https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 email@example.com https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png firstname.lastname@example.org 13:42:032022-07-25 10:06:03VCs Leading in National Security
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 email@example.com https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png firstname.lastname@example.org 00:00:062022-07-13 13:43:28NVCA Celebrates Earth Day with VC Leaders in Climate and Sustainability
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Jeff Farrah https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Jeff Farrah2022-02-02 14:32:302022-07-26 14:38:02Coalition for International Entrepreneurship Sends Open Letter Recommending Changes to International Entrepreneur Parole
Support for IEP
Immediately establish premium processing for IEP applications so qualified entrepreneurs can rapidly launch their businesses in the United States.
Yesterday, 36 organizations and individuals from the immigration and startup communities sent an open letter to Secretary of Homeland Security Alejandro Mayorkas. The letter, available here, commends the administration for reviving International Entrepreneur Parole (IEP) and recommends important procedural changes to make the program easier to use.
Numerous other countries, including the UK, Australia, Canada, New Zealand, and Singapore have designated visas to attract entrepreneurs, unlike the United States, which have helped them to cut into the United States’ lead in attracting talent from around the world. The IEP holds promise to be the United States’s foremost pathway for migrants to found businesses here, filling this missing gap in US immigration policy.
Changes are needed to make sure the program is effective, attractive, and efficient. Resolving the existing procedural issues could unlock the full economic potential of IEP. As stated in the letter, “if it were functioning smoothly, IEP…has the potential to create a million jobs over ten years.”
Read the full letter here.
Support for IEP
“For too long, the US has told international students and temporary workers brimming with good ideas and eager to start new ventures that they have to choose between building companies and staying in the United States,” said Jeremy Neufeld, Senior Immigration Fellow at the Institute for Progress. “These changes would unleash the potential of many stifled entrepreneurs.”
“The National Venture Capital Association was pleased to play a lead role in development of the International Entrepreneur Rule, including in the NVCA v. Duke lawsuit that challenged the Trump Administration’s attempt to delay and end the program before it began. Going forward, it is important the International Entrepreneur Rule be implemented in a way that supports the foreign-born founders who want to start high-growth companies in the United States,” said Jeff Farrah, General Counsel at the National Venture Capital Association. “NVCA is proud to stand with this coalition to continue to work with the Biden Administration so the benefits of the International Entrepreneur Rule are realized.”
“International students are vital contributors to our knowledge economy and innovation agenda,” Presidents’ Alliance on Higher Education and Immigration Senior Policy Advisor Jill Welch said. “The International Entrepreneur Parole program, if fully implemented, will provide a much-needed pathway for those who graduate from our colleges and universities to stay here and innovate.”
“The current visa options are inadequate to accommodate the modern practices of entrepreneurship and emerging companies,” said Tahmina Watson from Watson Immigration Law and author of The Startup Visa. “Therefore, it is crucial to implement these suggestions; otherwise, the program will remain unusable.”
The Honorable Alejandro Mayorkas
Secretary of Homeland Security
Department of Homeland Security
Washington, DC 20528
RE: U.S. Innovation and Job Creation through International Entrepreneur Parole (IEP)
Dear Secretary Mayorkas:
As the U.S. recovers from the COVID-19 pandemic, it is essential that we take advantage of every opportunity for economic growth and job creation. One of the biggest untapped resources to create new opportunities for Americans is international entrepreneurs’ and students’ strong motivation to launch their startup businesses in the United States. Over half of the billion-dollar startups launched in the United States were founded by immigrants—despite the incredibly challenging and outdated immigration system.1 Immigrants also start businesses at higher rates than native-born Americans.2
We commend the Biden Administration for its recent actions reviving International Entrepreneur Parole (IEP).3 It is the last remaining action item of your predecessor, Secretary Jeh Johnson’s 2014 plan to support high skilled businesses and workers.4 This announcement strongly signaled to the world that the United States welcomes talented minds from around the globe and strives to lead the world in technological and scientific achievement.
