One of the central strategies of the American Jobs Plan is to use increased innovation activity to make progress on three critical societal challenges: climate change, access to economic opportunity, and competition with China. The bill seeks to accomplish this by using government resources to seed commercial activity through research programs, education and training, facility construction, and support for entrepreneurship, among other proposals.
To achieve President Biden’s vision, the plan will need the active participation of the startup ecosystem, including the venture capital community. This ecosystem serves as a crucial bridge between government and university research and commercial markets. Venture capital fuels the development of novel products and technologies that, if successful, can either become new public companies or improve existing platforms. Our role in this debate is to work with policymakers to provide the insights of our members and the tens of thousands of entrepreneurs they support across the country on how the programs in the American Jobs Plan can bridge the lab to market divide and address our macro challenges.
If these programs are done right, we could see a wave of new companies emerging from labs across a range of critical technology areas, a more diverse set of entrepreneurs spread across more regions of the country, better coordination between government and private sector on shared priorities, and more domestic manufacturing. But details in these programs matter a great deal for startups, as we all so painfully remember from the Paycheck Protection Program debates last year. Therefore, we must be engaged on how the plan impacts the startup community, whether it’s fighting to make startups eligible for energy tax credits, prioritizing new company formation in research and technology commercialization programs, ensuring that any U.S. manufacturing policy include support for the production scale-up of growth companies, and any other issues that impact the startup ecosystem, either intentionally or not.
Below is an initial analysis of how we see startups fit into the American Jobs Plan. There is a long way to go to turn this broad summary into actual legislative text and we look forward to being a productive part of these conversations in order to accomplish shared objectives.
Why Startups and Venture Capital are Critical to the American Jobs Plan
VCs generally provide minority equity investment into young companies that are often technology focused. Venture capital is critical to the commercialization and scaling of new technological concepts because this model depends on long-term equity investment. In the VC model, in return for minority ownership stakes capital is provided to young companies that can be used for research and development (R&D), hiring, and other company scaling activities with no expectation of short-term returns or debt payments.
The use of equity investment means that VC funds take more significant downside risk (if the company fails, VCs lose their money) and are aligned with the long-term success of the company as the economic incentive for participation is long-term capital gains, as opposed to fees or bonuses. A recent survey of VC-backed companies by my colleague Michael Chow highlighted the power of VC investment. The survey found that four out of five respondents spent at least 70 percent of their budgets on two activities: wages and compensation and R&D.
This model fuels the growth of the most innovative companies in the world. The survey also found that over half of VC-backed companies spent more than 30 percent of their budgets on R&D. Looking to a public company comparison, Michael found that the most innovative companies in the Fortune Global 500 spent 26 percent of revenues on research. And about one in six VC-backed companies spend an astounding 80 percent or more of their budgets on R&D.
VC investment is also responsible for seeding a large percentage of novel drugs and innovation at younger companies drove development of the two most successful vaccines in the United States in Moderna and Pfizer through their partnership with BioNTech. In fact, a recent report by Silicon Valley Bank found that 42 percent of all FDA-approved drugs between 2009-2018 originated in VC-backed startups.
Technology-focused entrepreneurial activity is particularly important to creating economic opportunity for American workers. A recent report from the University of North Carolina’s Kenan Institute of Private Enterprise found that total high-technology employment in the U.S. grew by around 20 percent from 2007-2016, and that these jobs both paid higher median wages and were created faster coming out of the financial crisis than non-high-technology jobs in states across the U.S. This illustrates a fundamental trend in the modern economy: the path to greater economic opportunity for American workers runs through technological progress and long-term investment.
An indication of success for the American Jobs Plan would be an increase in the annual entry of innovative companies into the public markets, including more climate technology companies, distributed in regions and communities across the country. Venture capital is particularly critical to this process. Despite investing in less than one percent of new businesses annually, about half of all companies that enter the public markets each year in the U.S. are backed by venture capital. Young public companies create greater competition for incumbents and have been associated with the launch of a number of new industries in the post-World War II economy. A few examples include Intel and semiconductors, Apple and the home PC industry, Genentech and biotechnology, and Moderna and mRNA.
