn’t get a share in the upside return,” Coviello said.
Among Coviello’s concerns is not just keeping industry humming, but making sure her self-funding agency invests wisely and turns a profit. Occasionally that means investing in ventures that are outside New Jersey’s borders. Unlike some other states’ economic development programs, the NJEDA does not require that the funds it invests go only to New Jersey companies. For example, the Edison fund portfolios have consisted of anywhere from 10 to 30 percent New Jersey companies.
Sugden said the NJEDA gets better returns by not limiting itself to New Jersey. “The last fund was $250 million,” Sugden said. “With a fund that size, it wouldn’t be prudent to invest only in New Jersey.” Sugden said, however, that he prefers to invest in companies on the “home turf” where it is easier to have a hands-on partnership.
Sugden described the relationship between the EDA and venture capital as a symbiotic one. The companies he works with often qualify for NJEDA tax breaks and programs. He said that New Jersey companies would have a hard time competing against New York and Philadelphia-based startups without the NJEDA helping to create a business-friendly environment. “We have very aggressive states around us,” he said.
Sugden sees small businesses playing an increasingly important part of the economy and employing an ever-growing share of young workers. As larger companies employ fewer people, he sees startups as a more appealing option for young workers just beginning in their careers. To attract those young workers, he said, people like Coviello will have to support entrepreneurship.
Coviello grew up in Holland, Pennsylvania, where her mother is a part-time teller with Wells Fargo and her father was vice president in charge of transportation and sales for Commercial Plastics in Cornwall Heights, Pennsylvania.
She earned a bachelor’s degree in business administration from Albright College in 1988 and an MBA from LaSalle. She worked a total of 17 years in banking, including her last two at Silicon Valley Bank, where she was a relationship manager and made loans to tech companies. Before that, she worked for three different banks, but with the same boss. She worked for Progress Bank, a thrift bank, where she created a Tech Bank division to invest in technology. She later moved to Comerica as first vice president, before moving to Silicon Valley Bank.
Coviello said that her job at SVB took her traveling far and wide, and with three kids at home, she sought a New Jersey-based job where she could spend more time close to home. In 2006 she joined the NJEDA under Jon Corzine’s administration and stayed in place after Chris Christie took over in 2010.
Coviello, with a business rather than a science background, is in no position to look through all these companies and decide which has the next blockbuster drug. Instead her agency provides resources that the industry as a whole can take advantage of.
“What we have done is to create a portfolio approach. We have different financing tools for companies at various stages in business,” Coviello says.
For example, the Technology Business Tax Certificate Transfer Program allows businesses to buy and sell tax credits that they have received either for losing money or for spending on R&D. For example, a company might have a $500,000 tax credit for a net operating loss. They could save that credit and take it in a year in the future when the company finally makes money. However, the government is not going to just write them a check for $500,000. Instead, they can sell those credits to another company for 80 percent of their face value. A profitable company could then take those tax credits and use them to reduce their own tax bill, while handing over cash to the first company.
The arrangement is a win-win for everyone except the government, which collects less tax revenue. However, the tax break does serve the purpose of encouraging innovation and job growth in the state. The Technology Business Tax Certificate Transfer Program makes $60 million available every year to small technology-focused companies with 44 companies being approved last year for transfers. Over the program’s lifespan, it has given out $860 million in tax breaks to 500 technology and life science companies. For small companies, the transfers are a way to raise cash without going to venture capitalists.
The program differs from federal programs designed to encourage technology investment in that it doesn’t give grants or loans to individual businesses like the SBIR program. “We don’t have a staff of 600 technologists who can pick and choose winners, so we supplement and work with the private sector,” Coviello said.
Struggling technology companies have been able to take advantage of the program. Ocean Power Technologies, an alternative energy company located on Reed Road in Pennington, collected $1.7 million in tax transfers in January. OPT, founded in 1994, has attempted to build power generators that create electricity by bobbing in ocean swells, but has never turned a profit and suffered a series of setbacks last year resulting in its stock falling from $42 to around $1.50, a slide from which it has yet to recover. (U.S. 1, April 8, 2015.)
Another major initiative of Coviello’s is the Commercialization Center for Innovative Technologies located on Route 1 in North Brunswick. In 2002 the NJEDA bought an old 20,000-square-foot Johnson & Johnson facility, and in 2005 expanded it to 46,000 square feet of office and lab space. They turned the site into a facility where tech startups could obtain space at a reasonable price, as well as professional and support services. The campus is set up similar to other “incubator” type projects except the CCIT is funded by the NJEDA.
At the CCIT companies can take advantage of a number of programs designed to help launch their businesses. The CCIT is home to the “Executive in Residence” program, where underutilized — read, out of work — high tech executives can offer their expert mentoring and coaching services while networking at the same time.
Twice a year since the CCIT opened, it has hosted a “Founders and Funders” event where early-stage companies and venture capitalists — including representatives from Edison Partners — can get together one-on-one. The next session will be Wednesday, May 4.
The co-working space at the CCIT is now full, Coviello says. Several of the companies that got their starts in the co-working space have expanded to become major enterprises in their own right. In 2002 a gene sequencing company called Genewiz was founded with just three employees. Today Genewiz has its own office in South Plainfield with more than 600 employees. It has also launched a spinoff company, Admera Health, a molecular diagnostic company that specializes in personalized medicine and cancer testing. The EDA also supported Genewiz with tax credits. “You can see how it can multiply, not only with Genewiz, but with a spinout company,” Coviello said.
Another CCIT alumnus from the class of 2002 is Chromocell, which started at a small lab and has now grown to more than 125 employees at a site on the nearby Technology Center of New Jersey campus. The company, co-founded by Nobel laureate Gunter Blobel, develops flavors and artificial sweeteners, bitter flavor blockers, salt flavor enhancers, and other technology based on human cells and taste receptors. The company has developed flavors for such brands as Kraft, Nestle, and Coca-Cola.
It has also expanded its research in receptor cells to look for new ways to reduce pain. “These little companies can grow into very impactful companies,” Coviello said.
Coviello said that working with the government has allowed her more room to be creative than her previous banking career. “Banks are extremely conservative,” she said. “It’s funny, because even though it’s the government, the EDA has got the support from our board and the governor’s office to find ways to be creative and fill gaps in the marketplace. When I was in the private sector, it was kind of ‘vanilla or chocolate. Here’s what we do and here’s how we do it.’ But even though we are a state authority that administers our funds via programs, we are always looking for new and creative ways to fill market gaps and respond to market conditions.”
Commercialization Center for Innovative Technologies, 675 Route 1 South, North Brunswick 08902; 732-839-1881; fax, 732-745-7270. Anne-Marie Maman, manager. www.njtechcentre.com.
New Jersey Economic Development Authority, 36 West State Street, Box 990, Trenton 08625-0990; 609-858-6700; Melissa Orsen, CEO. www.njeda.com.