In 2021, NVCA successfully navigated significant policy challenges and opportunities for the venture capital industry. Our activity was driven by two main factors. On the one hand, there is new excitement around the promise of the startup ecosystem and its ability to solve key problems. Many policymakers understand how venture-backed companies are addressing the ongoing pandemic, climate change, deep tech, and other issues. On the other hand, the startup ecosystem is often misunderstood or forgotten and becomes collateral damage as policymakers address another ill in the marketplace.
In 2022, many of the policy debates of last year will continue. But one lesson is clear: there are “known unknowns” – policy issues will come out of left field, and we will be prepared to defend the industry. Let’s look ahead at what this year will bring.
Build Back Better Act
Last year, NVCA spent significant time and resources on the Build Back Better Act. As the year closed, the legislation fortunately did not increase taxes on carried interest or the top line capital gains rate, but did include misguided changes to Qualified Small Business Stock (QSBS). We raised concerns to key lawmakers regarding the proposed QSBS changes, which are detailed in a coalition letter NVCA joined with 31 innovation and entrepreneurship organizations.
The path forward on Build Back Better is unclear in 2022. Negotiations appear to be on pause between the main actors – Senators Sinema and Manchin on one side and the White House and congressional leadership on the other. President Biden recently stated the path forward might be to break the package up into more manageable pieces. Whether this strategy works or not is uncertain, but regardless we must remain vigilant and explain how counterproductive changes to QSBS would harm the entrepreneurial ecosystem.
Antitrust and Acquisition Restrictions
Antitrust scrutiny of large tech companies will continue this year and is likely to include restrictions or bans on acquisitions by these companies. NVCA will continue to voice our opposition to the Platform Competition and Opportunity Act (Op-Eds here and here) as Congress considers whether to crack down on Big Tech. The legislation is effectively a ban on acquisitions by large tech platforms and negatively impacts venture-backed companies that see an acquisition as the best opportunity for founders, employees, and investors.
At the same time, we will be active on proposed M&A policy changes at the Federal Trade Commission and Justice Department. Earlier this month, those agencies opened a public comment period on changes to prevent anticompetitive deals. Of particular interest is the agencies’ focus on “threats to potential and nascent competition. . .which may be key sources of innovation and competition.” A recurring theme in the current antitrust debate is the idea that acquisition restrictions are needed to protect young companies from large ones. We have repeatedly pushed back on this idea and educated policymakers on how acquisitions drive interest in entrepreneurship.
Financial regulatory proposals
NVCA will spend significant time this year on financial regulatory proposals that impact venture firms and their portfolio companies.
This month, SEC Chair Gary Gensler announced his agency is working on a plan to require more private companies to routinely disclose information about their finances and operations. Gensler stated he wants to ensure that private companies and investment firms are disclosing enough information to stakeholders. NVCA CEO Bobby Franklin was quoted in the Wall Street Journal in response to the development:
“We caution the SEC from putting additional and unnecessary burdens on privately held companies that could have unintended consequences. . .This segment of the U.S. economy has driven innovation and delivered products and services that have been very beneficial during the pandemic.”
Going forward, NVCA will engage in an important conversation with policymakers, including the SEC, about the role private markets play in the innovation ecosystem. Young companies should not be weighed down with regulatory requirements that are better suited for mature companies in the public markets. Instead, policymakers should focus on improving the public markets to attract more high-growth companies.
Two other financial regulatory issues will be important for NVCA. Last year, President Biden signed into law the Corporate Transparency Act that imposes new beneficial ownership reporting requirements on small businesses. In May, we submitted comments to the Treasury Department’s FinCEN to reiterate the importance of the uniform exemptions from reporting obligations for all VC funds, which was included in the statute due to NVCA’s advocacy efforts. We also stressed the need to minimize the regulatory impact on small companies. FinCEN has since released the draft regulations and we will formally respond through comments in early 2022. Separately, NVCA will provide input into proposed changes by the SEC for 10b5-1 plans, which allows major shareholders in a company to sell a predetermined number of shares at a predetermined time. Our comments will reflect how 10b5-1 plans are used by VCs and ensure our industry’s experience is understood as changes are contemplated.
Endless Frontier Act / U.S. Innovation and Competition Act
NVCA has been deeply engaged in the bipartisan Endless Frontier Act that would renew the United States’ commitment to federal basic research and offer tools to support the transition of technology from lab to market. The legislation was included in the larger U.S. Innovation and Competition Act (USICA) that passed the Senate in June. In November, Speaker Pelosi and Majority Leader Schumer announced an agreement for the House and Senate to begin conference negotiations on a final version of USICA.