For the United States to stay competitive and remain attractive to talented individuals all over the world, it is vital that the IEP application process be as efficient and smooth as possible. It is currently our best option to bring innovative entrepreneurs to our country and allow those who are already here to stay. Unlike many of our international rivals, the United States does not have a dedicated visa for startup entrepreneurs. There are limited pathways for international students transitioning from their student visas to start their own businesses. But, if it were functioning smoothly, IEP could fill this gap and has the potential to create a million jobs over ten years.5
Unfortunately, there are several procedural issues which make the IEP process volatile, uncertain, complex, and ambiguous. As currently situated, it is very difficult to actually use the program. Some of these barriers, such as the large backlogs at U.S. consulates, will lift as the COVID-19 crisis recedes, but others will continue to make the program ineffective.
As experienced immigration lawyers, venture capitalists, and policy experts, we have five key recommendations to improve the efficacy of IEP:
Immediately establish premium processing for IEP applications so qualified entrepreneurs can rapidly launch their businesses in the United States.
USCIS has in the past agreed to adhere to a 14-day processing time for certain cases without premium processing (e.g. O and P visas).6 Additionally, a clear procedure was established to allow applicants to follow-up should processing times exceed that timeframe. We would encourage the USCIS to implement a similarly defined and prompt timeframe for the adjudication of these cases.
Establish and communicate suitable processing systems at the USCIS service centers. Currently, IEP applications are adjudicated at the EB-5 Immigrant Investor Program Office. We respectfully suggest that the agency consider whether IEP applications should be redirected to officers who routinely adjudicate and are familiar with L-1 and E-2 cases as IEP applications are more similar to E-2 and L-1 petitions.
Incorporate the use of the Validation Instrument for Business Enterprises (VIBE) program to streamline the qualification process for investors. This program is already being used to validate information about companies petitioning to employ nonimmigrant and immigrant workers through Forms I-129 (for the H-1B, for example), I-140, I-360, and I-485.7
Modify USCIS guidance on the term “qualified investor” to ensure that investors with passive foreign limited partners are not unnecessarily excluded.
Restart the USCIS Entrepreneur in Residence initiative to develop routine feedback loops with stakeholders and consider a hybrid model with both virtual and in-person activities to improve entrepreneurs’ ability to participate and decrease the agency’s administrative and badging burdens.
Establish regular interaction with stakeholders in the academic, entrepreneur, legal, and investment communities to further refine the program. As the IEP program continues to develop, there will certainly be additional administrative or procedural hurdles that come to light, and the communities most impacted by these hurdles will be able to most readily and reliably recognize these hurdles ahead of time. Increased interaction can include more events hosted by the Public Engagement Division, or the creation of an entrepreneurship subcommittee for the Homeland Security Academic Advisory Council (HSAAC).8
To build our economy back better than before, we need immigrant entrepreneurs and innovative startup founders. By making these changes, the United States will have the opportunity to maintain its reputation as the top destination for entrepreneurship and innovation in the world and continue to be able to create new jobs for our citizens.
Coalition for International Entrepreneurship
American Immigration Council
American Immigration Lawyers Association
Angel Capital Association
Carnegie Mellon University Graduate Student Assembly
Center for American Entrepreneurship
Consumer Technology Association (CTA)
Digital Irish Inc
Economic Innovation Group
Federation of American Scientists
Illinois Institute of Technology
Illinois Science & Technology Coalition
Information Technology Industry Council (ITI)
Institute for Progress
National Immigration Forum
National Venture Capital Association
Presidents’ Alliance on Higher Education and Immigration
Washington Technology Industry Association
Katie Allen, Senior Vice President, Center for American Entrepreneurship
John R. Dearie, President, Center for American Entrepreneurship
Brad Feld, Partner, Foundry Group
Kumar Garg, Vice President, Schmidt Futures
Elizabeth Goss, Esq., Goss Associates LLC
Troy Henikoff, Managing Director, MATH Venture Partners
Jaclyn Hester, Foundry Group
Brienne Maner, Executive Director of Startup Sioux Falls
Fiona McEntee, Managing Attorney of McEntee Law Group
Blake Patton, Founder and Managing Partner of Tech Square Ventures
Nik Rokop, Coleman Foundation Clinical Associate Professor of Entrepreneurship, Stuart School of Business, Illinois Institute of Technology
Leslie Lynn Smith, National Director, GET Cities
Tahmina Watson, Immigration Attorney, Author of The Startup Visa; Watson Immigration Law
Stephen Yale-Loehr, Of Counsel, Miller Mayer
For the featured illustration, we thank Nick Matej for his great work.
