Is Washington turning its back on Entrepreneurship?
It may be cliché, but you can’t stop innovation. You can find a way to be a part of it, or you can stand by and wave as opportunity passes you by. At the very heart of entrepreneurship is innovation. Entrepreneurs solve problems. They generate new ideas, new businesses, and create jobs — nearly all of our economy’s new jobs in fact.
In just a little more than six months, the Trump Administration has rolled out policies which cast serious doubts on whether America will continue to be a leader in innovation. If the U.S. does not prioritize innovative technology the space will inevitably be filled by those nations willing to step to the forefront. And while it may be too early to tell, it’s worth asking the question: is our nation’s capital turning its back on entrepreneurship?
It is no secret that startups and tech companies need to attract top talent to survive. Some of that talent comes from around the globe. This makes startups particularly susceptible to changes in U.S. immigration policy. So when one of the President’s first actions was signing an executive order instituting a travel ban on seven Middle Eastern countries (excluding Iraq), the backlash among the entrepreneurial community was almost immediate. The executive order was almost universally condemned by top American tech companies.
Meanwhile, rumors are circulating that the Trump Administration will move to further restrict H1B visas, an effort that is proving to be even less popular among startups. Many tech companies rely on H1Bs to attract and employ top global talent. The visas are in limited numbers, operate on a lottery system, and are in demand at a level that vastly exceeds supply. Companies like Apple, Google, Facebook, Intel, Microsoft, Oracle and IBM are among some of the largest benefactors from the H1B visa:
While there are unfortunately companies that abuse the system (mostly Indian IT firms paying low wages), broadly restricting H1B visas would do disproportionate harm to those companies using the visa as intended. It would also close the door on America being the land of opportunity for the world’s best and brightest.
America could and should do more to encourage innovation and entrepreneurship through comprehensive immigration reform. Sounds easier said than done, right? Well supporters of startups are getting creative in their ideas for using immigration policy to drive entrepreneurship. It was recently suggested at a policy meeting for the Upstate Venture Association of New York (UVANY) that EB5 visas be expanded to encompass investments in startups as well as qualified venture capital funds in underserved communities. (Sorry Silicon Valley, but you don’t need the help).
EB5 visas are preferential visas for immigrant investors. Essentially, an investor can purchase a path to permanent residency by investing $1,000,000 (or $500,000, if in a rural community) to create or preserve at least 10 U.S. jobs. Typically, EB5 visas are used for real estate projects, but EB5 visas could certainly be restructured to incentivize investment in startups and early stage venture capital funds in communities that struggle with access to capital — like Upstate New York.
The U.S. should not be turning away top global talent. We should not be denying visas to individuals like the Afghanistan All-Girl Robotics Team. What if instead we leveraged this nation’s current entrepreneurial assets and actually further encouraged immigration? Imagine a 43North competition where in addition to handing out cash prizes to startups, we also handed out visas and green cards.
That’s the sort of immigration reform that can spark growth.
Coming up short on tax reform.
The Trump administration has proposed what may be the most significant tax reform package in decades. Unfortunately, that reform package does nothing to help startups. That’s right, nothing.
The problem with most existing tax-based incentives is that they are structured in a way that reduces tax liability on profits, making those incentives something most startups and high growth tech companies are not able to utilize. For example, Uber, which until some recent turmoil was considered a tech startup darling, just announced that it lost $708 million dollars in the first three months of 2017 alone. Similarly, Facebook lost hundreds of millions of dollars before finally becoming profitable in 2009 — just three years before going public. Saving money on taxes doesn’t mean much when you’re losing the national GDP of the Comoros in Q1.