We will continue to advocate for passage of this important technology bill that will increase our nation’s competitiveness at a time when other countries are ramping up their startup ecosystems. As the bill moves forward, we remain focused on prioritizing new company formation in the proposed programs.
Immigration
NVCA has long been the leading organization in support of a startup visa – a dedicated visa category for foreign-born founders who want to launch startups in the U.S. Last summer, Rep. Zoe Lofgren introduced a new startup visa bill called the Let Immigrants Kickstart Employment (LIKE) Act. This year, we will work closely with Rep. Lofgren to build support for her bill, advance it in the House, and make progress on a Senate companion. Immigration reform has been elusive for many years, but despite this frustration it is important to build support for sound policy so we are well-positioned to pass his commonsense idea when the political stars align.
Bipartisan Infrastructure Law
The $1 trillion bipartisan infrastructure package signed into law in November includes dozens of programs to incorporate technology into infrastructure-related systems, accelerate research and technology demonstration projects, and re-shore advanced technology manufacturing. These include programs for cybersecurity, energy storage, transportation and mobility, climate change, and smart city technology. Key decisions around program design and eligibility rules will be made over the coming year. NVCA will be engaged with agencies like the departments of Energy and Transportation on implementation of these programs to ensure that venture-backed companies are able to partner with the federal government.
Looking ahead
NVCA’s past success has been possible because of our strong partnership with our members. Our industry is at its best when we are unified and work together to encourage pro-entrepreneurship policy and push back on threats. Together we will address known and unknown challenges and share the compelling story of venture capital as it delivers jobs and innovation to the American people.
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:
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:
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:
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
As President Biden and his team prepare for the COP26 UN Climate Conference next week, they should highlight to the world how America is providing leadership in climate-focused venture capital (VC) investment. VC investment is the central factor accelerating the pace of innovation across a range of leading technologies, including biotechnology, medical devices, computer software and hardware, and climate and sustainability.
Simply put, innovation must drive down the cost and improve the reliability of climate technologies enough to make the global energy transition economically viable in developed and developing countries. Most importantly, this must happen before the most consequential impacts of climate change become unavoidable. Fortunately, American startups are leading the world in climate and sustainability technology investment, raising record amounts of capital to a develop broad range of climate and sustainability technologies, a promising trend that we must build off in order to be successful.
Data collected by Pitchbook shows that America is the undisputed leader in both the number of companies and amount of capital invested in climate technology startups within its borders.
Over the past five years (2016-2020), 44.5 percent of global climate technology VC investment went to U.S.-based startups. 1,917 early and growth stage companies raised $41.8 billion to develop solutions to the climate crisis, including new energy sources; energy storage; food and agriculture; clean transportation and infrastructure; and carbon capture and utilization technologies. China has attracted the second most VC investment for climate technologies, totaling $32.8 billion invested into 363 companies. Total VC investment in European Union countries is a distant third.
Climate and Sustainability Venture Capital Investment by Country 2016-2020
Top Ten Countries Attracting Climate and Sustainability Venture Capital Investment 2016-2020
Source: PitchBook Data, Inc.
Innovation has driven down the cost of clean energy to a price competitive level with fossil fuels in many markets, which creates a distinct opportunity to finally address this crisis. There are a number of promising programs in the Build Back Better Act (Democrats’ budget reconciliation package) currently being negotiated, as well as the bipartisan infrastructure framework, and the U.S. Innovation and Competition Act, that can harness momentum in the startup ecosystem and build on this unique American strength to develop the technologies necessary to make the global energy transition economically viable.
One key proposal from House Ways & Means Committee Chairman Richard Neal (D-MA) in the Build Back Better Act would provide startups with clean energy and storage tax credits. This proposal has the potential to be one of the highest impact policy actions by accelerating the deployment of climate solutions and thus allowing innovation to descend the learning curve and take further costs out of the equation. Such incubating policies can induce exponential impacts many times larger than the cost of the policy. While certainly not the most expensive climate provisions under consideration, these could ultimately be several of the most critical provisions because they leverage the strengths of the most dynamic and innovative companies in the world. It should have been no surprise for instance that the two most effective COVID-19 vaccines were developed by entrepreneurs in young companies backed by venture capital. In fact, VC-backed startups have been critical to driving the pace of innovation in most frontier technology areas in the modern economy. The pace of climate technology innovation is no different.
