A Startup Act at Last
Jonathan Ortmans, President, Public Forum Institute
It is time to implement new methods to shake our economy out of this lingering spell of slow growth (a disappointing 2% rate) and high unemployment (hovering around 9%). And while the large federal budget deficit does not leave much room for implementing more traditional economic remedies, the Kauffman Foundation—at a press conference this morning here at the National Press Club in Washington, DC—suggested it is time for legislation. Startup legislation.
As my previous posts on this blog have pointed out, a series of studies have well established that until recently the growth in US jobs and output was driven by the formation of new firms, or startups. In comparison, all existing firms older than five years, on net, did not generate even one additional job (i.e. new hires were offset by layoffs).
The entrepreneurs behind these new firms are also the drivers of radical, cutting-edge innovations that have many times spawned entirely new industries—just think of the many new business models on the Internet alone. This is not to discredit the important work of existing firms. Often, they are responsible for important incremental innovations that expand the standard of living improvements brought on by entrepreneurial breakthroughs.
Another reason to call for the creation of legislation beneficial to startups is their current rate of growth. It should not be surprising that Kauffman Foundation data show that new firm formation remains high—even after the 2008 recession—as many laid off employees might have found this to be the right time to launch their long-brewing entrepreneurial ideas on the market. Nonetheless, the number of new firms with employees has been dropping. This lack of growth impedes economic growth.
So it is clear we need high-growth startups. This demands not only bold entrepreneurs, but also low-cost capital available to finance them as well as supportive policies to nurture their development. The proposed “Startup Act” will facilitate just that through the following targeted, low-cost measures:
• Welcoming new firm founders to the US through entrepreneurs´ visas and green cards with diplomas for STEM degrees. The supporting data are clear. Immigrants start companies at greater rates than native-born Americans, and are disproportionately successful in launching high-tech firms. The entrepreneurs’ visas (embodied in the Kerry-Lugar Startup Visa Act) would screen entrants for a temporary visa based on either the outside capital they had attracted or revenues from U.S. sales they had already recorded. Permanent work visas (green cards) would then be granted once these entrepreneurs had hired a minimum number of U.S. workers. The Kauffman Foundation advocates a higher limit—or unlimited amount—for these visas than in the Kerry-Lugar provisions (10,000), given that welcoming more job creators can only expand U.S. employment. The green cards for STEM-educated immigrants idea would grant green cards to foreign students when they receive degrees in STEM fields- fields that are most likely to spawn businesses commercializing technological advances that drive improvements in productivity and living standards.
• Facilitating early-stage financing through capital gains tax exemptions for long-held startup investments, angel investor tax credits, and tax incentives for startup operating capital. These tax incentives would add to the federal deficit in the short run, but by inducing additional startup activity, some of which will lead to new scale businesses, these incentives will over time generate increased economic activity and thus more tax revenue.
• Facilitating access to public capital markets through optional SOX compliance. The Sarbanes-Oxley Act (SOX) significantly affected the cost of going public, which impinges on the growth of companies and the willingness of investors to fund early stage companies. Given that SOX was intended to protect shareholders, the proposed legislation would allow them to judge whether the benefits of the SOX requirements outweigh their costs. Accordingly, “the most logical SOX reform is to allow shareholders of public companies with market valuations below $1 billion to opt-in to at least Section 404 compliance, if not to all of the requirements of SOX. Companies whose shareholders do not elect to comply with SOX should have special designations in their exchange listings to denote this fact so that all shareholders, current and potential, are put on notice,” explains the proposal.
• Accelerating the formation and commercialization of new ideas through differential patent fees to reduce the Patent and Trademark Office (PTO) backlog and licensing freedom for academic innovators. The former would authorize, and ideally require, the PTO to establish a tiered fee system for patent evaluations, where those willing to pay more would have their applications handled more readily. Moreover, a lower fee structure, but also tiered by the speed of evaluation requested, should be established for individual inventors of modest means to prevent large business applicants from gaining excessive attention in the examination process. The latter measure, licensing freedom for academic innovators, would mandate that all federal research grants to universities be conditioned on universities affording their faculty members the ability to choose their licensing agent (currently the technology licensing office typically holds a monopoly on this). A university’s own TLO could compete in this new environment, or at minimum provide informational services and mentoring to university faculty members. The aim of competition in innovation licensing is to speed up the commercialization of faculty innovations.
• Removing barriers to formation and growth of scale businesses through automatic ten-year sunsets for all major rules and new common sense standards for regulations. At the state and local level, there should be assessments of startup and business policies. This would regularly cleanse the books of inefficient and costly rules. The federal law would require all major rules to sunset after 10 years, and then allowed to lapse until re-proposed and implemented under the following two common sense standards. First, rules that have long been defined to impose costs on the private sector of at least $100 million should not be implemented or maintained after a sunset review unless agencies can determine that their benefits outweigh their costs. Second, the form of such rules should be such that the option chosen is the most cost-effective of the alternatives available. The assessments at the state/local level would provide more productive competition among cities and states.
Concrete action on behalf of comprehensive startup legislation is long overdue. Many of the ideas listed have already elicited support from both sides of the aisle, but have not been positioned—until now—in the context of startups. The recent push from the White House in the launch of Startup America and the bipartisan statements of support from the House and Senate at today’s press conference should give us all reason for optimism in a town torn apart by competing philosophies on taxes and entitlement spending. Perhaps lawmakers might take a break from wars over the debt ceiling and work together on something we all support—helping our nation’s job creators continue to generate the wealth they bring to America.