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America Looks Over Her Shoulder and Washington Starts to Act

Posted by: Jonathan Ortmans on February 06, 2012 Source: Policy Dialogue on Entrepreneurship

Despite it being an election year and a period in American history of great political divide, the prospect that Washington, DC might actually get something done to make the path easier for nascent entrepreneurs and young firms is looking more promising. This past week saw lots of activity at both ends of Pennsylvania Avenue. First, on January 31st –the one-year anniversary of both the White House Startup America Initiative and the private-sector Startup America Partnership—President Barack Obama sent a “Startup America Legislative Agenda” to Congress. The following day, I took part in an official Senate roundtable on Capitol Hill focused on developing more high-growth entrepreneurship legislation. Add to this the efforts to support new and young firms announced in late 2011, particularly the Startup Act, and you have the most active pro-startup focus Washington has ever seen.

Accelerating the emergence of new high-growth firms is mostly about helping cities and educational institutions foster new communities of bottom up nascent entrepreneurs. However, government sets the rules and incentives and can play a vital role in encouraging more Americans to take risk from the top. This is especially important given the ‘race to the top’ underway across the globe—where cities and nations compete to attract nascent entrepreneurs who will create new firms, new jobs and new economic wealth. In fact, while parts of America are still supreme when it comes to their startup culture, support and ecosystem, there are already signs we are not the world’s best business environment anymore. The U.S. ranks 4th overall in the World Bank's Doing Business rankings, 72nd in terms of how easy it is for new and young companies to pay taxes, and 13th overall on the indicator of starting a business.

Other nations are readying themselves to compete and Washington is taking note. For example, delegations of startup leaders from more than 100 countries have already signed up for this year’s Global Entrepreneurship Congress (GEC) in Liverpool from March 9-16, 2012, in pursuit of the fastest path to creating an effective and attractive entrepreneurship ecosystem. The event expects three times the number of participants who gathering in Shanghai in 2011.

These efforts globally are in response to a reality that could not be clearer. In 2011, the Kauffman Foundation released data pointing to a "jobs leak" – new businesses have been starting up with fewer workers than historic norms and are also adding fewer workers as they grow. Also from Kauffman research we know that in any given year, the top-performing 1% of firms generate roughly 40 percent of new job creation. Government data also supports these findings. According to an interim report from the President’s Council on Jobs and Competitiveness, over the last three decades, firms less than five years old have created 40 million new jobs-- jobs which account for all net new jobs created in the U.S. over that period.

This type of data has helped re-shape “small business” policy to be much more conducive to real economic growth. Last year ended with several examples of action by policymakers, including a Startup Act of 2011 bill (S. 1965) introduced in December by U.S. Senators Jerry Moran (R-Kan.) and Mark Warner (D-Va.). In a nutshell, this bill aims at jumpstarting the economy through a five-prong approach:

  1. Reducing regulatory burdens by requiring a cost-benefit analysis of proposed regulations with an economic impact of $100 million or more to determine the efficacy of the rule and its potential effects on the formation and growth of new businesses.
  2. Attracting business investment by a) making permanent the capital gains tax exemption for investments held for five years in Qualified Small Businesses (QSB), b) providing a corporate tax credit of up to $5 million for QSBs in the first taxable year of profit, followed by a 50 percent corporate income tax exclusion in the two succeeding taxable years, and c) reforming the Sarbanes-Oxley Act of 2002.
  3. Accelerating the commercialization of university research by a) awarding grants to universities pursuing specific initiatives to improve commercialization capacity and to assist universities that want to pursue initiatives that allow faculty to approach technology transfer programs outside their institution of employment to commercialize research, b) creating a committee of technology transfer experts, university stakeholders, and others with private sector experience in commercializing new technologies and new company formation to advise the Secretary of Commerce, and c) directing a new committee within Commerce to issue a report evaluating the effectiveness of the new grant program in accelerating the commercialization of faculty research.
  4. Attracting and retaining entrepreneurial talent by a) creating a STEM Visa for up to 50,000 immigrants per year who graduate with a Masters or Ph.D. in science, technology, engineering or mathematics, and b) creating an Entrepreneur’s Visa for up to 75,000 immigrant entrepreneurs who register a business and employ at least two non-family member employees, and invest in their business within one year of obtaining the visa.
  5. Encouraging pro-growth state and local policies through a Department of Commerce-led study of state laws that affect new business formation and economic growth.

Another important bill for entrepreneurship that is expected to be debated on Capitol Hill in 2012 is the Startup Expansion and Investment Act (S. 1962), also introduced last December, by Senators Jim DeMint (R-SC) and John Barrasso (R-WY). This bill zeroes in on regulatory burdens imposed on young and growing companies by the Sarbanes Oxley Act of 2002. The bill is based on similar legislation introduced in the House of Representatives by Rep. Ben Quayle (R-AZ) last September (H.R. 2941).

