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Congress has trained its sights on Big Tech: several antitrust bills have been introduced. But one bill stands apart because it would affect more than large tech companies – it harms American entrepreneurs who launch new enterprises and are responsible for our economic dynamism. Policymakers must take care to protect the startup model that has made the United States the envy of the world.

The Platform Competition and Opportunity Act, sponsored by Senators Amy Klobuchar (D-MN) and Tom Cotton (A-AR), imposes an effective ban on acquisitions of other companies by Apple, Amazon, Facebook, Google, and arguably Microsoft as well. Senators Klobuchar and Cotton have charted this course because they believe large tech companies have been scooping up would-be rivals before they grow to be competitive threats.

As solutions go, the Platform Competition and Opportunity Act is like using a bazooka to kill a fly. Sure, you’ll kill the fly; you will also destroy your house.

Big Tech critics often cite Facebook’s purchases of Instagram and WhatsApp as prominent examples of what needs to be prevented in the future. But these acquisitions are extreme exceptions to the rule and should not drive policymaking. Policymakers should consider the market and the significant benefits that acquisitions provide.

In listening to critics, you might think each acquisition was a Machiavellian effort to crush a potential competitor. Instead, we see large tech companies make acquisitions to help the underlying company run faster and jump higher. In the last few years, Big Tech has acquired VC-backed companies in cybersecurity, cloud computing, medical testing, traffic processing, and education. When such acquisitions occur, a signal is sent to the market that more innovation in these spaces is valued and will be rewarded. That is a good thing.

Acquisitions serve as fuel for the next generation of innovation. Entrepreneurs and employees who realize liquidity through the sale of the company regularly go on to found new, innovative firms. They often become angel investors or venture capitalists and share their expertise and capital with future company builders. This “recycling effect” is one of the key drivers of growth in the U.S. economy, an important component in creating emerging startup ecosystems across the country.

Critics of such acquisitions fail to understand that when a venture capitalist invests in a startup, there are only three possible outcomes: bankruptcy, acquisition, or go public. Company failure is the most common outcome; it’s an unfortunate reality of entrepreneurship. Going public and ringing the bell to open a day’s stock exchange trading is the dream of many aspiring entrepreneurs – but most companies don’t grow to the size necessary to exist on the public markets. That leaves acquisition as the most common and achievable positive outcome for a startup. One survey of founders showed that 58% of founders see an acquisition as “the realistic long-term goal for [the] company.”

But the Platform Competition and Opportunity Act hurts those company builders by taking some of the largest potential acquirers off the field. That leaves founders with fewer options when selling their company and drives down the acquisition price. As with selling a home, when selling a company, it is optimal to have multiple bidders with the financial ability to make the purchase.

Beyond harming startups, the Platform Competition and Opportunity Act could also backfire in its attempt to rein in Big Tech. Serial entrepreneur Bettina Hein has written that by increasing regulatory hurdles and costs, the bill will “likely deepen and widen the competitive moat protecting large incumbent companies from smaller, more innovative challengers.”

The Platform Competition and Opportunity Act may also embolden large tech companies by draining the well of would-be entrepreneurs. Many founders leave their jobs (and lucrative stock options) at large tech firms to strike out on an entrepreneurial journey. If those employees no longer see an acquisition as an option for their startup, the incentive to leave their comfortable Big Tech jobs will be weakened – and new innovative companies may not be created.

The American startup ecosystem is a national treasure. Our country benefits from this ingenuity because we effectively bring together capital, innovation, and smart public policy. But this phenomenon should not be taken for granted, and it can be destroyed by bad policy. That’s why policymakers should reject the Platform Competition and Opportunity Act and instead focus their energy on making the United States the best place in the world to create a high-growth company.

This piece originally appeared in Real Clear Policy.

Venture capital has left a massive imprint on American life, having served as fuel to create new industries (like biotechnology) and new companies (like Moderna) that have transformed the world. A recent academic study found that VC-backed companies are almost solely responsible for corporate innovation, and venture-backed public companies perform nearly half of total U.S. R&D spending across government, academia, and industry.

The United States needs more of this activity to address challenges like climate change, cybersecurity, and healthcare. The future of American innovation will be determined by how well two geographic trends—one an opportunity and the other a challenge—are navigated by American policymakers and the venture industry. The opportunity before us is that venture and startup activity is spreading into new pockets of the United States—the “Rise of the Rest” talked about by AOL founder Steve Case is accelerating. The challenge we face is that venture and startup activity is increasing overseas, and our share of global venture investment is diminishing.

Geographical trend #1: venture spreads across the U.S.