American Jobs Plan and the Startup Ecosystem
While the American Jobs Plan contains a broad range of programs, our focus is on the R&D and innovation, climate, and manufacturing programs. There is much to be encouraged about in the first draft of the plan, as well as a number of questions and a need for further details.
R&D and Innovation
Noting that “half the jobs in our high-growth, high wage sectors are concentrated in just 41 counties,” the plan will put $180 billion into R&D investment and technology commercialization, with a focus on expanding innovation activity to more regions and communities. This includes $30 billion for R&D that spurs innovation and job creation, $40 billion for research infrastructure modernization, $35 billion to address the climate crisis through additional research, a new federal agency (discussed more in the climate section), R&D demonstration projects, and $70 billion for a new technology directorate at the National Science Foundation (NSF) and for the creation of regional innovation hubs.
Endless Frontier Act
The legislative centerpiece of the President’s plan to create economic opportunity through innovation is the NVCA-endorsed $110B Endless Frontier Act, which comprises the new directorate, regional innovation hubs, and R&D investment programs. If implemented effectively, the Endless Frontier Act will facilitate greater research, a better skilled workforce, and more technology companies distributed throughout the country. Through a newly established Directorate of Technology and Innovation at NSF, this bipartisan legislation leverages public-private partnerships to provide major investment in early research, education, training, facilities, and entrepreneurship to support the U.S. leadership position in key emerging technologies such as quantum computing, advanced energy and materials, biotechnology, cybersecurity, and several others.
NVCA has been engaged in productive discussions with the bill’s sponsors and we were pleased to see new company formation listed as a priority for each of the proposed programs, meaningful additions that will help to accomplish our shared objectives of supporting the growth of emerging startup ecosystems throughout the country and facilitating advances in key emerging technologies. This will give us a stronger position in the implementation phase of the program to prevent regulatory and eligibility barriers from being built that may exclude startups or otherwise impede commercialization of technology. This priority will also guide our engagement in other programs as they are developed.
Small Business Capital Program & SSBCI
There is also a $31 billion dollar program for credit, VC, and R&D programs that we are working to learn more about, particularly after the American Rescue Plan provided $10 billion to the State Small Business Credit Initiative (SSBCI), which in itself was a six-fold increase over the initial SSBCI program. This is clearly a significant amount of capital for small business and early-stage startup investment. Given that many of the companies we hope will be created through the R&D and technology commercialization programs will not begin appearing for several years at the earliest, figuring out how this capital plugs in with SSBCI and other programs in the American Jobs Plan is important as large early losses to the government stemming from an influx of capital chasing too few deals could ultimately undermine support for the entire program.
Climate & Sustainability Technology
The plan envisions climate technology as a core industry of the future, where innovation can lead to better jobs deploying new products to drive down carbon emissions and reduce legacy pollution in underrepresented communities. While climate is integrated into almost every section of the President’s plan, programs that directly impact climate and sustainability technology include ten year extensions of the production and investment tax credits, new tax credits for storage and decarbonization of heavy industry, an expanded carbon capture and utilization tax credit with a refundability mechanism, $174 billion for electric vehicle deployment and infrastructure, $46 billion in government procurement of domestically-sourced clean energy products, $111 billion for water infrastructure upgrades and recycling programs, $100 billion in upgraded power infrastructure, and additional support for climate-related agriculture programs.
Similar to other industries in their infancies, climate technology startups are often off-limits to debt and more traditional small business financing mechanisms because of their significant risk profile, lack of collateral, lack of revenues, and need for large sums of capital with long investment horizons. In positive news, a record $23.7 billion dollars of venture capital investment was deployed into 1,255 climate technology companies last year. Given the importance of speed in getting the economy to carbon-neutral, the success of this wave of young companies will be a major factor in the success of the country’s effort to address the climate crisis.
At NVCA, we have convened VCs and climate-focused entrepreneurs from across the country to discuss a policy agenda that will focus the tremendous innovative power of the U.S. startup ecosystem on climate technologies, building off the successful momentum we are seeing today to turn this emerging industry into a significant component of the U.S. economy. Members of this group have identified a number of issues to support climate and sustainability technology startups that overlap with the American Jobs Plan. These include extending and expanding energy tax credits, creating a new energy storage tax credit, support for research, commercialization, and scale-up activities of climate and sustainability technologies, and programs to support decarbonization of agriculture.
