How to shrink the innovation pipeline

December 20, 2009

My op-ed about how one of the tax increases being considered by Congress will hurt business growth in Florida has just appeared in the Tampa Tribune.

The op-ed explains how the venture capital industry in Florida has played a critical role in job creation throughout the state, and how Congress’ plans will alter the balance of risk and reward involved in starting new companies – for both the entrepreneur and the VC firms who support them.  If the potential reward of starting a company is reduced, fewer will get started, and since young companies create most or all of the new jobs in our economy, that will mean fewer jobs.

Here’s an excerpt from “Tax change would cloud Florida recovery“, published December 20, 2009:

Venture capital firms have invested more than half a billion dollars into private, early-stage growth companies in our state since 2005…  Even more encouraging, Florida’s venture activity stretches across the state from Jacksonville to Tampa to Orlando to Palm Beach. This decentralization of growth equity capital, which is uncommon in other states, means that the venture industry’s continued growth will create more jobs statewide, rather than in only one or two regions…

HR 4213 would increase taxes up to 133 percent on venture capitalists by reclassifying their carried interest (the profits they share in if they help build successful companies) from capital gains to ordinary income…  [This] will remove a major element of [the potential] reward, and these diminished incentives will particularly discourage the formation of the small venture capital funds that invest in early stage companies.

Those venture firms that do continue will likely seek shorter investment horizons and shift investments to larger, more established companies to help mitigate the risk of investment losses and rebalance the risk-reward ratio. That shift ultimately shrinks the innovation pipeline, because many promising early-stage companies simply won’t get funded. The result is fewer jobs created and fewer technological advances to spur new growth industries. This would be disastrous for Florida, which desperately needs these types of companies to broaden its economic base and be positioned for future growth.

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