Our country is blessed to have startup epicenters like Silicon Valley, the greater Boston area, and New York City where venture capitalists deploy billions of dollars annually in new companies. But entrepreneurs are everywhere, and they need capital to grow their businesses.

In the past decade, vibrant venture and startup ecosystems have emerged across the country that are now supporting local entrepreneurs. NVCA has created a “Spotlight On” series to highlight these exciting startup movements and to date has held events focused on Austin; Atlanta; Indianapolis; Miami; Minneapolis; and Salt Lake City. Events for Detroit, Houston, and Raleigh-Durham are scheduled, and more are in the works. In 2019, NVCA also launched VC University LIVE, a new educational program held in emerging ecosystems across the country. Four programs have taken place to date: Ann Arbor, New Orleans, Dallas, and the Raleigh-Durham, bringing education, convening coastal and local startup communities, and shining a spotlight on these ecosystems. The excitement in these regions is palpable, and the data proves out the excitement. For example, from 2015-2020:

• North Carolina saw a 47.7 percent growth in venture investment and last year received $3.64 billion.
• Ohio experienced a 39.5 percent growth in venture investment and last year received $1.45 billion.
• Georgia witnessed a 39.3 percent growth in venture investment and last year received $2.03 billion.
• Florida earned a 31.5 percent growth in venture investment and last year received $1.93 billion.
• Other states that saw growth rates above 20 percent were Connecticut, Minnesota, Pennsylvania, Tennessee, Utah, and
  Washington.

These trends should be celebrated because it means entrepreneurs can now launch companies throughout the United States, creating jobs and value in new places. Policymakers can support this dynamic in a few key ways:

Cheer local funds: The temptation of many policymakers is to look enviously at mega venture funds in places like San Francisco and hand wring over why more of that capital is not being deployed in emerging ecosystems. That is the wrong approach. VC is inherently a high-touch business – i.e. venture capitalists tend to invest in their backyards as they serve on company boards and act as an outside advisor. What is needed is the proliferation of regional funds that understand the value of the local ecosystem and can work closely with local founders to build a business. Policymakers – whether at the federal, state, or local level – should cheerlead for their local ecosystems. Getting to know the founders and investors is the first step. The second is asking a familiar question to VCs: “How can I help?” Miami Mayor Francis Suarez famously asked this on Twitter, contributing to an invigorated Miami startup ecosystem.

Once the relationship is established, policymakers can:

•  Connect entrepreneurs to federal or state agencies that are impactful to startups.
• Bridge the divide between regional research institutions and entrepreneurs who want to commercialize technology.
• Ease state or local regulations that impact entrepreneurial activity.
• Connect potential local limited partners (LPs) in venture funds to VCs.

Local pools of capital: Venture funds in emerging ecosystems often look to a broader limited partner (LP) base, such as family offices and wealthy individuals. But too much capital is on the sidelines because local wealthy individuals and family offices do not understand the opportunity to earn a great return and support the development of their startup ecosystem (thereby creating additional investment opportunities). Policymakers can serve as an important bridge between those sources of capital able to invest in venture funds and those funds investing in the next generation of startups in emerging ecosystems.

Another promising source of new capital is the recently re-funded State Small Business Credit Initiative (SSBCI), which received an infusion of $10 billion in March 2021 to support small business financing programs, including state venture capital programs. NVCA has provided recommendations for how this capital can be deployed to support startups in emerging areas. Policymakers – be they federal, state, or local—can play a constructive role in ensuring SSBCI dollars are effectively used for equity investment in high-growth companies.

Small funds, big challenges: Emerging ecosystems tend to spawn smaller and regionally focused funds. The median sized venture fund in the U.S. is $75 million. But that number drops to $24.6 million if California, New York, and Massachusetts are removed from the equation. Many emerging ecosystems are seeing even smaller seed funds in the $5 to $15 million range.
Smaller funds face unique challenges:

• Venture investors are generally compensated on a “2 and 20” model – a 2 percent management fee on the assets of the fund and 20 percent carried interest (profits of the fund). For smaller funds, the management fee barely covers the administrative expenses of the fund and often means investors go without salaries in the early years of a venture firm.  This means carried interest is the economic motivator for starting a regional VC fund.  In that way, emerging ecosystem funds are hypersensitive to proposed tax increases on carried interest and policymakers should keep this in mind when entertaining tax hikes that are intended to hit other investment entities, such as hedge funds.
• Smaller funds also face many of the same regulatory challenges that much larger funds navigate with relative ease – g. new beneficial ownership requirements; CFIUS scrutiny of foreign LPs and co-investors; and the financial regulatory framework at the SEC that has some funds organized as Exempt Reporting Advisers (ERAs) and others as Registered Investment Advisers (RIAs) that have eight times the compliance costs according to an NVCA survey.

