Systemic Risk to Innovation in America: The Federal Government

There is a saying that the road to hell is paved with good intentions. If that’s the case, the federal government’s current assault on innovation in America must signal Washington’s determined effort to seek canonization for its technocrats.

At a time when our economy is in desperate need of re-invention, the federal government is putting American innovation at enormous systemic risk. Sure, rhetoric calling for innovation is common in many speeches about re-invigorating our economy. Unfortunately, through a series of policy decisions – decisions either already enacted or likely to be enacted – the United States is rapidly becoming a much less attractive host for the twin pillars of innovation — talent and capital.

These pillars are the most portable assets in the world, moving to whatever environment embraces and rewards them. Increasingly, these assets are leaving the United States to places like India and China. Last year, $8 billion in venture capital was invested abroad, the most ever. Increasingly, bright and highly energetic Indian and Chinese entrepreneurs educated at top-flight American universities are gaining experience at U.S. startups and then returning home to start competing companies or companies they could not create without the time they spent in the United States.

This is totally unacceptable. 

For decades, the U.S. economy was powered by these talented and hard-working entrepreneurs, native-born as well as worldwide emigrants, who sparked much of the pursuit of innovation with the support of risk capital. We enjoyed an environment that fostered entrepreneurial growth by attracting and rewarding talent and its financiers. This contributed significantly to U.S. economic muscle and global competitiveness and was the envy of developed and developing economies around the world.

This scenario has frayed badly, largely because the federal government has imposed too many regulatory burdens on young growth companies. This must change. This is not to suggest the elimination of regulation, but rather thoughtful regulation, which recognizes that rewards are essential to encouraging entrepreneurs and their investors to take risks. Specifically, let’s undo recent changes to the tax treatment of stock options and fully restore stock option incentives for startups. Ambitious people join startups for a chance to help build something from the ground up and reap substantial equity from their company if they are successful. Unlike corporate employees, they are motivated by stock, not salaries and bonuses, and it’s crucial that we re-engage them to maximize their odds of success. This is risk/reward in its purest form.

Let’s also amend Sarbanes-Oxley, which burdens small entrepreneurial businesses with the same regulatory and statutory burdens that are applied to multi-billion-dollar enterprises, costing them millions of dollars annually in additional and unnecessary fees they cannot afford. Currently, there is scant regard for the ramifications of this policy, creating powerful disincentives for those that would otherwise be tempted to take their companies public and continue to support job growth.

The federal government should also reconsider the ridiculous notion of putting venture capital firms under the aegis of the Securities and Exchange Commission and reconsider the faulty wisdom of a new proactive strategy to pick winners and losers in our economy. It has committed billions of dollars to legacy industries with a clearly demonstrated track record of being uncompetitive. These actions amount to a tax on the economy and an additional systemic risk for emerging startup companies.

Perhaps most important, let’s restore the “Entrepreneurs Wanted” sign on our national immigration policy, recognizing the value that gifted immigrants bring to our shores. For years, the world’s best and brightest came to the United States and became key players in our startup communities. Those communities, in turn, created jobs and wealth and contributed to our tax base.

Today, unfortunately, our immigration policy amounts to this: “Now that you have your PhD, please go home”. And this is exactly what foreign-born entrepreneurs are doing, attracting startup capital away from the United States and moving the potential to create new industries – and jobs – to other countries.

If we as a nation are to prosper again, it will be through the creativity, hard work and entrepreneurial talents of Americans, coupled with the creation of a more hospitable domestic environment for ambitious and technologically savvy immigrants. We have a deeply vested self-interest in creating an environment that attracts rewards and retains them, as well as the venture capital firms that help make it possible for them to build strong new companies.

There will always be significant innovation in the world, and it will spark substantial job creation. The question is this: “Where will it happen?” We have a right to expect our elected leaders and bureaucrats to grasp the challenge and do what is in the best interests of America. So far, their actions are less than impressive and fall far short of what Americans deserve. This must change once and for all.