This piece originally appeared in Institute for Progress
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Jeff Farrah https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Jeff Farrah2022-01-28 14:45:102022-07-26 14:47:11SEC Could Pull More ‘Unicorns’ Into Public Reporting Regime
The U.S. Securities and Exchange Commission could compel more large private companies to comply with public reporting requirements in order to bolster transparency, potentially inviting resistance from so-called unicorns objecting to greater oversight.
The SEC’s current regulatory agenda indicates it is considering a proposal to amend how “shareholders of record” are defined under Section 12(g) of the Securities Exchange Act of 1934. Any change to existing criteria could be significant, because that provision of securities law triggers when companies must begin filing public disclosures regardless of whether they plan to conduct an initial public offering.
Morrison & Foerster LLP partner David Lynn said if rules around unicorns — or private startups valued at $1 billion or more — become more stringent, then a “pretty significant number of companies would have to rethink their approach going forward.”
“It changes the landscape of how they finance themselves and how they would structure their ownership,” said Lynn, a former counsel at the SEC’s Division of Corporation Finance, which reviews corporate disclosures for accuracy and materiality.
One scenario is that private companies could go public sooner, either through a direct listing or traditional IPO. Otherwise, “they’ll have the burdens of reporting under the Exchange Act without the upside of having their securities being publicly traded,” said K&L Gates LLP partner David Bartz, who works in the firm’s corporate practice.
Private companies disclose little information regarding their operations and financial conditions compared with their public counterparts. Public companies also have to abide by additional rules regarding accounting procedures and corporate governance.
As the ranks of unicorns have swelled in recent years — venture capital database CB Insights lists 986 unicorns worldwide — so have concerns that a large swath of companies with vast economic impact are operating without public oversight.
SEC Commissioner Allison Herren Lee raised transparency concerns in a speech in October in which she called for updating how shareholders of record are counted for public reporting purposes, expressing worry that much of the American economy is “going dark.”
“It’s time for us to reassess what it means to be a holder of record under Section 12(g),” Lee, one of the three Democrats in the majority on the SEC, said at the time.
Potential new SEC rules would add to the agency’s broader efforts to increase scrutiny of private markets under Chair Gary Gensler. On Wednesday, the SEC proposed rules that would beef up disclosures for hedge funds and private equity funds.
The SEC declined to comment on how it may propose to change Section 12(g) rules beyond a brief description listed on its regulatory agenda, which indicates the agency could propose amendments to the shareholder of record definition by October.
As it stands now, companies with 2,000 shareholders of record, with certain conditions, must register with the SEC and submit periodic filings applicable to public companies.
This threshold had stood at 500 shareholders dating back to 1964, when Congress created Section 12(g) of the Exchange Act aiming to ensure that companies would enter the SEC’s reporting system once their assets and investor base grew to a certain size.
The Jumpstart Our Business Startups Act of 2012 quadrupled that minimum to 2,000 shareholders, part of a larger legislation designed to stimulate IPOs and private capital raising. The bill effectively provided companies the flexibility to stay private longer.
The SEC is powerless to revise statutory thresholds enacted by Congress. But the agency can revisit its rules determining how shareholders of record are determined, which has become a sticking point.
Stock ownership of public companies now are often held in “street name,” by a broker rather than the beneficial owner. This enables brokers to keep electronic records of ownership, allowing for faster trading as it reduces reliance on paper certificates.
Thousands of shareholders can be covered under one “street name,” which one securities law professor said creates a misleading picture of a company’s investor base.
“This belies reality, and it is also contrary to investors’ best interests,” said Marc Steinberg, Radford professor of law at Southern Methodist University. “The reason is the lack of disclosure in the marketplace. Simply, this is not what Congress could have intended when it adopted the statute in 1964.”
