Education Supplement: Launch Sequence
Gov. Cuomo's plan to give tax breaks to startups on college campuses faces high costs, uncertain outcomes
By Neil deMause
published: January 08, 2014
When companies that got their start on college campuses come to mind, the universities in question are typically the big-name schools that bespeak tech royalty: Stanford spawned Google, Harvard launched Facebook, MIT begat Dropbox. Locally, NYU has been the big name in incubating new businesses (Foursquare, Audible), recently opening an Entrepreneurial Institute to encourage students and faculty to start their own ventures.
It's an idea that was destined to trickle down to the more aspirational members of the higher education world, and it's now done so with a vengeance: Under START-UP NY, a program proposed last fall by Gov. Andrew Cuomo and officially launched on January 1, one CUNY school in each borough — Bronx Community College, City College of New York, York College, Medgar Evers College, and the College of Staten Island — will be designated startup development zones, with new businesses exempted from all state income, sales, and property taxes for their first ten years of operation. (Upstate SUNY schools and private colleges will be eligible as well.) Entrepreneurs will also get space on (or near) campus, and access to academic resources; students will get — in theory, anyway — access to training and jobs.
"We hear an awful lot of talk about jobs going unfilled in certain sectors, mostly in the technology sector," notes Bronx Community College president Carole Berotte Joseph. Partly in response to this, BCC now offers a degree program in biotechnology, she says, "and yet we don't have a lot of biotech companies in the Bronx. We have students who are going through this program who will need internships, who will need jobs, so it would be an excellent match."
At Medgar Evers, which was picked as Brooklyn's representative because the surrounding Crown Heights neighborhood was judged to be "an area of economic distress," interim vice president of administration and finance David Taylor says START-UP NY is in line with new Medgar Evers president (and former Giuliani schools chancellor) Rudy Crew's vision of aiding the surrounding community. "We want to create a pipeline of students coming from our middle schools and high schools" through Medgar Evers, says Taylor, "where they think, 'I don't have to stay in central Brooklyn — I can go regional, national, overseas.' "
It's an ambitious vision, and not entirely unprecedented: Innovation Fund America, based on a trial project at Lorain County Community College in Ohio, has created startup incubators at community colleges in Long Beach, California and Hickory, North Carolina. "The fundamental of the knowledge economy is a partnership between business and academia," says Leslie Whatley, the former Morgan Stanley real estate exec who Cuomo appointed to head START-UP NY in October. By joining campuses and startup together on business development and research, she says, "it's a very powerful economic engine."
Praise for the plan is significantly scantier from the economic development world, where experts from the left and right have both assailed the plan as a waste of state tax dollars that could be better spent on projects that provide more bang for the buck. The governor's office itself has estimated that the state will lose $323 million over the next three years thanks to companies that would have located in New York anyway, but which will now take advantage of the new tax-free zones.
Originally dubbed Tax-Free New York, Cuomo's plan got a late rebranding last summer after local business owners griped about giving preferential treatment to startups. It's a legitimate concern, says Ron Deutsch of the progressive tax reform group New Yorkers for Fiscal Fairness: "You could have a local business that's not expanding, but doing okay; then you have a competitor coming in from another state setting up a similar business. And not only do you now have to compete with someone who's not paying any taxes, but you as an existing business are subsidizing them to pay no taxes."
Deutsch's bigger concern, though, is all that tax money that the state will be forgoing. "It's the smokestack-chasing that all states do," he says, noting that New York state has a long record of trying to lure business with tax breaks, with Enterprise Zones turning into Economic Development Zones, then Empire Zones, and finally the Excelsior Program. Deutsch points out that the state tax reform commission headed by Carl McCall and Peter Solomon, in its final report issued in November, indicated that the state has little way of knowing whether such tax credits are effective, concluding that they "may not result in a good return on investment" for the state.
"We're spending anywhere from 4 to 7 billion dollars a year on these programs," charges Deutsch, "when in reality we would probably be better off investing that in education and in job training and in preparing a skilled workforce for employers."
Whatley counters that the governor's office hopes the program will create 10,000 new jobs per year, though she readily acknowledges that's only an estimate. "We are taking land and space that is currently underutilized and trying to put business in it. So what we're counting on is that we're going to create an economic multiplier with excess capacity that's in the system that creates a net positive."
The scale of the tax breaks aside, there are likely to be other challenges for schools participating in the program. First off, there's the question of space: While the upstate SUNY schools that were originally the target of START-UP NY have plenty of unused capacity, CUNY campuses are already bursting at the seams after the surge in college enrollment during the recession. Joseph says her school has been "looking at spaces adjacent to the college," while Medgar Evers is hoping to rent the vacant Bedford Union Armory, which the city is currently taking bids on redeveloping, to provide startup space.
In addition, there's the question of what benefits will accrue to the participating schools. Joseph, for one, has a long wish list. "Some companies might be able to donate equipment to the college," she says. "They might be able to set up internships, so that participants can be getting hands-on experience in the field. Others will be creating jobs — depending on the company, it could be as little as two jobs to a thousand jobs."
But Lori Hoberman, an entrepreneurship and venture capital expert at Chadbourne & Parke (and a Queens College graduate) cautions tempered expectations, at least at first. Colleges, she says, "have incredible technology and lots of brilliant minds and the potential to build things, but often there's a disconnect in how to build the business side of it."
START-UP NY can begin to bridge that gap, she says, especially at schools with strong programs in a particular field such as tech or medical services. (She cites in particular SUNY's Stony Brook University, which has become known for its digital media programs.) But so-called startup "incubators" are only step one toward getting new businesses off the ground — and in some ways the easiest part.
"The next phase involves writing a check," says Hoberman. "Most of the entrepreneurs I work with don't have wealthy friends and family," which means finding venture capital to grow the business beyond its initial stage. In addition, the most successful incubators provide mentors to help companies go from startup to full-fledged operation: "The universities are going to have to figure out how to do that — and it can't just be mentors in academic, it has to be mentors in the venture business world." These are items that the NYUs of the world, with their robust alumni networks, can more easily manage; for CUNY schools, finding capital and business mentors may be more of a challenge.
Likewise, Hoberman expects that jobs for CUNY graduates could take some time in arriving: "When you first start off, all you want to do it hire the bare minimum to see if the idea has legs," she says. "I don't think job creation is going to happen three months after the idea comes to fruition, or six months later." It could be within a year or two — but only if the company can gather the financial capital and business acumen to get itself out of the nest.
Regardless, with START-UP NY now in full swing and set to continue through 2020, it's set to become a fact of life for New York's campuses. "Many community colleges throughout the country have partnerships with business and industry, but this is a scale we've never seen before," says Joseph. "We're very excited about it — it's going to be kind of building the road as we walk it."