Energy Tax Policy
We strongly support reforming energy tax credits to make startups eligible. The lack of refundability generally means startups cannot access the capital in their credits until they have become profitable, if ever. In other words, when startups are most in need of the support, the value of these credits is often out of reach. As noted above, because climate technology startups are focused on research and long-term growth activities, they do not generate profits in the short-term that the tax credits can offset. Even tax financing transactions, where energy tax credits are transferred to taxable investors, often do not work for startups because they are too small to be worth the transaction friction. Further, the Section 383 limitation on credit carryforwards can diminish the value of tax credits while startups are in their growth phases. Refundability of the credits would solve the issue and provide immediate liquidity to this subset of climate technology companies. Separately, we encourage policymakers to explore growth-company specific proposals that target startups across a range of technology area, including ideas such as the IGNITE American Innovation Act (more below).
Carbon capture technology is critical to any strategy seeking to meet global emissions reductions targets by 2050. But the minimum scale requirements in the carbon capture credit under Section 45Q also bars startups from accessing the value of the credit. The minimum scale requirements require facilities to capture tens of thousands of metric tons of carbon dioxide in order to be eligible, while companies in their early stages may only be able to capture less than one thousand metric tons. This creates a massive gulf between a technology coming out of a university or government lab and a fully-scaled product deployed widely in the commercial markets, depressing investment into carbon capture technology and the pace of innovation.
We also encourage policymakers to explore the various new technologies coming on-line to ensure that reform of 45Q appropriately encourages novel approaches and broad experimentation in carbon capture technology, as well as an increase in the value of the credit per ton of carbon captured for new innovative technologies, which would bring greater investment into carbon capture and transformation innovation.
We hope that the Advanced Research Projects Agency-Energy (ARPA-E) will be a key agency relied upon by Congress to lead research, commercialization, and scale support efforts for climate technologies. ARPA-E already runs several successful programs in this regard, including early stage-support programs and the ARPA-E SCALE-UP Program. Our members strongly support more resources for ARPA-E to accomplish their mission and hope to work closer with the agency to increase the pace of commercialization of climate and sustainability technology.
The American Jobs Plan calls for a new agency, the Advanced Research Projects Agency-Climate (ARPA-C), to fight the climate crisis. We are interested in learning more how this mission would be different than ARPA-E as it may not be worth setting up a new agency if providing more resources and authorities to ARPA-E could accomplish the same objective.
Mobility & Electric Vehicles
Mobility and Transportation accounts for more than half of climate technology investment. The ambitious investments into mobility and electric vehicles in the American Jobs Plan will drive broad adoption and generate greater innovation in the sector, giving the country an advantage in ensuring that the next generation of auto jobs will be created domestically. Further, it will produce activity that generates greater domestic manufacturing opportunities, including in semiconductors and batteries.
Noting that “workers on the factory floor work hand-in-hand with engineers and scientists to sharpen and maintain our competitive edge,” the plan proposes $300 billion for manufacturing and small business programs, including $50 billion for a Commerce Department office to support domestic production of critical goods, $50 billion for semiconductor manufacturing and research (similar to the CHIPS Act), $30 billion for critical medical R&D and manufacturing, and a further $52 billion for programs to use manufacturing to generate economic activity in rural areas and regions where the decline of coal is having an outsized impact.
Many climate technologies require significant manufacturing and supply chain activity. In addition, other startups backed by venture capital with manufacturing activity include biotechnology, medical devices, semiconductors and other hardware technologies. Policies that encourage manufacturing in the United States to bolster the nation’s economic competitiveness can attract the attention of young companies faced with a decision of where to locate production at the outset of their scale-up phases. But the American manufacturing system and supply chain are no longer the most competitive in the world. Significant state support in competitor nations, including land, facilities and capital, has led to manufacturing often being faster and more affordable in other jurisdictions. One consequence is most of the battery manufacturing infrastructure needed for the growth of renewable energy is now being built abroad, making us more vulnerable from an economic and security standpoint.
The United States still has world class manufacturing facilities and a talented workforce. And though the challenge is multi-faceted and evolving, strong leadership in supporting domestic manufacturing and a more comprehensive supply chain can leverage our existing strengths and reverse these trends.