Steinberg said nothing requires the SEC to count shareholders of record under “street name,” though that has been the practice for decades. In her speech, Lee of the SEC noted that the agency has the authority to require companies to look deeper to count beneficial owners.
It’s not fully certain to what extent investor records of private companies are held under “street name,” though Lee called on the SEC to further study the matter.
The SEC can also opt to count investors that participate in private investment vehicles known as feeder funds on an individual rather than collective basis. The agency could likewise count individually the number of investors in a venture capital fund, which could push companies closer to the 2,000-shareholder threshold that triggers public reporting.
If such options are pursued, one attorney said companies seeking to avoid inadvertently becoming a reporting company may respond by limiting the pool of their investors.
“It opens the door and shifts the scales in favor of wealthy individual investors who are capable of writing larger checks and only representing one shareholder on their cap table,” said K&L Gates partner Matthew Miller, who represents private investors.
Companies have various reasons for wanting to stay private longer, including the fact that activist shareholders expect results on a quarterly basis, which can hinder long-term strategic planning. Entering the SEC’s reporting system also opens a company’s disclosures to the plaintiffs bar, potentially inviting litigation.
Morrison & Foerster’s Lynn added that companies may also fear that disclosure requirements could be “used as a way to shame companies” into taking some sort of action, be it on climate change or other hot-button social issues.
In her speech last fall, Lee said employees who depend on stock compensation would benefit from more disclosure from large private companies. She also noted that labor unions bargaining for worker rights may want a clearer picture of a company’s finances.
While it’s unclear what an SEC proposal may look like, advocates for venture-backed companies are concerned about potential new rules. The National Venture Capital Association contends that such companies have delivered immense value to the public, including helping to mitigate effects of the coronavirus pandemic through innovation.
“We are concerned that unnecessary regulation of this vibrant sector will hamper entrepreneurship when jobs and technological leadership are needed,” National Venture Capital Association general counsel Jeff Farrah said in a statement to Law360. “Instead, the SEC should focus on making the public markets more inviting to high-growth companies as all stakeholders have a strong interest in more American public companies.”
If the SEC does proceed, support is likely not to be unanimous. Republican SEC Commissioners Hester Peirce and Elad Roisman, who recently left the agency, expressed concern last month that the SEC could counter the JOBS Act, which sought to provide private companies greater flexibility in deciding if and when to go public.
SMU’s Steinberg noted that private companies have additional tools to reduce their shareholder count if they want to avoid tripping over a minimum threshold, including reverse stock splits or tender offers by which they repurchase shares from investors.
“It’s not as if companies today are stuck with going public if they’re over this number,” Steinberg said. “There are internal corporate governance procedures that can be used to enable the company to stay private.”
Read more at: https://www.law360.com/articles/1459446/sec-could-pull-more-unicorns-into-public-reporting-regime?copied=1
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Jeff Farrah https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Jeff Farrah2022-01-27 14:29:332022-07-26 14:41:42House Adds ‘Game-Changing’ Visas For Immigrant Startups And Ph.D.s
The House Rules Committee has added a significant element missing from a Senate innovation bill—visas for people who will produce innovations. House Democrats addressed that oversight by adding two potentially game-changing measures for immigrant entrepreneurs and immigrants with Ph.D.s in STEM (science, technology, engineering and math) fields. If these measures become law, their impact could be far-reaching. (See sections 80301 to 80305 in the bill.)
Immigrant Startup Visa: The lack of a startup visa costs America talent, according to the National Security Commission on Artificial Intelligence. In its final report, the commission members said the absence of a startup visa places the United States at a disadvantage compared to other nations like Canada in retaining and attracting foreign-born entrepreneurs. Many innovations are realized through entrepreneurship, and, according to a 2018 National Foundation for American Policy (NFAP) analysis, more than half of the billion-dollar startups in the United States had at least one immigrant founder. The list included some of America’s most innovative companies, such as SpaceX, Stripe and Moderna.