The bottom line is policymakers must be sensitive to how policy changes impact these smaller funds that are vital to emerging ecosystems.

Geographical trend #2: venture spreads across the globe

Twenty years ago, the United States startup ecosystem received about 90 percent of global venture capital investment. Venture capital was invented in the U.S. after all, and the world’s top entrepreneurs generally thought they had to come to this country to raise capital for risky but promising endeavors. Other countries paled in comparison to the U.S.’s capital markets, protection of intellectual property, cultural and legal tolerance for failure, basic research investment, and other important attributes.

Then other countries used the U.S. playbook and reformed their laws to draw startup ecosystems to their shores. Countries reformed their immigration laws to create startup visas to attract the world’s best entrepreneurs; tax regimes were modified to benefit early-stage companies; and bankruptcy laws were reformed to not punish risk-taking entrepreneurs.

Around the same time, the United States made changes that negatively impacted our competitiveness: immigrant entrepreneurs struggled to launch companies in the U.S. because of a lack of startup visa; basic research investment stagnated; and foreign investment into U.S. startups faces new national security hurdles.

The sum of these developments is the U.S. now attracts about 51 percent of global venture capital—a nearly 40 percentage point drop in a couple decades. To be fair, VC investment into U.S. companies continues to rise as an absolute number, but our share of the global pie is shrinking. There are new pools of capital around the world, and entrepreneurs can remain in their home countries to launch an innovative new company.

Policymakers should be alarmed by this trend and redouble efforts to make the U.S. the best place in the world to launch a new company. Reforms in these areas would go a long way:

Immigration: It is unnecessarily difficult for a foreign-born entrepreneur to launch a high-growth startup in our country. Uncle Sam is shooting himself in both feet as entrepreneurs who struggle to come to the U.S. end up creating their companies in other geographies. Congress should pass a “startup visa” like Rep. Zoe Lofgren’s Let Immigrants Kickstart Employment Act. The bill would create a dedicated visa category for foreign-born founders who are backed by VCs or other investors, thereby ensuring immigration law is not an impediment to company creation.

Competitiveness: U.S. technology dominance is underpinned by successful collaboration by the public and private sectors – technologies like GPS and companies like Moderna owe much of their success to forward leaning commercialization efforts. But the U.S.’s investment in basic research and commercialization has dwindled as a proportion of overall R&D funding. We should reverse course so the seeds of growth are planted now. The Senate-passed Endless Frontier Act (re-branded as the U.S. Innovation and Competition Act) is a commonsense approach that increases investment in research, training, facilities, and entrepreneurship to support American leadership in emerging technology areas.

Tax: Venture-backed startups are different than other companies. The startup model means these companies sell minority equity stakes to outside investors to fund oftentimes radical innovation and in the face of low odds of success, all while losing money for years. With this model comes unique policy considerations, especially in the tax space. Policymakers should approach tax policy with more sensitivity to how high-growth startups are organized rather than focusing on large companies or traditional small businesses.

The good news is there are champions in Congress who are working to reform the tax code to encourage new company formation. For example, the IGNITE American Innovation Act from Representatives Dean Phillips (D-MN) and Jackie Walorski (R-IN) would allow startups to monetize net operating losses (NOLs), thereby financing job creation and R&D. Another example is the American Innovation and Jobs Act from Senators Hassan (D-NH) and Todd Young (R-IN), which would increase the ability of young companies to access the R&D tax credits.

These policy proposals would set the United States on a course of increased competitiveness vis-à-vis other countries. Beyond job creation, home grown innovation is a tremendous national security asset as it domiciles companies with critical technology in our country and subjects them to U.S. laws.

The Path Forward

The future of venture-backed companies is bright. New industries will be spawned. Diseases will be eradicated. Lives will be improved. But the degree to which this all happens both in the United States and spread more equitably across our country is not yet determined. That is why the moment is now for policymakers and the startup ecosystem to stand together to make the United States the best place in the world to launch a high-growth company

The House is expected to vote on the bipartisan infrastructure package this week. When you think of infrastructure you don’t normally think about technology, but this bill is more than just roads and bridges. It is squarely focused on modernizing our infrastructure through integration of frontier technology. The legislation includes dozens of programs that seek to incorporate technology into a range of infrastructure-related systems, processes, and facilities, and reshore advanced technology manufacturing. It shows a clear intent by Congress to accelerate American economic growth and opportunity by harnessing the power of innovation to address significant societal issues.

Below is an overview of technology’s role in the bipartisan infrastructure framework. If successful, the bill could generate both a greater supply of new technologies that address various societal priorities and more significant demand for those technologies from government and other public service entities.