There are dozens of other programs with tens of billions of dollars in funding in the legislative packages that can accelerate climate-related innovation. These include funding for climate technology research and commercialization efforts; programs to encourage integration of climate technologies into infrastructure networks and power grids; and funding to accelerate the scale-up of promising climate technologies.
In addition to global leadership, winning the race to become the global leader in climate technology will also put America in the enviable position of leading what may become the world’s biggest industry. If successful, the country will see millions of new jobs, more domestic manufacturing, and economic growth.
The advantage to the American strategy is that innovation often drives down the cost and thus expands access to the benefits of technology. A corollary to consider is how the Moore’s law pace of innovation in semiconductors has expanded access to previously unfathomable amounts of computing power across the world. The question is no longer if, but when, these technologies can affordably produce reliable clean energy at scale to allow developing countries to fully transition their economies, and who leads the new energy economy.
As American startups continue to lead the world in the climate innovation race, their successes not only accelerate the energy transition domestically, but also lower the barriers to the energy transition for all nations. If the packages under consideration ultimately pass and are effectively implemented, America has a distinct opportunity to leverage our greatest strengths to lead the world through this crisis.
New research reveals that taxing carried interest at ordinary income rates will harm new venture capital (VC) fund formation in emerging technology regions in the United States. The study, by Professors Yael Hochberg and John Barrios (of Rice University and Washington University in St. Louis, respectively), finds that taxing carried interest as ordinary income would make starting a new fund less economical and instead make steady employment at incumbent companies by comparison far more attractive than forming or participating in venture capital.
In particular, the lower potential earnings due to additional tax burdens could significantly reduce the number of VC funds in areas with less mature startup ecosystems, reduce diversity in the startup ecosystem, and limit the effectiveness of several programs in the Build Back Better agenda. The success of several significant priorities under consideration by policymakers today—such as the U.S. Innovation and Competition Act, the Infrastructure and Jobs Act, and the Democratic reconciliation bill—rely to great extent on the availability of funding to support the creation and growth of new innovative entrepreneurial ventures.
Study Highlights:
Why It Matters
Carried interest is often offered up in political discussions in the mistaken belief that it is a pain-free tax increase on the annual income of hedge fund managers. But the reality is that taxing carried interest as ordinary income would have its most significant impact on VC partnerships. These partnerships are financing the economic transition of the U.S. economy, backing technology-focused startups from concept through scaling phase by providing multiple rounds of equity capital as well as strategic counsel and mentorship to company founders. VC partnerships would be disproportionately impacted by increased taxes on carried interest because of the particularly long-time horizons that company building requires, the higher-risk nature of startup investing, and the primary reliance on capital gains as the economic incentive for participation.
The research by Professors Hochberg and Barrios shows that, far from being painless, a significant new tax increase on carried interest will particularly hurt regions and communities with nascent technology ecosystems. This tax increase will limit early-stage venture capital investment, reduce job creation and economic growth in these areas, and ultimately leave them further behind regions with mature technology ecosystems in and outside the United States. Further, a tax increase focused on the VC model will hurt startup activity in virtually all areas of the country and all industry verticals, including climate technology, cybersecurity, semiconductors, and medical technology, dampening our nation’s global competitiveness at a time when the U.S. is fiercely competing for leadership in the next generation of technologies.
A recent survey of VC-backed companies by NVCA showed that “four out of five respondents spent at least 70 percent of their budgets on two activities, wages and compensation and research and development.” The survey also found that nearly one in five VC-backed companies spend at least 85 percent of their budget on R&D. It’s no surprise then that this industry is responsible for over half of companies that go public each year (including 40 percent of climate technology companies), around half of new FDA-approved cures, and are causally responsible for the rise of one-fifth of the current largest 300 US public companies. What is surprising is that, at a time when we as a nation are seeking to accelerate economic growth and access to opportunity, a tax increase this targeted on the most productive investment financing model in the U.S. economy is under such significant consideration. We hope that this study will help inform policymakers as they continue to debate a consequential policy agenda that seeks to improve the long-term economic prospects of our country.
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!
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:
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:
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:
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:
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:
Recently, President Biden hosted a cybersecurity summit with corporate executives and stakeholders to discuss threats and how the public and private sectors can work together to address the issue. The president’s attention to cybersecurity is encouraging as leadership on this issue is critically needed. Cyber-attacks seem to be in the news every week – be they ransomware attacks, data manipulation, or other threats from bad actors.