Efforts to respond to the new global frenzy of building the best startup ecosystem continued to unfold in Washington soon after the holidays, starting with Senator Mary Landrieu (D-LA) convening a roundtable entitled “Developing and Strengthening High-Growth Entrepreneurship.” Sen. Landrieu not only chairs the only Senate committee with “entrepreneurship” in its name, but is more and more looked to for leadership on all matters influencing startups, even those outside the jurisdiction of her Committee. As she said last week, her committee will be “singularly focused” and will “keep the accelerator down on this” in getting other committees to take action.

Her roundtable was the first in a series of three, leading to a committee hearing to discuss high growth start-ups and economic growth. The roundtable included various perspectives on opportunities to create and strengthen America´s ecosystem for entrepreneurship. I was joined, among others, by: Brink Lindsey, Senior Scholar in Research and Policy at the Kauffman Foundation; Wayne Crews, Vice President for Policy at the Competitive Enterprise Institute; Diane Tombs, Executive Director at the National Association of Women Business Owners; Sean Greene, Associate Administrator for Investment at the SBA; and, Madeleine Sumption, Policy Analyst from the Migration Policy Institute. The official record offers evidence that there is little disagreement as to what needs to be done.

The roundtable with Sen. Landrieu was an early step in the call from President Obama to take immediate action to accelerate startup and small business growth. “I urge Congress to send me a common-sense bipartisan bill that does even more to expand access to capital and cut taxes for America’s entrepreneurs and small businesses,” said President Obama on Jan 31st. As a former Hill staffer, I know this should be viewed as a formidable challenge for an election year but it need not. When the likes of Senator Warner, Senator Moran, Senator Landrieu, President Obama, Majority Leader Eric Cantor and the Republican House leadership agree on how to do much of this, with the world on our tail, we really should be able to get something done.

The President’s Startup America Legislative Agenda covers taxation, access to capital and immigration. While it is a call for comprehensive reform during a difficult political year, the good news is many of the areas for improvement are already addressed in legislation already introduced, such as the Startup Act. For example, the agenda proposes four tax breaks:

  1. Expand and make permanent zero capital gains on small business investments.
  2. Create a new tax credit for 2012 that would provide a 10 percent income tax credit on new payroll for small businesses—through either hiring or increased wages—added in 2012.
  3. Permanently double the amount of start-up expenses entrepreneurs can deduct from their taxes (from $5,000 to $10,000).
  4. Extend 100-percent first-year depreciation for one year, effective for qualified property acquired and placed in service before January 1, 2013.

The four proposals on the agenda that will help expand access to capital in turn are:

  1. Raise the offering limit under Regulation A from $5 million to $50 million, coupled with strong investor protections.
  2. Create a national framework that allows entrepreneurs and small businesses to raise capital through “crowdfunding.”
  3. Create an “IPO on-ramp” by changing how current securities laws and regulations are phased in for smaller, young companies in their first years after going public.
  4. Increase the SBIC program to allow for up to $4 billion in annual support.

In terms of immigration, Obama´s call, in my view, was too limited in that it only calls for improvements to already-existing immigration paths—but it is a step in the right direction. The request to Congress is to design a balanced approach to eliminate country-specific caps for certain immigrant visa categories to attract more high-skilled foreign workers and entrepreneurs. The Administration also announced new DHS administrative reforms to streamline existing pathways for immigrant entrepreneurs to enter and create businesses in the U.S., retain more foreign-born science and technology graduates from U.S. universities, and facilitate immigration by top researchers. In the immigration realm, the Startup Act is much bolder but this should not stop us doing something.

Other announced administrative commitments involve (among other cabinets): the Department of Commerce to launch a third round of the i6 Challenge, which funds regional collaborations to bring innovative, ground-breaking ideas from the lab to the marketplace; the Department of Energy to kick off a second year of America’s Next Top Energy Innovator program to reduce the cost and red tape facing startup companies that license federal energy technology; and, the Department of Education to invite students —from middle school through college— to participate in the National Education Startup Challenge by developing an innovative solution to an education problem and designing a blueprint for a new company or non-profit organization to deliver that solution.

Last week´s announcements also included revamped efforts from the private sector. In January 2011, as a private-sector response to the call for more startups, Steve Case, AOL co-founder and member of the President’s Jobs Council, and the Kauffman Foundation formed the Startup America Partnership, a nonprofit alliance of entrepreneurs, major corporations, and service providers that has mobilized more than $1 billion in business resources to serve an estimated 100,000 startups over the next three years. This year, the Partnership is launching nine new entrepreneur-led regional networks across the country (DC, Hawaii, Kansas, Michigan, Missouri, Nebraska, Rhode Island, Virginia, and Vermont).

And more is on the horizon. On February 9th, in particular, state-level policies for entrepreneurship will be the topic of the Kauffman Foundation’s State of Entrepreneurship Address. Benno Schmidt, interim president of the Kauffman Foundation, will discuss “A Roadmap for State Growth,” which will include effective, low-cost ways of promoting entrepreneurship and innovation at the state level. The event will include remarks from Governor Dave Heineman of Nebraska, chair of the National Governors Association, and Governor Jack Markell of Delaware, vice chair of the National Governors Association. If you are not going in person, be sure to check it out on live webcast here and tell me what you think.

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