Bob Ackerman is founder and managing director of venture capital firm Allegis Capital (www.allegiscapital.com)

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12 Comments

  • You’re kidding right? Otherwise how to explain the failure to mention the small fact that capital flows to EMERGING markets when opportunity presents itself. Over the past few years at Stanford I’ve spoken with many students/entrepreneurs who are heading east because they see massive opportunity to start businesses in their home countries of India and China as those economies evolve and allow this activity for the first time. I have yet to meet a computer scientist proclaiming “Sarbox is onerous, I’m moving home”. To a large extent these students have come here to learn, thousands of miles from their homes and families, always with the intent of going home to start their businesses. Regulation of venture funds may have a downside, but associating such a proposal with the acceleration of opportunities in China is downright silly.

  • It’s time for an Innovation Policy. I sincerely hope that with the start of the new Congress in 2010 that President Obama’s talented staff will send up a bill entitled “A Bill to Promote a US Innovation Economy” . You’ve outlined the major elements and now we need the President to use his bully pulpit and make this happen.

  • Bob is quite a bit out of touch with reality. Every time we go through one of these downturns some, like him, look for scapegoats. Part of globalization is that there will be opportunities overseas and people will migrate to those places, as people had been migrating to the US to fulfill their dreams. SarBox is irrelevant, as JH said, no entrepreneur thinks about SarBox when he/she starts a dram. I’m sure Bob blames Allegis’ dismal performance on the gov’t.

  • Thoughtful regulation is an oxymoron. As you point out at the beginning, good intentions likely prevail. But those good intentions get expropriated by bureaucrats, congressionsal staffs and the “king’s court” mindset that oozes through the Beltway. Wrapped up with nece words and prety bows of concern, politicians invariably seek to increase their scope of influence and breadth of power. Like all large unwieldy institiution and enterprises, their continued expansion for the sake of it becomes the raison d’etre in and of itself. It is this fundamental recognition of the corrupting nature of power that drove the structure and intent of the Constituition.

    We need to hit the reset button if we wish to sustain the entreprenurship and vitality that makes this place so cool. All that the current tenants have done is push the whole situation beyond the level of tolerance. I get such a kick out of those who think a bill/law/agency/set of rules… is required to foster innovation. You have to be kidding.

  • Excellent article Bob. In my own experience the tone of discussion and optimism in entrepreneurial circles has tempered in recent years, largely for many of the reasons you highlight in the article. Through the late 80s, early 90′s, the bubble, and even after the bubble entrepreneurial circles thrived on stories of success, even if they grew few and far between at times. Even in the destruction just after the bubble burst optimism and visions of building from the ashes sprang up quickly. Today, discussions in those circles have lost that preponderance of optimism and are more about how one might get government funding, how to compete with government funded competitors, why IPOs aren’t really a great way to exit, if the VC model is dead for certain industries, etc. I know far too many “former entrepreneurs” who can no longer resolve the risk/reward equation and that can’t bode well. You make some great recommendations. Lets hope this is a pendulum that has reached amplitude.

  • With respect to JH, just because the students at Stanford do not know that Sarbox is part of what is killing innovation opportunities, does not mean that Sabox has not had a significant effect on their opportunities. For more on the detrimental effect of Sarbox see http://hallingblog.com/2009/06/17/sarbanes-oxley-–-the-medicine-is-worse-than-the-disease-part-1-background/

    Bob, I think you also need to include the detrimental effects to patent law that have been enacted over the last decade. Countries with strong patent laws are the most innovative and have the greatest technology diffusion. The US patent system has been significantly weakened over the last decade and there proposals to further marginalize the patent system.

