Congress May Be Finally Listening! Hope for Our Startup Ecosystem

For more than a year, I’ve been writing that the U.S. financial ecosystem for venture capital-backed startups is crumbling and placing the U.S economy in jeopardy at a time when countries such as China and India are producing far more sophisticated startups than ever. For so long, it seemed that these concerns fell on deaf ears.

I’m heartened to say that this message, at long last, may finally be getting heard in Congress.

I met last week with a small group of venture capitalists and 8 members of the New Democratic Coalition – members of the House of Representatives–including Joe Crowley (D-N.Y.); Betsy Markey, (D-CO); Jared Polis (D-CO); and Laura Richardson (D-CA)—all of whom have a stated commitment to innovation and entrepreneurship. We met on Silicon Valley’s Sand Hill Road in a meeting organized by Silicon Valley Bank.

The members of the House made it understood that they appreciate the problem and take it seriously. I was elated to hear this, and I was also pleasantly surprised to find that a number of them have roots in the “real world” as former entrepreneurs, corporate executives and small business owners. Perhaps it’s not an accident that “walking the talk” as a politician is a lot easier if you have actually “walked the talk” in the real world.

All of this is a significant step in the right direction because Capitol Hill didn’t seem to previously grasp the gravity of the issue.

Among our growing challenges, $10 billion in venture capital was invested in China last year, not that much less than the $13 billion invested in the United States. A decade ago, China attracted less than $1 billion in venture capital. Capital – and talent – are highly mobile assets that flow to the markets that best reward them, and we’ve obviously begun losing this battle.

Another significant problem is that the U.S. remains critically dependent upon foreign-born technological talent, which continues to be educated here but increasingly is returning home to pursue careers. We must implement policies that effectively pin “Green Cards” to advanced engineering and science degrees from our leading universities.

For the record, I’m a strong fiscal conservative with deeply held conviction as a venture capitalist and former entrepreneur that a healthy and properly functioning free enterprise system that embraces innovation is the key to reinventing the US economy. This is the way to create the millions of differentiated new jobs that our nation requires to not only meet its financial obligations, but to sustain and improve our standard of living.

The congressmen and women chose to schedule a visit to Silicon Valley during their summer break to discuss what is working in our economy and what is not. This time, they acknowledged that innovation is the key to the viability and growth of the U.S. economy and that Silicon Valley has been the heart of American innovation for almost three decades in America. In addition to what I noted above, here are other points raised during our discussion:

  • Innovation inherently involves risk. Prudent risk, the type undertaken by venture capitalists and the entrepreneurs they back, depends on a profitable relationship between risk and reward. In America today, we appear to be increasing risk via ever-tougher regulations and a restrictive immigration policy while reducing rewards by increasing taxes. We need to adopt policies that encourage, not discourage, long-term and prudent investment in innovation as the engine of job creation.
  • Large U.S. corporations are reducing their investment in R&D in favor of increased acquisition of successful innovation from the venture capital/startup ecosystem. Problems in this ecosystem compound the threat to the U.S. economy by limiting access to critical innovation for large companies.
  • Research is the “seed corn” for innovation in the U.S. economy. With major corporations and universities reducing their R&D investments in favor of investments generating more immediate returns, we have embarked on a long term secular decline that will negatively impact our ability to innovate.

The medical device market provided a poignant illustration of the challenges facing innovation in America. An industry where the US is still the world leader and a major exporter is under assault by a combination of regulatory challenges and penalizing taxes. Where it takes up to 10 years to obtain regulatory approval for an innovative device in the US and up to 5 years to work through the process of insurance reimbursement – these same processes take half the time in other developed markets. The net effect – formerly US-based innovation and jobs are leaving for more attractive and economically viable markets, including Europe.

While the discussion could be perceived as a shopping list for government initiatives, one congresswomen correctly noted that government resources are likely to be severely limited in today’s economic environment. Government cannot spend enough to address the full range of our structural challenges. However, the implementation of policies designed to encourage and reward innovation can attract the resources – on a global basis – necessary to fuel our engine of innovation. Enablement and leverage should be the watch words of economic policy making in Washington. Unleashed, the efficiency, velocity and ability to scale of the entrepreneurial ecosystem will outperform even the best intentioned government programs and generate far more revenue for the government. With proper incentives, government policy can re-encourage the healthy flow of capital and talent necessary to resuscitate our innovation economy. In the interim, government can ensure that future “seed corn” is available through targeted investments in education, research and DARPA–like initiatives.

At the end of our discussion, what was crystal clear is that such changes are critical to the viability of the U.S. economy and our standard of living. It is in the enlightened self interest of U.S. society to put aside the politics and finger-pointing of populism to work together to find the common ground necessary to rebuild our economy. It won’t be easy. But this important meeting between venture capitalists and congressional representatives bolsters my optimism that if we reject the politics of division and focus on economic truths, we can successfully cross the chasm and put America back on the right track to economic growth and prosperity.

Bob Ackerman is the founder and managing director of Allegis Capital (www.allegiscapital.com), a seed and early-stage venture firm headquartered in Palo Alto, California. Ackerman has worked with more than 50 corporate investment partners over the past 20 years as both a venture capitalist and a startup executive. Read his past peHUB posts here