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 (