On January 25, 2022, the House Rules Committee added Rep. Zoe Lofgren’s (D-CA) LIKE Act to the nearly 3,000-page America COMPETES Act (H.R. 4521). The bill creates a temporary visa for foreign-born entrepreneurs who qualify and, according to a summary, “Allows the founder to apply for and receive lawful permanent residence if the start-up entity meets certain additional benchmarks.”
An individual qualifies for a new temporary W visa for an initial three years if:
“(1) the alien possesses an ownership interest of not less than 10% in a start-up entity;
“(2) the alien will play a central and active role in the management or operations of the start-up entity;
“(3) the alien possesses the knowledge, skills, or experience to substantially assist the start-up entity with the growth and success of its business; and
“(4) during the 18-month period preceding the filing of the petition, the start-up entity received at least $250,000 in qualifying investments from one or more qualified investors; or at least $100,000 in qualifying government awards or grants.”
The bill allows for an extension of the W (temporary) status for an additional three years if the individual possesses at least a 5% ownership stake, will continue to play a “central and active role” in management or operations, has received at least $500,000 in “additional qualifying investments,” created “at least 5 qualified jobs” or “generated not less than $500,000 in annual revenue in the United States and averaged 20% in annual revenue growth.”
An entrepreneur in W status may adjust status to lawful permanent residence without being placed in a green card backlog (i.e., they are exempt from the numerical limit) if the individual has maintained W status, ownership interest in the startup and an active and central role in the company, and the startup has “created at least 10 qualified jobs and . . . has received not less than $1.25 million in qualifying investments . . . or generated not less than $1 million in annual revenue in the U.S. in the two-year period preceding the filing of the petition.”
The startup visa’s impact could be significant. The measure could create approximately 1 to 3 million jobs over a decade, depending on factors that include how government agencies administer the provision, according to an NFAP estimate of an earlier Lofgren startup visa bill.
“The National Venture Capital Association (NVCA) is excited to see the America COMPETES Act include a startup visa,” said Jeff Farrah of NVCA. “Immigrant entrepreneurs have created some of the most iconic American companies. But our immigration laws make it too hard for foreign-born entrepreneurs to launch new, high-growth companies in the U.S. A startup visa would provide a dedicated visa category that will allow the world’s best entrepreneurs to create the next generation of great companies that will ensure the United States remains the global leader in technology and innovation.” (See a startup visa coalition letter here.)
A Green Card Exemption For Ph.D.s: Another significant provision added to the House bill would exempt from annual green card limits individuals with Ph.D.s in STEM fields. That would allow U.S. employers to gain a significant competitive edge by offering the chance at permanent residence to outstanding researchers from around the world, including those early in their careers and engaging in cutting-edge work.
Under the bill, individuals can gain permanent residence without being placed in a green card backlog (or be subject to per-country limits) if they “have earned a doctoral degree in a program of study involving science, technology, engineering, or mathematics—from a qualified United States research institution; or from a foreign institution if such degree is the equivalent to a degree issued by a qualified United States research institution; and are seeking admission to engage in work in the United States in a field related to such degree.”
Analyzing a similar provision, an estimated 10,000 people a year could benefit from a measure limited to Ph.D.s in STEM fields from U.S. universities. However, since this new provision also allows for Ph.D.s from foreign universities, the annual number of potential beneficiaries could be higher. Moreover, the bill uses a broader definition of STEM.
The bill states, “The term ‘program of study involving science, technology, engineering, or mathematics’ means a field included in the Department of Education’s Classification of Instructional Programs taxonomy within the summary groups of agricultural sciences, natural resources and conservation, computer and information sciences and support services, engineering, biological and biomedical sciences, mathematics and statistics, military technologies, physical sciences, or medical residency and fellowship programs, or the summary group subsets of accounting and related services and taxation.”
The broader definition of STEM will carry several benefits. “The bill also expands the definition of STEM in sensible directions that include highly skilled and productive individuals in important industries,” noted Alex Nowrastesh of the Cato Institute. Attorney Greg Siskind said, “Including physicians who do residency and fellowships in the U.S. also has the added benefit of dramatically helping health care in the U.S. since MDs are one of the most backlogged occupations for green cards.”
