Dear Mr. President,
I feel compelled to write you a letter to express my thoughts and frustrations regarding innovation policy in our country. While I have modest expectations that you’ll actually read this, perhaps someone in your inner circle will and represent my thoughts.
First of all, I hope that you realize how very fortunate we are as a country to have an innovation and entrepreneurial engine at the heart of our economy. It is part of our culture and is a pervasive mind set that is the envy of the rest of the world. Furthermore, it was not created, nor is it (currently) regulated by the government. If you look at the venture capital industry as a proxy (since many innovative startup companies need some financial backing to prosper), one can see how important this ecosystem is. The latest report from the National Venture Capital Association called "Venture Impact" talks about the important of venture-backed companies in the macro U.S. economy. Among the highlights:
- Venture-backed companies employed more than 12.1 million Americans in 2008;
- Venture-backed revenues were $2.9 trillion in 2008, equating to 21 percent of US GDP; and
- Venture backed companies grew jobs and revenues faster than their non-venture counterparts from 2006-2008.
Best of all, none of this costs the government anything, nor does it require any bailouts. The jobs created in this country are real, high paying and reflect the newest opportunities in the world economy and aren’t shipped overseas. One would think that you would want to do everything in your power to encourage growth in the innovation sector and make sure current proposals don’t unnecessarily negatively impact this gift that our economy has been given. So I propose to you some things that your administration should and should not do.
What your administration should do:
1. Reform immigration policy. My partner Brad Feld wrote a post last week on the "Startup Visa Movement," based upon the earlier writings of Paul Graham. The basic premise is this: we should openly encourage and enable people from different countries to move to the United States, start companies and create jobs. Clearly, there would need to be some limitations and thresholds to ensure that the companies created were "real," but I am frustrated by how many foreign founders are being forced home due to our overly-restrictive policies. I’ve seen two companies this year in Boulder, Colorado, that would have received U.S. venture funding and stayed here, but won’t be able to. There are many of such cases across the country.
Also, we still don’t have a handle on the H1-B issue. Every year, our U.S.-based investments struggle to hire all of of the computer science talent that they need and their growth is stunted. It’s time to de-politicize the immigration debate and concentrate on ways that we can make this country’s workforce even stronger.
2. Enact real patent reform. There are many points of view out there – from abolishing some types of patents, to materially revising the way jurisdiction is handled in patent cases, but, regardless, the loud chorus from the innovation economy is that the patent process is not working. Patents are too costly to obtain, are too uncertain in the rights they grant when obtained and then all too often, end up with meaningless lawsuits that amount to nothing more than a tax on innovation in favor of lawyers. We need to clearly define what is patentable and what should not and re-architect the system to deal with the realities of a connected world.
3. Push for FASB to "figure out" valuation methodologies. Over the past few years, venture funds have had to "mark to market" their investments. This "FAS 157" (or Topic 820, as it’s been recently renamed), has placed a tremendous burden on venture firm managers and their investors. In short, not even the accountants can tell us how to accurately value our portfolios and there is tremendous cost and uncertainty about the asset class because of it. I’ve written about the issues, here, in detail.
4. Get a handle on Sarbanes Oxley / help with opening of the capital markets. The last financial meltdown earlier this decade brought about increased regulations through Sarbanes Oxley. While some credit the act for deterring and lessening fraud in public companies, it’s easy when almost no companies are going public. In my opinion, the frauds perpetrated in the most flashy cases (Enron, Worldcom, etc.) were the work of bad actors and lazy accountants. They were not systemic in the industry and even the rules today can be easily circumvented by two unscrupulous executives with a criminal agenda.
What the effect has been is to stop the flow of companies going public which has greatly hurt venture capital returns and has driven venture firm investors (limited partners) out of the market. This has severally constrained the amount of capital able to fund new and innovative businesses. I think a complete review of all of these rules needs to be undertaken, as I’ve had many conversations with entrepreneurs who don’t even want to go public due to all the red tape involved with Sarbox.
The secondary effect has been a rush to other foreign markets, whether they are in London, China or India and thus the U.S. is losing its market share of new offeringings and further weakening our financial industry.
What your administration should NOT do:
1. Regulate the Venture Capital Industry. We aren’t hedge funds. Nothing we do increases "systemic risk" in the economy. In fact, the entire VC industry invested a total last year of $28 billion dollars (not an atypical year). That sum is less than half the amount that Bear Stearns was borrowing every night before its collapse. Regulating us, in the best case, foists additional costs upon us that smaller, early-stage VCs can’t afford and worst case, materially and negatively impacts the VC industry’s ability to fund new companies. Lastly, it should be noted that investors in VC funds are of the highest sophistication levels. This isn’t the case of protecting the average investor. The WSJ recently had a great opinion piece supporting this position.
2. Increase taxes, especially capital gain taxes. There is quite a bit of research that shows correlations between low capital gains taxes and high GDP growth rates. I won’t pretend to have a PhD in economics (although I did manage to get an undergraduate degree from the University of Michigan in it), but many of the entrepreneurs I speak to say they specifically take the outsized risk of starting a business because of the potential financial gains.
Additionally, changing the characterization of venture capitalist’s carry is inconsistent with how VCs invest – long term with high risk of capital loss. I also have a hard time delineating between founder shares and VC carry and wonder if VC carry is changed will founder shares be next? The reason behind capital gains treatment was to incentivize long term investing and also to help make up losses from risky asset classes that benefit our society in the long run. This is precisely what VCs do.
3. Engage in activities that will devalue the dollar. One thing to keep in mind is that with some of the current issues detailed above, it is harder and harder for VCs to raise money to fund startups. Small businesses must do more with less. If the dollar becomes devalued, these companies would effectively have less money to spend on hiring and other activities to make them successful in the global marketplace.
Again, Mr. President, I urge you to consider how your policy makers are taking into account one of the most important drivers of this country’s economic future. This is not about venture capitalists: it is about the ecosystem of innovation which venture capitalists spend their lives funding. We’ve been blessed in this country with a large population of entrepreneurs and we need to foster this culture so that we can maintain our competitiveness as the greatest economy in the world. To that goal, the government can largely stand out of the way and help on the margins to tweak some things that will benefit all.
I humbly ask for your consideration.