This problem was partially addressed by the U.S. Congress in 2015, with the expansion of research and development (R&D) tax credits. The Protecting Americans from Tax Hikes (PATH) Act of 2015 not only made existing R&D tax credits permanent, but also included enhancements intended to address the shortfalls of traditional tax credits by including offsets to alternative minimum tax and payroll tax for eligible businesses. The credits are still based on eligible R&D expenses, and the added offsets apply only to costs incurred beginning in 2016. The key is that the new payroll tax offset allows startup companies to receive a benefit for their R&D activities — regardless of whether they are profitable or not.
Unfortunately, the new payroll tax offset for R&D comes with some limitations, which undermine the potential impact:
1. Offset is only available to companies with gross receipts for five years or less. A company isn’t eligible if it generated gross receipts prior to 2012
2. The company must have less than $5 million in gross receipts in 2016 and for each subsequent year the credit is elected
3. Expenditures claimed must fall within qualifying research activities and expenditures
4. The maximum benefits an eligible company is allowed to claim against payroll taxes is capped at $250,000
For some perspective on what our nation’s capital should be doing, we need only to look to the vast ice-filled hockey mecca to the north. Yes, our friendly neighbor Canada currently puts U.S. research and development offsets to shame by offering a tax credit which can exceed $1 million for qualified R&D expenditures — in addition to the standard deduction.
To take tax reform a step further and truly help entrepreneurs, reforming the Qualified Small Business Stock (QSBS) provisions should be considered. While QSBS is a good idea in theory — stimulating investment in small businesses — the end result was a regulatory scheme so complicated, with so many restrictions and nuances, that it became virtually unworkable. Simplifying the rules, would make QSBS more effective, and encourage investment in early stage startups and venture capital firms in underserved communities.
Rolling Back Net Neutrality.
FCC Chairman Ajit Pai recently announced an upcoming vote which may undo net neutrality rules put in place under the Obama administration. To say that this news has not been well received by the startup ecosystem would be an understatement. On April 25, 2017, a group of 800 startups, entrepreneurs, incubators and investors sent a letter to the FCC Chairman objecting to the proposed changes to existing net neutrality rules.
The letter warned that “Without net neutrality, the incumbents who provide access to the Internet would be able to pick winners or losers in the market. They could impede traffic from our services in order to favor their own services or established competitors. Or they could impose new tolls on us, inhibiting consumer choice. Those actions directly impede an entrepreneur’s ability to ‘start a business, immediately reach a worldwide customer base, and disrupt an entire industry.’ Our companies should be able to compete with incumbents on the quality of our products and services, not our capacity to pay tolls to Internet access providers.”
The letter went on to suggest that “[R]ather than dismantling regulations that allow the startup ecosystem to thrive, we urge you to focus instead on policies that would promote a stronger Internet for everyone.” My thoughts exactly.
Stronger internet. Stronger startups. Stronger economy.
Pulling out of Paris.
Even more recently, President Trump announced that he was beginning the process to withdraw from the Paris Climate Agreement signed by President Obama. And while the complete withdrawal will not become effective until 2020, the immediate actions create uncertainty in the economy about the future of renewable energy in the United States. Current energy policy has resulted in increased investment and spending on renewable energy R&D and has contributed to global momentum towards renewables. A U.S. retreat from that shift toward renewables (which will continue, regardless of our involvement on a global scale) will be bad news for those investing (and invested) in renewable energy technology.
This decision was justified in part by President Trump on the basis that the Paris Agreement “handicaps the U.S. economy” and that pulling out will save jobs for America. While there may be some short term employment benefits in fossil fuel based industries, the U.S. would be giving up long term innovation and economic opportunities. Short term gains for long term losses is not a formula for sustainable growth.
Pulling out of the Paris Agreement leaves an international leadership void that Russia, China and India will be eager to fill.
Don’t think for a second that other countries aren’t going to try and capitalize on this opportunity. France already is. Meanwhile Volvo, the Swedish automobile manufacturer just announced it would be phasing out conventional gasoline engines in favor of electric. A shift in global leadership carries the risk of the U.S. losing jobs while global leaders are accelerating markets.