Policymakers must also find ways to encourage development and deployment of technologies that mitigate the environmental impact of manufacturing on communities. Young companies backed by venture capital are working on these very solutions. Supporting their deployment will help policymakers avoid one of the most significant challenges that could be associated with reshoring manufacturing and drive this nascent industry forward.
There are few details about how the manufacturing support programs in the American Jobs Plan will work, so we’ll have to learn more before we can understand the impact on startups with either current manufacturing operations or plans for future activities.
Other Issues Under Consideration
The release of the American Jobs Plan is a high-level blueprint for one of the largest economic development packages ever considered in the United States Congress. As policymakers work to fill in the details, we urge them to consider the proposals below which would support the objectives of the package if included.
Startup Tax Policy
Given how much of the success of the American Jobs Plan relies on the successful transition of technology from lab to market, including startup-specific tax policies is a critical way to immediately begin making progress on supporting technology commercialization and scale. By offering immediate liquidity to growth companies in technology areas that are priorities of the plan, the below tax proposals could work as the lead programs while other programs are being implemented.
To better understand the potential impact of these proposals, policymakers could look to Canada’s Scientific Research and Experimental Development (SR&ED) Tax Credit Program to see an example of how tax policy can spur innovation and grow startup ecosystems. This program provides tax credits for novel research and development undertaken by private firms and has been a key component of the country’s pitch to locate investment and growth company operations in Canada.
IGNITE American Innovation Act
Including the IGNITE American Innovation Act in the American Jobs Plan will accelerate the innovative economic activity necessary to meet the goals of the package. IGNITE is focused on companies in their R&D and growth stages (pre-profit) that accumulate significant tax assets such as NOLs and R&D credits while they deploy equity investment primarily into R&D, building up a new workforce, and facility buildout. By allowing these companies to monetize up to $25 million of tax assets, IGNITE will provide immediate liquidity to our most innovative companies that must be used to finance R&D, payroll or facilities, all necessary economic activities that the American Jobs Plan seeks to encourage. In addition, many innovative climate technology companies are pre-profit and would be able to accelerate their activities if IGNITE is included. The IGNITE bill is one of the best ways that government and the private sector can work together to allow entrepreneurs to lead our post pandemic recovery, as we explain here.
The American Jobs Plan also invests $30 billion to protect Americans from future pandemics, including for research activity, testing and therapeutics. IGNITE would double the value of the R&D credit for pandemic research activities at growth companies. IGNITE’s R&D bonus would support pandemic plans by providing immediate liquidity and provide an incentive for more startups focused on pandemic preparedness technology.
American Innovation Act
The American Innovation Act would make it more attractive to invest in capital-intensive startups by allowing tax assets to flow through financing rounds and initial public offerings (IPOs) without limitation. Tax asset carryforward limitation rules were never meant to interfere with growth transactions to begin with, so this change would simply focus Sections 382 and 383 on their intended purpose of preventing loss trafficking (i.e. the concept of incumbent companies purchasing dying firms solely for the value of their tax assets). Financing rounds and IPOs are growth transactions where investors are showing confidence in the prospects of the company and thus should be outside the bounds of tax asset limitation rules. The American Jobs Plan needs more successful outcomes and greater investment into capital intensive startups in order to achieve its goals. The American Innovation Act would support both simply by returning tax rules more to their intended purpose.
American Innovation and Jobs Act
Similar to the energy tax credits mentioned above, research and development tax credits have limited impact for startups due to a lack of refundability, creating the anomaly that startups cannot access the value of the credit when they most need the support. A provision included in the PATH Act now allows companies less than five years old with less than $5 million in revenues to offset up to $250 thousand dollars in payroll taxes per year. The American Innovation and Jobs Act would increase these thresholds and improve the mechanics of the credit for startups.
The American Jobs Plan is a bold public effort to expand research and commercialization of technology to further societal goals. We fervently hope it will be successful and are actively engaged with policymakers to support the effort. Given the enormity and trajectory of the challenges facing our country, we understand its importance. But we must also be clear-eyed about the honest reality that we do not know whether these programs will be effective or not. Details matter, and new company formation must remain a priority through the drafting of legislative language and the implementation process, even as larger political constituencies battle over the shape of the plan.
