Open Letter To President Obama on Innovation Policy

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.

Jason Mendelson is a managing director at Foundry Group and recovering lawyer. He blogs at www.jasonmendelson.com.

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15 Comments

  • Good, constructive arguments Jason….lets hope that they resonate on the right sets of ears in D.C. Of interest to me is not only the GDP figure expressed in terms of a % of total venture backed REV, which is very impressive in its own right, but also the total economic impact that venture back organizations have on their economy, both far and near, beyond just the REV metric, such as procurement, labor, etc…

    Way to represent, nicely done.

  • Very well put. I would think this should be sent to the Senate Finance Committee members as well.

  • 1. The reality of the dysfunctional politico-administrative system in this country (like in the vast majority of others) is that there is no chance in hell this letter will be read by Obama or any of decision-makers or influencers around him. Unless, of course, you are willing to cough up a few million to K-street lobbyists, and thus contribute to the very dysfunction that prevents you to be heard and listened to right now.

    2. There are solutions from this Catch 22 situation, but, being busy writing futile letters, most pleaders won’t care to hear them. Thus, we are firmly stuck in the situation described in the point (1) above. Congratulations.

  • Couldn’t disagree more Jason.

    The systemic risk to innovation is the artificial arbitration stemming from a cartel of VCs, that is why the venture business is such a bad performer. It subsequently attracts only entrepreneurs that subject to that artificial arbitration, better known as mediocrity. Innovation today is a sub-prime business because of it.

    To solve that we need regulation that enforces transparency, so that the marriage between the assets of the LP (money) and the assets of the entrepreneur (innovation) creates a true meritocracy. You are a matchmaker in that process, and either you produce a financially rewarding relationship or not.

    And because you (collectively, don’t know about your performance) haven’t, the mounting dissatisfaction from experienced entrepreneurs, the mounting false negatives, a public market that doesn’t trust your stock etc are an indication that your dating service isn’t working.

    Let’s put transparency in place first, so we can have real valuable debate as to how we can enhance innovation.

    Best,

    Georges

  • “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…”

    All lawsuits are meaningful or no one would sue. You apparently have no first hand knowledge on patent suits, or at least not as a patentee.

    Patent reform is a fraud on America…
    Please see http://truereform.piausa.org/ for a different/opposing view on patent reform.

  • Well done Jason.
    Agree completely.
    Thank you.
    Jon

  • Another OPEN LETTER TO PRESIDENT OBAMA:

    re: Disregarding Blatant Proof of Wells Fargo’s Egregious Deceptive Practices Could Result In A Worse-Than-Madoff Situation

    Mr. President

    PLEASE launch probes into self-evident false IRS form 1099-A’s connected with foreclosures.

    A mere look at Wells Fargo’s false 1099-A’s will expose various White Collar real estate & foreclosure fraud (carried out for years)–likely, another S&L mess! Further, the most recent controversy about former Wells Fargo (WF) senior vice president, Cheronda Guyton’s use of the Miami home which the owners lost as a result of Bernie Madoff, is actually an unwitting exposition of deceits associated with foreclosure and repossessions. Moreover, Wells Fargo’s internal investigation into that Miami matter has glaring appearances of coverup –particularly because WF implausibly announced Ms. Guyton acted solely when it fired only her.

    The point I want to make is that non-legal foreclosures filed DELIBERATELY in courtrooms are for reasons such as: filing false Internal Revenue form 1099-A’s for tax advantages; repeated property flipping (which leads to blighted neighborhoods); and Bankruptcy Court false motions to “Lift Stay” for purposes of achieving SIMULATED AUCTIONS. As such, loan modification is not in the interest of these sort of lenders. Ongoing news reports of court judges who dismiss foreclosure cases because of no proof of owning notes is not always a coincidence, or mistake.

    Deliberately false foreclosures often name defunct mortgage companies or companies which no longer hold the notes, and contain illegally affixed fees in excess of “Acceleration Clauses,” which makes it even harder for people to re-pay arrears. If property owners sue for “Unfair Debt Collection Practices,” attorneys make more even $$$ through protracted litigations –which Wall Street Investors often incur the tab. In some instances, through use of a false mortgage holder’s name, the debt collection lawyer actually is the disguised foreclosing plaintiff who wounds up with ownership of foreclosed property and flips it!

    The reality is that SCORES of foreclosure cases -including some of Wells Fargo’s have been thrown out of court when lenders (via collection lawyers) file foreclosure or Bankruptcy court proceedings without proof of being the proper party in interest. Accordingly, as it pertains to the minuscule information supplied by WF after embarrassment by its former vice president squatting and partying in the Miami home; and in light of irrefutable foreclosure frauds, here are some blatant questions about foreclosures, as well as that home squatting incident for which Wells Fargo dismissed our intelligent ability to contemplate:

    1. Undeniably, the Elin property had not yet been put on the market for public sale. How or why then, did ––according Ms. Guyton’s public statement– Collin Equities wind up owning that Miami home after the Elins signed it property over to Wells Fargo?

    2. Could it be that (in like manner as Wells Fargo does here in Louisiana) Collin Equities was the straw buyer for the Elins property, or did some sort of “simulated sale” occur whereby the property deed became (unlawfully) CONVEYED to Collin?

