It’s been one year since we elected a new president and since that time, Washington policy makers have been moving at a velocity this country has not seen in decades. As the president pushes forward to make good on his campaign promises of meaningful change while simultaneously addressing the economic crisis, not all constituents are going to be happy with each and every direction and initiative. The venture capital industry is no exception.
On the positive side, President Obama has made it clear that innovation and technology are critical drivers of change in areas such as climate control, health care reform, education and economic growth. As NVCA Board Member and Venrock General Partner Ray Rothrock has been fond of saying this year, “Science is cool again.” The administration’s commitment to technology is evidenced by the inclusion of significant R&D funding in the stimulus package and the overall support for clean technology projects.
Further, the president has demonstrated an appreciation for small businesses and their role as economic engines for our country’s recovery. Though it has yet to be translated into legislation, the proposal for a zero capital gains tax for investment in small businesses suggests an understanding of the importance of maintaining incentives for long-term, patient investment.
Lastly, on the plus side is the appointment of individuals who understand that a world exists beyond large multinational companies. With the appointment of technologists and business professionals who understand the venture capital ecosystem into positions in the administration, the president has signaled that he is open to hearing new and fresh points of view. Each and every one of these discussions offers the venture industry the opportunity to be part of the ultimate solution.
Yet, the president’s strategies have not all been put forth without challenges for the venture capital industry. The biggest issue we have faced is the administration’s consistent casting of an extremely wide net to address areas of reform. For example, on the financial reform front, the Treasury Department deliberately chose to include all private pools of capital in its proposal to regulate hedge funds more closely. The Treasury could have chosen to limit its reform to those asset classes that cause systemic risk, but instead elected to be extremely broad in its proposal. This strategy left the venture capital industry fighting to escape the net intended for another asset class.
Though it has yet to be translated into legislation, the proposal for a zero capital gains tax for investment in small businesses suggests an understanding of the importance of maintaining incentives for long-term, patient investment.
The precedent is concerning because of the impact on our industry, but also because it is counterintuitive to the goals this administration is trying to achieve. The support for basic R&D is only as good as the support for venture funding after a new technology is proven to work. Certain policies being put forth actually discourage long-term, patient investment including taxing carried interest at ordinary income and reducing the exclusivity period for biologic drugs. In each of these cases, the NVCA finds itself returning to policy makers to remind them of what is at risk if they choose to tax innovators and providers of risk capital.
Back again to the positive side, none of these proposals have passed Congress and the administration continues to be willing to listen to the venture industry’s point of view on all of these major issues.
The venture capital industry remains in the enviable position of being on financially solid ground. We are not in need of a bailout, handout or additional capital to manage. We continue to ask for support on policies that will motivate long-term investment in startup companies. The president is supportive of this type of investment. Our biggest challenge, to date and going forward, is not to make sure the administration pays attention to us. It is to make sure our business model can avoid the law of unintended consequences and thrive in a new, more cautious regulatory environment, while continuing to lead the way in supporting entrepreneurs and growing jobs.
Mark Heesen is president of the NVCA and can be reached at email@example.com.