The American Jobs Plan ultimately will be judged not by its size but by the amount of commercial activity that is generated, including new companies and public offerings, private sector jobs created and the regions and communities in which they are created, productivity gains and economic growth, and long-term trajectory of greenhouse gas emissions.
In a dream scenario, reinvigorated leadership will drive both greater research investment and new business activity across the country, including in historically underrepresented communities. A better skilled workforce will fill new jobs and found new companies, driving productivity gains that jumpstart economic growth and increase tax revenues. Examples of this could be more lifesaving cures and medical devices being developed in New Jersey, new carbon transformation companies spinning out of labs in West Virginia, or battery manufacturing facilities scaling up in Arizona.
But the nightmare scenario would be if this tremendous investment in innovation doesn’t ultimately generate further commercial activity. Instead of startups and IPOs, the resources are instead swept up by government contractors, SBIR mills, and science experiments which only produce further science experiments. And other policies that discourage long-term equity investment and entrepreneurship, such as taxing capital gains at ordinary income rates, are included and drive down venture capital and entrepreneurial participation, leaving us further behind than where we started. If new VC funds are not created, including in noncoastal regions and communities where the plan seeks to increase economic activity, fewer startups will get funding for R&D and growth activities, constraining our ability to harness innovation to solve these important issues.
We must remember that this is an opportunity to rebuild faith in government leadership with a strategy that has proven successful before. The concept of the modern venture capital industry was created in the United States, and for a long time we dominated the game. But the share of global venture capital investment into U.S. companies has dropped from 83 percent from as recently as 2004 to just 51 percent last year. In an increasingly competitive world fighting for leadership in the next generation of technology breakthroughs, the United States must prioritize greater scientific discovery and patient capital investment to maintain our leadership edge. Central to this plan is new company formation and growth.
Fortunately, we have as an asset the most vibrant startup ecosystem in the world, one that continues to produce a disproportionate amount of the world’s innovation. It has been nearly ten years since venture capitalist Marc Andreessen wrote a seminal op-ed explaining how “software is eating the world.” Since that op-ed, VC investment has increased from $28 billion to $166 billion, funding the growth of companies such as Zoom, Shipt, GitHub, and Coursera. The success of our digital economy was critical to sustaining operations and saving jobs throughout the broader economy and supported societal functions such as education and health care delivery. And millions of Americans are being vaccinated by a young growth company called Moderna, which raised VC financing numerous times throughout the decade to fund research and growth.
We stand ready to work together on a new decade of technological progress in society. We will continue to do our part to explain how the American Jobs Plan can effectively harness the tremendous power of our startup ecosystem to address the critical macro challenges of climate change, economic opportunity, and global competitiveness.
 Trends in Health Investments and Exits 2019 (Silicon Valley Bank), available at https://www.svb.com/globalassets/library/managedassets/pdfs/healthcare-report-2019-midyear.pdf
 Frontiers of Entrepreneurship (2020 Trends Report, University of North Carolina – Chapel Hill), available at https://frontiers.unc.edu/wp-content/uploads/2020/01/2020-TrendsInEntrepreneurshipReport.pdf.
 Initial Public Offerings: Updated Statistics (Professor Jay Ritter, University of Florida), available at https://site.warrington.ufl.edu/ritter/files/IPO-Statistics.pdf.
Decarbonizing the U.S. Economy in a Way that’s Fast and Fair (National Academies of Science, Engineering and Medicine), available at https://www.nationalacademies.org/news/2021/03/decarbonizing-the-u-s-economy-in-a-way-thats-fast-and-fair
 The Science-Based Case for Carbon Capture (Third Way), available at https://www.thirdway.org/memo/the-science-based-case-for-ccus
 The State of Climate Tech 2020 (pwc), available at https://www.pwc.com/gx/en/services/sustainability/assets/pwc-the-state-of-climate-tech-2020.pdf
 NVCA 2021 Yearbook, Data Provided by Pitchbook, available at https://nvca.org/wp-content/uploads/2021/03/NVCA-2021-Yearbook.pdf.
 Pitchbook-NVCA Venture Monitor Q1 2021, available at https://pitchbook.com/news/reports/q1-2021-pitchbook-nvca-venture-monitor