Groundwork Labs has generated some news lately with its new stipend for out-of-town startups and partnership with the international entrepreneurship organization UP Global. It’s also recruiting a new class of five startups – the deadline is September 5.

Its director, John Austin, recently sat down with the ExitEvent team to share the history of his program and explain its link to the NC IDEA grant program and the venture capital firm Idea Fund Partners. The story was pretty cool, and worthy of publication for those who haven’t heard it. Thanks to Austin for writing it up in the paragraphs below.

Since Groundwork Labs doesn’t charge a fee or take an equity stake in the companies that participate in our program I often get asked “How does Groundwork Labs afford to do what you do?” The short answer is we are funded by NC IDEA, a private, not-for-profit whose mission is to help North Carolina startup technology companies. Because “NC” is in the name, many folks assume NC IDEA is a state-funded entity, but that is incorrect.

Then I get asked, “How can NC IDEA afford to do this?”, and then, “How does NC IDEA fund their grant program?”

The short answer is you can think of it as an endowment – and there’s some fascinating history of how it came to be.

I thought our startup community would be interested in that history and enlisted the help of John Cambier from Idea Fund Partners to help with the story – he was personally involved in MCNC for more than a decade.

A long, long time ago – 1980 – led by Governor Jim Hunt, several forward thinking leaders in the state (including some of those behind the founding of the Research Triangle Park itself) endeavored to attract VLSI chip fabrication companies to the state by creating a workforce trained in microelectronics design and fabrication.

In 1981, the state legislature appropriated $24.4 million to create the Microelectronic Center of North Carolina (MCNC) as a private, not-for-profit state-wide resource. With that money, a 130,000-square-foot research facility, including a Class 10 wafer fabrication facility, was built on Cornwallis Rd in the Research Triangle Park, professorships were established and research projects were funded at MCNC, NC A&T, UNCC, UNC Chapel Hill, NCSU and Duke.

As a result of the desire by faculty to avoid having to drive to MCNC to use the chip design resources (Digital VAX systems), in 1984, MCNC’s mission was expanded to include NC REN, a proprietary, high speed network linking the state’s research universities to each other and to the Internet.

By the late 1980s, supercomputing was looking like the next “big thing”, and each of the state’s major universities was lobbying for funds to establish a supercomputing center. In response to these requests, the UNC general administration worked with the legislature to enable MCNC to expand its mission to include supercomputing and funded the NC Supercomputing Center, a shared resource for all of the universities.

By 1996, it was pretty clear that, for a number of reasons, the Triangle was not going to become the next Silicon Valley and was not likely to establish a significant base of microelectronics companies. At the same time, the state continued to provide a significant amount of financial support to MCNC, and many representatives were questioning the return on that investment. So in 1996, the legislature instructed MCNC to come up with a plan to become self-sufficient by 2000. The plan that was blessed by the legislature and adopted by MCNC had three main facets:

1. Manage the NC-REN network and the NC Supercomputing Center in support of public and private universities across the state.

2. Increase the amount of sponsored research in microelectronics and networking technologies.
Commercialize the innovations and related intellectual property that had been generated at MCNC over the last 15 years.

3. Between 1997 and 1999, while state support gradually decreased, MCNC spun-out three companies, each of which obtained venture backing:

Secant Technologies (high-speed ATM switching)
Unitive Microelectronics (flip-chip packaging)
Cronos Integrated Microsystems (MEMS technology focused on optical switches).

With each spin-out, MCNC lost people, revenue and infrastructure as those assets went to the new company.

When Cronos closed its Series A financing in November of 1999, MCNC retained ownership of roughly a third of the company. In April of 2000, as the Internet bubble reached its peak and everything related to optical switching was getting acquired for mind-boggling sums, JDS Uniphase announced the acquisition of Cronos for $750 million in stock. When the sale of Cronos to JDS Uniphase was closed in May, MCNC went from having two weeks of operating capital (the state had written its last check earlier that year) to having an endowment worth >$200M virtually overnight.

After spinning-out three businesses in three years (and with them customers, revenues, employees and equipment each time), there was a good bit of re-investment to be done into business units of MCNC. At the same time, there was an ongoing operating deficit to plug that was no longer being covered by state appropriations. Add to this a $30M donation to the Rural Internet Access Authority (RIAA) and a post-internet-bubble 90% decline in the value of the Cronos proceeds still held in JDSU stock, and the amount available for distribution when the organization was split in 2003 was considerably less.

In January of 2003, MCNC, now under the leadership of current NC IDEA CEO Dave Rizzo, split the very different missions and customers of the two remaining businesses of MCNC.

The mission of the networking and supercomputing business was to build and operate a leading-edge broadband infrastructure for North Carolina’s research, education, non-profit healthcare, and other community institutions. It still operates today, known simply as MCNC.

The technology research and commercialization business was spun out as the MCNC Research and Development Institute (MCNC-RDI). This new entity, also a 501(c)(3) private, not-for-profit, continued work in microelectronics and related fields in collaboration with universities and corporations around the country and was largely funded through Federal research contracts. As part of this restructuring, a $15M seed stage venture fund was created, the MCNC Enterprise Fund, with the intention of investing in North Carolina-based companies developing technologies in areas where MCNC-RDI had expertise.

In February 2005, MCND-RDI sold its research business to RTI International, leaving a core staff to focus completely on creating new companies and jobs in North Carolina. MCNC-RDI was renamed NC IDEA and became a supporting organization of the Council for Entrepreneurial Development (where before it was a supporting organization of MCNC). MCNC Enterprise Fund partners Lister Delgado and John Cambier left the fund to start Idea Fund Partners in in 2007. They still manage some of the fund’s investments.

With a strong balance sheet and a continuing mission to support the formation and growth of high-technology companies in North Carolina, NC IDEA launched its grant program in the Fall of 2006 in response to the significant need for additional pre-venture capital in North Carolina. It was, in fact, born out of the teams own experience investing out of the MCNC Enterprise Fund where they saw many more interesting ideas than fundable companies. To date, NC IDEA has awarded over $3.5M in grants to 88 startups, resulting in an additional $66M in angel and venture capital raised by those 88 (nearly a 20x leverage of funds).

In 2012, NC IDEA furthered its mission with the launch of Groundwork Labs to provide mentors, advice and guidance to startups.

If you’ve stayed with the story this long, now you know how we can afford to do what we do.