    My analysis of the problems with technology start-up market are very similar to yours see http://hallingblog.com/2009/05/26/innovation-regulatory-road-kill/

  • In response to JH –

    Of course capital (and talent) flow to where the greatest opportunities can be found – you are making my point. For decades, those opportunities where perceived to be primarily in the US. Today, the playing field has been leveled and there are opportunities in emerging markets that have become increasing attractive and compelling. Against this backdrop however, the US is becoming less attractive for talent and capital – in no small measure to the cumulative impact of some of the factors that I have cited. Any one of the points that I have cited – in and of itself – is not the sole cause of the problem I am addressing. It is the combinatorial effect. And this comes at a time when we in the US need to raise our game – becoming more attractive to entrepreneurs – as opposed to raising barriers to success.

    As for engineers and scientists returning to the country of their birth – perhaps my perspective is shaped by my 30 years in the technology business. For decades the best and brightest left their homes – came to the US – earned their degrees – and stayed here to build their careers and reputations. They did this because this is where the opportunities were greatest (see my comments above). Along the way they became US citizens, raised their children, and contributed to our intellectual and financial success.

    As we push to reinvent our economy, we have a vested interest in attracting the best and brightest from around the world to contribute to our success. This is the story of America’s innovative success in the past and is essential to our future prospects.

  • Johnson –

    No scapegoats here Johnson. The facts are quite clear – there is a tectonic shift underway in where and how technology-based innovation is taking place in the world. For several decades, the US possessed a relatively unique environment that integrated world-class Universities, a culture that embraced the risk inherent in innovation and was comfortable with rewarding success, availability of risk capital, financial transparency, respect for intellectual property and a large homogenous market. This combination attracted the best and brightest from around the world – it was the place to be for Entrepreneurs. Our advantage is now diminished as other markets have become more attractive and we have raised the barriers to success here at home. All simple facts. The debate is “what do we do about it”. “Nothing” does not seem to be a reasonable option – at least to this entrepreneur.

    As for venture capital – there is a transition underway. Successful venture firms will evolve and adapt to changes in the marketplace – just as any other business is required to do. In the case of Allegis – we made a number of adjustments coming out of the dot com bust and are quite comfortable with the markets direction. $2.4B in exits over the past 4 years for us – demonstrating that entrepreneurs and venture firms can succeed in today’s environment – if they are thoughtful and responsive. It is those that ignore the changes that are afoot that will be most challenged.

  • What if America has just been lucky? While everyone wlse was fighting, it enjoyed a long peaceful run. Now peace has broken out everywhere.

    The USA wasn’t always the richest and greatest, you know.

    So why should it remain so?

  • Sam -

    35 years of luck would be a pretty good thing but I don’t think you can chalk it all up to luck. Many of the best and brighest who emigrated to the US did not come from war torn areas – Europe, India, China. They came because of an environment that embreaced innovation and gave them the tools, resources and attitudes necessary to try – and hopefully succeed.

    As the US not having always been the richest and greatest – you are absolutely right. That said, I think we need to understand what has contributed to our success and how can we sustain and improve on the vital aspects. “Oh Well” doesn’t seem like a viable strategy if we as a nation want to remain at the forefront of innovation..

  • Go to 31:40 in this G-Video:

    In reference to Tsun Tzu’s Art of War, G. Ed Griffin says, “If he neither knows himself , nor his opponent, he will suffer defeat in virtually every better… we certainly do not know ourselves, and our opponent, and let’s talk about strategy…” which pretty much sums up your views, although his speech for the rest of the clip on “collectivism” is quite off tangent (the rest is boring, some lesson on history of marxism, and I don’t get it).

    http://video.google.com/videoplay?docid=6015291679758430958

    But add him to your megaphone, and you have FREEDOM ADVOCACY for your callings on Innovation in this country. Keep up the good fight!

  • Add Dov Charney to this context and you’ve got a recipe for sprouting startups, coast to coast!
    I appreciate your thoughts, Bob. Only if Obama and the Czars of every other industry listens, oh well!

    http://www.shoutle.com/dreamshout.html

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