    3. Considering Guyton’s brass to use that Miami home, and her reference to Collin Equities, could there have been kickbacks / quid pro quo activity between them or any other firm of which Guyton oversaw property ownership transfers?

    4. Since Ms. Guyton was “responsible for commercial foreclosed properties,” wouldn’t it be the role of the person who is in charge of Residential foreclosed properties to permit Guyton to have access to the Elin property? On the other hand, if the property is under Collin Equities ownership, did Collin permit Guyton’s personal use of that home?

    5. If Guyton had no authority over residences such as the Elin home, but Guyton’s authority was commercial property, does that not demonstrate that Wells Fargo’s investigation was not truthful; and that persons in the residential properties department were actually tangled with Guyton’s actions?

    6. What percentage of reasonable thinking people can honestly believe that WF employees do not make personal use of other repossessed properties as long as no exposure and public outrage occurs?

    7. How many people are unlawfully homeless, unlawfully evicted due to null foreclosure filings, or due to Bankruptcy Court “Lift Stay” motions that have been filed in the name of a lender which does not own the note, or a defunct lender?

    8. If courtroom judges simply give collection attorneys carte blanche approval to seize and sell [defaulted] property without judges bothering to determine whether the named mortgage company has lawful right to the property, how probable is it for an unscrupulous lawyer to use any company’s name to seize someone’s home?

    9. How many lawyers (via straw buyers) wind up with those distressed properties until they flip them!?

    10. When mortgage companies receive form 1099-A tax advantages from the Internal Revenue; and when mortgage companies continually flip property while at the same time gain negotiable security for the same property, what incentive is there for such lenders to bother about blighted neighborhoods?

    11. Lastly, aside from the gust of foreclosures that were dismissed from courts, what untold numbers of people who lack legal knowledge or lack means to pay for legal representation have lost or will loose their homes unlawfully?

    The seriousness of the above information is more than ample reasons why I respectfully ask you, Mr. President, to compel Congress to conduct a massive investigation of Wells Fargo (which will shed much light on many aspects of lender frauds), and refrain from blindly accepting Wells Fargo’s own spin of the truth. Please feel free to make use of the facts, court pleadings, transcripts, and other prima facie evidence posted on my website. Moreover, there is more available evidence I have not made public of which, I will be pleased to provide when my safety is certain. Here are 2 links from my website:

    http://www.lawgrace.org/2008/08/08/my-august-8-2008-statement-to-the-louisiana-secretary-of-state-office-of-financial-institutions-concerning-wells-fargo-irs-and-mortgage-frauds-sham-foreclosures-and-judicial-collusion-and-national-app/

    http://www.lawgrace.org/2008/09/14/lehman-brothers%E2%80%99-mortgage-troubles-nationally-evidence-of-foreclosure-fraud-deception-and-conspiracy-with-wells-fargo-deceptive-judicial-filings/

    Barbara Ann Jackson
    Law & Grace, Inc

  • Jason: if you assume that VC funded companies mainly burn budgets you are right on the spot with desire to keep exchange rate artificially high. If however, we decide that VC funded companies must produce new technologies, stay competitive and conquer the world market then your demand is manna for all overseas tech companies (such as mine). We will hire cheaper labor. We will sell less expensive goods. We will force your portfolio companies off the market. Yess!!! Go for it! God bless Obama and Mendelson that paid for our competitiveness.

    And never ever ever come to me asking to invest in my business. I want a smart VC on board.

  • We currently have a surplus of qualified computer programmers. Companies like to hire H-1Bs because they will work for less money and accept bad working conditions. Dr. Norman Matloff testified on this issue to the U.S. House Judiciary Committee Subcommittee on Immigration on April 21, 1998. Nowadays you would never know it by the way our politicians and reporters are talking. You can find Dr. Norman Matloff’f writings by doing an internet search on his name. Better yet do a search on “Dr. Norman Matloff Testimony to the U.S. House Judiciary Committee Subcommittee on Immigration,” Also, search for “Dr. Norman Matloff Fixing Our Badly Broken H-1B Visa and Employer-Sponsored Green Card Programs”

  • The lack of technical talent that the author refers in his letter: “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” is a myth. There is an oversupply of computer programmers in the US. The myth was invented by the US corporations and executives trying to reduce labor costs and import cheap labor into the US. It has benefited countries like India and China, as well as thickened US executives’ wallets, but has weakened the American Workforce, contrary to what the author states in the letter.

    The letter is clearly designed to promote the interests of the Corporate America. I think we already have too much of that in US.

  • awesome info about credit

  • Great job done! You have addressed a very core issue. You have actually raised the voice of common Americans.

  • 1. The reality of the dysfunctional politico-administrative system in this country (like in the vast majority of others) is that there is no chance in hell this letter will be read by Obama or any of decision-makers or influencers around him. Unless, of course, you are willing to cough up a few million to K-street lobbyists, and thus contribute to the very dysfunction that prevents you to be heard and listened to right now.

    2. There are solutions from this Catch 22 situation, but, being busy writing futile letters, most pleaders won’t care to hear them. Thus, we are firmly stuck in the situation described in the point (1) above. Congratulations.

  • All lawsuits are meaningful or no one would sue. You apparently have no first hand knowledge on patent suits, or at least not as a patented.

  • Fantastic edification. Thanks for achievement so thorough! I’ve printed this go-ahead my mission auto polish.

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