The NVCA’s letter to the President-elect

December 4, 2016

The National Venture Capital Association (NVCA) has sent a letter to President-elect Donald Trump outlining how the entrepreneurial ecosystem is the key to creating new jobs and economic opportunity for Americans who feel left behind by the modern economy.

startup_trendsThe letter outlines an agenda crucial for supporting entrepreneurship and building a strong economy in all areas of the country, including: a tax policy that encourages new company formation; making capital markets work for small-cap companies; encouraging talented immigrants to build or work at American startups; making life-saving medical innovation a reality; increasing basic research investment; and other key policies that would bolster the entrepreneurial ecosystem and foster new company creation.

The NVCA’s letter opens with a brief paean to entrepreneurship:

Entrepreneurship is the key to expanded economic opportunity in the United States.  From FedEx to Genentech, entrepreneurs have fueled growth and expanded opportunity across the American economy.  America’s venture capitalists have been hard at work supporting these startups with tremendous growth potential in areas like personalized medicine, next-generation computing, 3D printing, and synthetic biology.

Young companies, many of them venture-backed, create an average of 3 million new jobs a year and have been responsible for almost all net new job creation in the United States in the last forty years.  In addition, venture capital has backed nearly half of all companies that have gone public since 1974, which have collectively been responsible for 85 percent of R&D investment during this period.  In short, while a small industry by relative standards, venture capital is mighty in its outsized role in supporting economic activity and creating growth and economic opportunity.

27,000 U.S. venture-backed startups have received $290 billion in funding—and 11,000 of those received funding for the first time—since 2012.  To put this into perspective, that calculates to about $170 million invested into 15 startups each day.  An underappreciated truth is that startup activity has proliferated in the middle of the country in recent years.  Since 2012, nearly half of all startups receiving venture capital backing have been based outside of California, Massachusetts and New York.  Specifically, about 12,900 venture-backed companies in the other 47 states have raised $83 billion in funding since 2012.  What’s more, the collective annual growth rate of companies receiving funding in these states (10.1%) has exceeded that of the top three states.

We highlight/excerpt three of their recommendations below, but we also encourage all our readers to check out the NVCA’s letter in its entirety.  (We also provide a few links to some of the relevant Greatest Hits here at Navigating Venture.)

1. Support tax policy that encourages new company formation.  Since the Reagan Administration, our tax code has been relatively effective at encouraging patient, long-term investment, but on net has been hostile to entrepreneurial companies.  For example, punitive loss limitation rules punish startups for hiring or investing in innovation, while benefits such as the R&D credit are inaccessible to startups.  Unfortunately, tax reform conversations in Washington have ignored these challenges while at the same time proposing to raise taxes on long-term startup investment to pay for unrelated priorities.For instance, carried interest has been an important feature of the tax code that has properly aligned the interests of entrepreneurs and venture investors since the creation of the modern venture capital industry.  Increasing the tax rate on carried interest capital gains will have an outsized impact on entrepreneurship due to the venture industry’s longer holding periods, higher risk, smaller size, and less reliance on fees for compensation.  These factors will magnify the negative impact of the tax increase for venture capital fund formation outside of the traditional venture regions on the coasts.

2. Reform the regulatory state to bolster startup activity.  When Washington piles on new regulations it is startups who are most adversely affected because these young, high-growth companies do not have the resources to navigate the regulatory state like large companies.  At the same time, government red tape is inhibiting government entities from tapping into venture-backed innovation in fields such as cybersecurity due to challenges with the government acquisition process.

3. Make life-saving medical innovation a reality.  The future has never been brighter in terms of scientific and health care discoveries that are on the horizon.  Venture capital is investing in revolutionary medical innovation and groundbreaking treatments and cures that are aimed at diagnosing, treating, and curing the deadliest and costly diseases.

Unfortunately, medical innovation is at risk unless policymakers adopt modern approaches to development, regulation, and reimbursement for medicine and medical devices.  Progress has been made to streamline the regulatory approval process at the Food and Drug Administration, particularly for novel technologies, but more improvements are needed.  In addition, we need to establish pro-innovation approaches to reimbursement at the Centers for Medicare and Medicaid.

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