It is a fact (yes, a real fact) that employment in renewable energy is growing at a much faster pace than employment in traditional fossil fuels. In fact, the U.S. Department of Energy reports that in 2016, solar grew by 25% and wind by 32% — bringing total renewable jobs nearly in line with the electric power energy jobs from fossil fuels. Simply put, renewable energy is growing, and with that, creating millions of jobs for Americans.
It is no wonder that 28 major U.S. companies publicly urged President Trump not to pull out of the Paris Agreement, including top tech companies like Facebook, Google, Microsoft, Adobe and Apple. A letter published in The New York Times, Wall Street Journal and New York Post emphasized that “[B]y expanding markets for innovative clean technologies, the agreement generates jobs and economic growth. U.S. companies are well positioned to lead in these markets. Withdrawing from the agreement will limit our access to them and could expose us to retaliatory measures.”
According to a recent NPR report, solar energy employs twice as many people as coal in the United States. Now, before the hate emails start writing themselves — yes, admittedly, solar and renewable energies are benefiting heavily from government subsidies. But let’s not be so quick to forget that for centuries we have provided heavy corporate subsidies to top American industries like fossil fuels and railroads. Any guesses as to the value in subsidies provided to those industries? Because I did some rough math and it’s high — very high. Perhaps it’s just a coincidence, but many of America’s top-performing industries over the last two centuries also happen to be some of the industries with largest public subsidies. But even subsidies can’t prop up an industry going against the tide of innovation.
Because evolve or die.
Taking a step back from being the world leader in innovation and entrepreneurship in sectors that are not only not dying, but growing at a pace that well exceeds industries like coal, iron and steel is going to cost the U.S. more jobs and economic opportunity in the coming decades. Innovation doesn’t stop just because an administration would rather put its head in the sand.
The Startup Genome 2017 Global Startup Ecosystem Report estimates that in the next 15 years, 46% of current U.S. manufacturing jobs will be replaced by automation. Globally that number is estimated to be between 60% and 80%. Unless we’re comfortable with losing a huge amount of American jobs to machines, we’re going to need to come up new opportunities — we’re going to need to innovate to protect American workers. We’re going to need to rely on entrepreneurs. Entrepreneurs that in the tech and renewable energy industries are outpacing the growth of the rest of the economy. And on any given day, the top five publicly traded companies in the U.S. are tech companies.
That growth, however, is occurring disproportionately throughout America. Top metropolitan areas are experiencing positive growth while much of the rest of the country struggles. To make matters worse, changing a regional economy takes approximately 20 years by best estimates. What that means for struggling communities, is that to plan for economic growth 15–20 years from now, we need to start taking action now. Pretending that manufacturing in coal, steel, paper and iron is the path to long term economic growth for America is a fool’s errand and will put many communities in even more dire situations in the future. We need to plan for where growth will be. We need to plan for entrepreneurship. Because planning for entrepreneurship is planning for jobs.
A good example of how misguided betting on dying industries is exists in the city I now call home — Buffalo. At the turn of the 20th century, Buffalo was a top city for innovation, energy and industry. We had hydropower, built massive displays of architecture and bridged the gap with westward commerce. We had industry, canals and massive grain silos. We were the cat’s meow. But as technology changed, so did regional economies. Unfortunately, Buffalo placed its bets on industries that were never going to come back. Even more unfortunate, we kept doing that for over 50 years.
And how exactly did that work out? Well, I’ll leave you to some quality time with Google to answer that question. Fortunately, though, Buffalo (and much of upstate New York) realized the error in this approach and pivoted — choosing to instead bet on innovation and entrepreneurship that leverages existing assets. We are building public policy around startups and a community that fosters sustainable, organic growth. And while we may have a long way to go, we are already starting to see the benefits from a shift towards innovation. Those communities that wait another 20 years to create innovative economies are going to be too late.
Washington can’t afford to be too late on this one. It can’t afford to turn its back on entrepreneurship.