An indirect benefit of the provision will be to help individuals waiting many years in employment-based green card backlogs even if they do not have a Ph.D. That is because individuals with Ph.D.s who previously would have used a green card number would now be exempt from the numerical limits.
“It is increasingly important that the U.S. be able to recruit foreign-trained Ph.D.s,” said Mark Regets, a senior fellow at the National Foundation for American Policy. “Not only do they link us to research being done abroad, but they are an increasing proportion of the total doctorate-level STEM talent in the world. It is not just China that has increased Ph.D. production, but many European and other developed countries as well.”
Postdoctoral researchers work at U.S. universities after completing their Ph.D.s and play a significant role in research in the United States. Approximately 56% of postdocs at U.S. universities are on temporary visas, with many in biological sciences, medical sciences and engineering. A large number of PhD.s with foreign degrees assist in research and development. The new measure would allow many more an opportunity to stay and contribute in the United States.
A great example of someone who could have benefited from a special green card provision for Ph.D.s is Katalin Karikó. She is credited with producing the underlying research breakthrough that made messenger RNA possible for vaccine use. That discovery likely already has saved hundreds of thousands of lives. Karikó earned her Ph.D. in Hungary and toiled for years in the United States, first as a postdoctoral researcher, before her work became recognized as life-saving.
The House is expected to vote on the bill as soon as next week. The legislation, including the new immigration provisions, would need to be reconciled with (and pass) the Senate and signed by the president to become law.
Helping America and its companies better compete for talent through startup visas and a clear path to U.S. permanent residence for the world’s top researchers might help a bill on innovation live up to its name.
This piece originally appeared in Forbes
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Jeff Farrah https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Jeff Farrah2022-01-20 13:27:062022-07-13 13:37:59Venture Industry’s 2022 Policy Priorities
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.
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.
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.
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Jeff Farrah https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Jeff Farrah2021-11-19 11:16:162021-11-19 11:16:16Startups Will Be Collateral Damage in Lawmakers’ Zeal to Attack Big Tech
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.
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Jeff Farrah https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Jeff Farrah2021-11-04 08:00:452021-11-04 08:51:10How Policymakers Can Capitalize on Two Geographical Trends in the Startup Ecosystem
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.
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
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
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Justin Field https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Justin Field2021-10-29 08:00:142022-07-13 13:47:52President Biden Should Highlight American Leadership in Climate Technology Innovation at COP26
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.
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Justin Field and Michael Chow https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Justin Field and Michael Chow2021-10-12 08:30:292021-10-28 07:30:39Study Shows Significant New Taxes on Carried Interest Damages Economic Opportunity
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.
- Carried interest tax changes “have the potential to have far-reaching effects on the creation and growth of innovation-driven entrepreneurial ventures in precisely the locations where policymakers are often seeking to increase entrepreneurial activity and growth.”
- VCs under a tax regime taxing carried interest at ordinary income rates face a wage equivalent approximately 20-25% lower than under the current tax regime, a substantial income hit.
- Over the life span of a venture capital fund (which averages about 12 years), the pre-tax wage that would be economically equivalent to the compensation a General Partner receives from running a representatively successful fund of $10 million is approximately $71,000 under the current tax regime. Under a regime that taxes carried interest at ordinary income rates, this pre-tax wage equivalent falls to $52,000.
- Significant new taxes on carried interest “may risk a reversal in the gains that are being made towards increasing diversity among the investor community, and as a result, in the progress towards increasing the diversity of the entrepreneur community.”
- In 2020, 63% of woman and minority-owned firms in the market were raising first-time funds, with many featuring investment strategies that aimed to address social injustice, including investing in underrepresented entrepreneurs.
- States with startup ecosystems that stand to lose the most from this tax change include Pennsylvania, Arizona, Wisconsin, Montana, Michigan, Ohio, Nevada, New Hampshire, Colorado, and Indiana—all of which would lose out on the creation of high-quality jobs should funding to startups dry up due to less local VC financing available.
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.