We will work through the process to identify and target any issues that may unintentionally exclude startups and growth companies. Should this bill pass into law, various federal agencies will be responsible for implementation, including writing the rules that will stand up the programs. To achieve the objectives of the legislation, program rules and procurement processes must emphasize the most promising and best technologies. They must be clear and timely to fit with commercial practices and provide a level playing field for technologies developed with equity financing.

The bipartisan group of policymakers who passed this bill should be applauded for their efforts and vision of a modernized American infrastructure network that enhances productivity and reduces carbon emissions. We look forward to facilitating discussions between policymakers, NVCA members, and their portfolio companies to support these efforts. We know the highest quality technology necessary to accomplish these goals will be developed by innovative startups backed by venture capital. Our goal will be to ensure open access to all technology companies for these programs. This is an exciting opportunity to bring public and private sectors together to move our country forward, and we are prepared to do our part to make it a success!

OVERVIEW OF TECHNOLOGY PROGRAMS IN BIPARTISAN INFRASTRUCTURE FRAMEWORK

Potential VC Industry Verticals Affected:
There are a number of VC-backed companies that could participate if the programs are written and implemented correctly. These include companies that focus on cybersecurity, transportation and mobility, clean energy sources and storage, smart city technology, semiconductors, carbon capture and utilization, water technology, and advanced manufacturing.

How the Programs Work:
The bill funds a series of grant programs to accelerate the integration of cutting-edge technology into U.S. infrastructure. The programs will provide grants to state and local governments utilities, transportation authorities, and other private entities for technology acquisitions, demonstration projects, research, and domestic manufacturing activity. The bill also creates several new government offices that are intended to enhance government insight into infrastructure-related technology trends.

Grants for Technology Acquisition
The grant programs for state and local governments and other public service providers will provide resources to these entities for the acquisition of new technologies to achieve goals such as greater grid resiliency, improved cybersecurity defenses, lower carbon emissions and more efficient transportation networks. Several examples include:

• $7.5 billion program to build out alternative fuel recharging infrastructure that includes the acquisition of charging and storage technology.
• $1 billion dollar program to address cybersecurity risks and threats.
• $5 billion dollar program to support the acquisition of clean school buses.
• $3 billion for the Smart Grid Investment Matching Grant Program to support the deployment of technologies that enhance electric grid flexibility.
• $50 million grant program for rural and disadvantaged communities to identify and deploy emerging drinking water technology.

Grants for Technology Demonstration Projects
Grant programs for technology demonstration projects will provide resources for public and private sector entities to create demonstration projects for promising infrastructure and climate-related technologies. Some of these programs will be administered by federal agencies while others will be administered by state and local governments and other public service entities. Examples include:

• SMART Grant program to provide $500 million for smart city demonstration projects.
• $3.5 billion for carbon capture large-scale pilot projects and carbon capture demonstration projects.
• $500M for a program to demonstrate viability of clean energy projects on current and former mine land.

Research and Manufacturing Grant Programs
The bill creates several grant programs for private companies to support research in critical areas and to encourage more domestic manufacturing activity. These programs will be administered by various government agencies depending on the goals of the program. Examples include:

• Creation of ARPA-Infrastructure (ARPA-I) to fund private sector R&D on advanced transportation infrastructure technologies.
• $750 million to create the Advanced Energy Manufacturing and Recycling Grant Program to provide grants to smaller climate technology manufacturers that build or retool manufacturing facilities in former coal communities.
• Creation of a Battery Manufacturing and Recycling Grant Program for battery manufacturing and recycling facility retooling and construction, and for battery demonstration projects.

New Technology-Focused Government Offices
There are several other provisions establishing new entities within the government to create domain expertise in certain areas. Examples include:

• Smart Community Resource Center, a new federal office that would provide resources and information to state and local governments regarding smart city and transportation-related technologies.
• Industrial research and assessment centers to identify climate and environmental upgrade opportunities at manufacturing and other industrial facilities.
• Center of Excellence for new mobility and automated vehicles.

Manufacturing and Buy American Requirements
In seeking to maximize domestic job creation opportunities, the bill includes requirements that manufactured products and construction materials must have some production nexus in the United States or qualify for a waiver. To satisfy the domestic production requirement, more than 55% of the cost of components making up the product must be mined, produced, or manufactured in the U.S., unless another standard already exists in federal regulations.

The agencies implementing the program may waive this requirement if:

• Adherence to Buy America would be inconsistent with the public interest.
• Materials are not produced in the U.S. in sufficient quantities or reasonable quality.
• Using U.S. sourced products increases the costs of the overall project by more than 25%.