The attendees at the White House meeting were generally large companies, like Alphabet, Amazon, JP Morgan, and Southern Company. Two venture capital-backed companies were also there: Coalition, which raised capital from Felicis Ventures and offers a cybersecurity platform and cyber insurance, and Resilience, which empowers the insurance ecosystem and is backed by Lightspeed Venture Partners and CRV. The participation of Coalition and Resilience is a promising sign that the Biden Administration sees venture-backed companies as a necessary ingredient in safeguarding against cyber threats.
To tackle cybersecurity, the Biden Administration should redouble engagement with the entrepreneurial ecosystem, which produces the most innovative companies in the world.
Why include new companies alongside established ones? Take the U.S. government’s successful bid for a COVID-19 vaccine, which led to Moderna and Pfizer developing deployed vaccines. Moderna was just 10 years old when Americans began receiving the company’s vaccine, whereas Pfizer was 171 years old. Despite their age differences, both offered invaluable innovation that has saved lives.
In the same way, cybersecurity startups contribute to defense of our networks. Fortunately, cybersecurity is a bright spot for venture capital. Venture investment in cybersecurity startups is at a torrid pace, with nearly $10 billion invested in 276 companies so far this year. That is about a third more than all the capital that was invested in cyber companies in 2020 ($7.21 billion) and nearly twice as much as was invested in all of 2018 ($4.93 billion). Pitchbook recently summed it up well:
With billions of dollars in new funding, cybersecurity startups have lined up the capital to take on incumbents or expand into green opportunities. . . A new generation of cybersecurity startups is scaling up to serve companies in the remote work era as a fresh wave of sophisticated attacks spreads security fears.
Source: Pitchbook
VCs are investing in cybersecurity companies of all stripes, including the following innovative companies that are fighting to protect networks and data.
Founded by former NSA Director General Keith Alexander, IronNet is focused on ‘collective defense’, or the idea that industries plus government sharing information in real-time are better than any one company trying to defend itself on its own. IronNet uses behavioral analytics to find threats and then share the information quickly via their ‘dome’ technology. IronNet recently went public after backing from ForgePoint Capital, Kleiner Perkins, and other venture firms. Ted Schlein and the Kleiner Perkins team have decades of experience in developing top cybersecurity companies. Don Dixon, Alberto Yepez, and the ForgePoint Capital team are prolific cyber investors and have more than 30 early-stage cybersecurity companies in their portfolio.
Started by CEO Jennifer Bisceglie, Interos developed a way to map any company or government program’s supply chain to any degree of supplier. It then shows users the risks associated with each node of a supply chain. For example, if a company is worried about political unrest in an area of the world, Interos can tell the company which of its suppliers will be impacted most and help find alternatives. The company recently completed its $100 million Series C round with backing from Venrock, Kleiner Perkins, and other VCs and is valued at nearly $1 billion.
Ann Arbor, Michigan-based Blumira offers a comprehensive cloud security monitoring platform for small business resiliency. It analyzes billions of events and surfaces priority important threats to allow rapid response to an attack in progress. Blumira is thriving in the Michigan startup ecosystem after investments from VCs like Ten Eleven Ventures (led by Alex Doll) and Mercury Fund (led by Aziz Gilani).
Going forward, the federal government should seek out and team with innovative VC-backed companies that are leading the way on cybersecurity innovation. The cybersecurity provisions in the bipartisan infrastructure package passed by the Senate are a good starting point, but more should be done. The temptation of federal partners is to fall into familiar patterns of procuring from incumbents that all too often offer second-class technology but are first-class at navigating the procurement process. That is not a recipe for securing American networks. Let’s take a page out of the COVID vaccine playbook and leverage the vibrant startup ecosystem to deliver results for the American people.
Welcome to our VC Policy Pulse series, where we speak with a VC or founder on a policy issue that is having a major impact on the venture and startup ecosystem. Today, we’re speaking with Scott Raney, Managing Director at Redpoint, and Sophie Alcorn, Founding Attorney of Alcorn Immigration Law, about a Startup Visa category for immigrant entrepreneurs who want to come to the U.S. to create a new company. Read more
Congress has stepped up its focus on large technology platforms. The current emphasis is how our nation’s antitrust laws can be changed to address the power of these companies. One of the proposed solutions is restricting or forbidding acquisitions of smaller companies, which would hurt VC-backed companies due to the importance of acquisitions to the startup ecosystem. Instead of making the startup ecosystem collateral damage in this fight, Congress should encourage the creation and growth of new companies across a broad range of industries. This is the most effective way to increase competition in the U.S. economy. Read more
