An Attractive Time to Invest Abroad? –

The NVCA surveyed our membership earlier this year and 90% of respondents wanted to know more regarding venture capital outside the United States. The reason, not surprisingly, is that more and more firms are looking abroad to invest and access capital. Two recent reports show exactly why. The studies, one by the Kauffman Foundation and the other by Arthur Anderson, show that neither American society nor its laws and regulations are necessarily the most fertile ground for growing a new company.

The Global Entrepreneurship Monitor of 2001 Report (GEM) by the Kauffman Foundation polled and interviewed 75,000 adults in 29 countries to determine the level of entrepreneurial activity, its impact on economic growth, and the factors either accelerating or hindering business start-ups.

According to the GEM study the U.S. ranked seventh out of 29 on the level of entrepreneurial activity. Mexico, Australia, New Zealand, Korea, Brazil and Ireland ranked ahead of the U.S. It found levels of entrepreneurship range from a low of 5% in Belgium and Japan to as high as 18% in Mexico.

Importantly, the GEM study demonstrated a statistically significant association between entrepreneurial activity and national economic growth. Furthermore, the study concluded that higher investment in national research and technological development is associated with higher levels of entrepreneurial activity and wealth-creation.

Overall, the GEM study identified three areas critical for increased entrepreneurial activity: cultural and social norms, access to capital, and government policies. The study found that a public’s attitude toward self-employment, individualism, self-reliance, and failure had a dramatic affect on the country’s overall levels of risk taking. Access to capital issues is a concern in many countries where banks rely on debt financing and employ zero tolerance policies that view any terminated business as a major failure.

The GEM study estimates that 3.1% of adults act as angel investors and supply $196 billion per year to start-up and growing companies. The total informal investment averaged 1.1% of GDP; it was highest in Korea at 3.7%. For every dollar of venture capital there was $1.60 of informal capital invested. In New Zealand, Australia, Denmark and Korea informal investors provided 90% of total invested dollars; in U.S., Canada and Israel informal investments represent less than 60% of total investment.

The most fertile ground to grow a start-up…

Supporting the theory that Europe needs to encourage more entrepreneurship was a study by Arthur Anderson and Growth Plus Europe called Not Just Peanuts: 2001; simultaneously, it undermined the belief in U.S. dominance by concluding that the most entrepreneur friendly environment was the United Kingdom, not the U.S.

Out of 10 countries analyzed, the U.S. ties with Spain for second; The Netherlands and France round out the top five respectively. The study focuses exclusively on government policies of tax and regulation and did not focus on level of education, infrastructure, general economic situation, or subsidies. Although the study gives the U.S. the highest score on business environment, which includes items like the cost of regulation and compliance, taxes on income and capital gains, and labor law, the U.S. receives the lowest score in the funding category, and an average score for laws regarding conditions for attracting and retaining employees, stock options, bonuses and other types of risk based pay, and immigration law.

The U.S. was particularly chided for not providing effective tax incentives for private investors investing in entrepreneurial growth companies (EGCs), for venture capital funds, for angel investors, for R&D investments. France, the Netherlands, Spain and the U.K. all have special tax regimes for venture capital funds or for companies investing in growth companies.

Extending the U.K.’s Lead?

The U.K. recently put forward a new series of policies to encourage the launch of start-up businesses and help grow existing firms. Gordon Brown, the chancellor of the exchequer, released a “pre-Budget statement” or economic stimulus package that is mainly targeted at high-tech and EGCs. The initiatives include:

No tax on the exercise of employee stock options and favorable capital gains tax treatment on the ultimate sale of the stock.

Capital gains tax rates of just 5% to 10% on sales of employee-held or large investor-held stock in entrepreneurial companies (if the stock is held for four years or more).

Research and development (R&D) tax credits equal to 150% of entrepreneurial growth company (EGC) R&D investments (refundable even to EGCs that are not yet profitable).

Enhancements to Venture Capital Trusts (VCT), which are funds invested in EGCs in the form of up-front tax deductions and capital gains tax treatments on the sale of VCT EGC investments.

Appropriations for the UK High Technology Fund, a fund of funds investing in venture capital firms that specialize in early-stage equity for high-tech EGCs.

Targeting $1.5 billion for at least nine Regional Venture Capital Funds in the U.K.

Providing $100 million for the University Challenge Fund, whereby seed venture funds invest in EGCs spun out from universities.

The creation of and funding for eight enterprise centers at universities around the United Kingdom to pursue research and education in the field of entrepreneurship.

$1 billion for the funding of business incubators throughout the United Kingdom.

Tax Free in Israel

Israel announced in September that new investments by foreign VC funds will be exempt from capital gains taxes. Foreign investments in existing funds will be partially exempt, with taxes of up to 20% applied to capital that hasn’t yet been invested. The exemption will apply only to funds that have at least 20% of their assets, minus management fees, invested in companies incorporated and operating in Israel

Israeli Prime Minister Ariel Sharon has indicated that he is in favor of exempting Israelis from paying tax on investments in venture capital and granting them similar benefits to those given to foreign investors.

Thus, European and Israeli policymakers are implementing many new policy ideas that would be well worth considering in regard to the on-going effort to expand entrepreneurship in the United States. They accept the premise that an economically healthy and competitive country is inextricably linked to entrepreneurial health and high growth companies.

U.S. policymakers must take immediate note of these efforts because entrepreneurs, angels and venture capitalists surely will.

Mark Heesen is the president of the National Venture Capital Association