VC-backed start-ups hindered by immigration obstacles

Immigrants have co-founded some of the most successful start-ups in the US, but the VC community says outdated government policies are holding back foreign-born entrepreneurs.

Jeff Clavier came to the US on a transfer visa called an L-1. At the time, he was working for a company that had bought his start-up and flown him from his native France to the US.

After several years, Clavier and his wife decided it was time to seek permanent residency and end the need to renew their work authorization constantly. But it was September 2001, and their green card submission was delayed repeatedly until they finally obtained one four years later. He went on to secure citizenship in 2012.

Clavier is now founder and managing partner of Uncork Capital, formerly known as SoftTech VC, a venture firm founded in 2004 that occasionally works with immigrant founders in the pre-seed to seed stage.

Clavier knows firsthand how hard it is for an immigrant to begin a life in the US. But he also knows he’s lucky. The L-1 visa allowed him a way to get permanent residency.

“It’s hard enough to build and scale a company to success and you don’t want anything to get in the way,” he says. “Great ideas have been everywhere. The venture industry’s success has shown that we’re pretty good at building iconic companies with immigrants. But there are a bunch of hurdles in front of them that has essentially forced them to other countries.” (opens in a new tab)

VCs are seeing some foreign-born portfolio company founders unable to stay in the US, and they hope immigration policies can change to help these entrepreneurs continue building business in the country.

Some of the most successful start-ups and established companies have been founded or co-founded by immigrants, including household names like Moderna, Uber, Tesla, Slack and Zoom. Bond Capital founder and general partner Mary Meeker’s annual Internet Trends Report in 2018 showed 56 percent of the most highly valued tech companies were founded by either a first- or second-generation immigrant.

Despite proven success, it is not easy for immigrants to build start-ups in the US. Immigrant founders often have to jump through several hoops to either stay in the country or come to the US to build their companies. Without a specific visa category for new entrepreneurs, they have to make themselves fit existing ones, which are not always a perfect match.

In addition, other countries are streamlining the process. Canada, for instance, promises entrepreneurs a start-up visa in as little as two weeks. And as global VC investments continue to rise and virtual fundraising makes it easier to grow companies outside of the US, competition for top talent is tighter.

In July, however, congresswoman Zoe Lofgren of California introduced HR 4681, or the Let Immigrants Kickstart Employment (LIKE) Act. The bill essentially creates a start-up visa to encourage immigrant founders to develop their venture-backed businesses in the US. As the House Subcommittee on Immigration and Citizenship chair, Lofgren could shepherd the legislation through tricky debates on immigration.

In the US, the venture community has renewed calls to establish a start-up visa for years now, and VCs want the bill to finally be completed. In their view, only with a specific category for founders can the US continue to entice more innovators, especially in an age where global investments are easier to come by.

The LIKE Act will create a temporary visa for start-up founders with a path to permanent residency “if the start-up entity meets certain growth-related benchmarks.”

VCs have welcomed the LIKE Act, but their optimism over the creation of the start-up visa remains cautious. After all, there have been many attempts to make it easier for immigrant founders to build their companies in the country.

A complicated process

Founders currently have a few ways to gain legal status to build their businesses. In May 2021, the Biden administration reinstated the International Entrepreneur Rule (IER), an Obama-era policy that allows foreign-born founders to temporarily apply for parole to build their business. The parole enables individuals to work in the US for two-and-a-half years if they can prove their start-up has the potential to generate jobs and it provides significant public benefit.

Jeff Clavier

“The venture industry’s success has shown that we’re pretty good at building iconic companies with immigrants”

Jeff Clavier
Uncork Capital

The IER was first published in January 2017 by the Office of the Federal Register and was set for implementation in July of that year. But under the administration of president Donald Trump, its implementation was delayed. The National Venture Capital Association (NVCA) then led a lawsuit challenging the IER’s postponement and won. However, the Department of Homeland Security (DHS), which oversees offices related to immigration, did not follow the order.

Fiona McEntee, managing attorney at Chicago-based law firm McEntee Law, says US immigration law hasn’t changed in 30 years even though the world around it has.

“When you think about what has happened since then, there’s been so many advances in our lifestyle and technology and yet immigration is still stuck back in the early ‘90s,” she says. “The types of companies we have now were never really envisioned back then.”

Whether they are already in the US or thinking of moving to the country, foreign-born founders need to have a visa to build a business. Some individuals currently use a few popular visa categories, such as the O-1 for individuals who possess extraordinary ability, the H-1B employment visa, the EB-2 or E-2 visa for entrepreneurs and the L-1 transfer visa. Each of these categories has some limitations and requires a significant amount of documentation.

Fiona McEntee

“There’s been so many advances in our lifestyle and technology and yet immigration is still stuck back in the early ‘90s. The types of companies we have now were never really envisioned back then”

Fiona McEntee
McEntee Law

The EB-2 visa category sets a minimum amount of investment for the applicant. For instance, the EB-2 asks individuals to prove they are putting in at least $1 million.

While there’s no minimum investment required for E-2 visas, people have to come from countries with an investment treaty with the United States. Founders from China and India, which have produced many start-ups, are not included in the list of countries allowed under the E-2.

Immigration lawyers say the O-1 is popular for founders, but can be difficult to secure. Often, the applicant must already be a “rock star,” someone who has gained a little bit of notoriety in their field.

Alcorn Law founder Sophie Alcorn says many potential entrepreneurs are being turned away. “I have advised thousands of start-up founders in my career, and it pains me that most of the brilliant people I speak with are often not qualified for any US immigration option,” she says. “So if I were a venture capitalist, and I wanted access to the best possible investments, I would want the best people to be leading those teams. Unfortunately, the way US immigration law and policy are currently structured, we are routinely excluding the world’s top talent from our borders.”

She adds that in trying to fit specific visa categories, such as the O-1, founders get distracted in trying to get famous enough instead of focusing on their technology or business model.

Sophie Alcorn

“If I were a venture capitalist, and I wanted access to the best possible investments, I would want the best people to be leading those teams. Unfortunately…we are routinely excluding the world’s top talent from our borders”

Sophie Alcorn
Alcorn Law

Some founders may start on the H-1B, which requires a company to sponsor their employees. But if a person is on the H-1B, this usually means they have to stay on as an employee and will not be able to run their own firm. The same goes for L-1 transferees. The H1-B also has another complication: applicants have to be chosen via a yearly lottery. Many of these visa categories take months to process, and sometimes there is no clear timeline for approval.

Growing competition

That is where the IER can help, according to both McEntee and Alcorn. The IER at least allows individuals to go to an embassy or consulate and obtain what’s called a ‘boarding foil’ to enter the country – functioning as a one-time residency card – and have two-and-a-half years to grow their company.

However, the IER is still not easy to get, the lawyers say.

First, applicants must prove they are backed by a qualified investor, either by a VC or through a government grant or contract. Second, they have to show their business has a significant public benefit and will meet certain growth metrics. McEntee says those criteria are easy enough to meet, but the fact that many consulates remain closed due to covid-19 means her clients will have difficulty getting the boarding foil.

It also doesn’t provide a path to permanent residency. So far, United States Citizenship and Immigration Services, the agency under the DHS that handles visas, cannot give timelines on how quickly it can process IER applications.

And, as evidenced by the events of 2017, the IER is not a permanent solution, and that can be worrisome, McEntee says. The DHS can choose not to move forward with the IER, which puts those under its parole in a precarious position.

Without the Startup Visa, some VCs think the US might find itself losing out to other countries for the most talented start-up founders. For example, the NVCA tells Venture Capital Journal that if a start-up visa isn’t created, “foreign-born entrepreneurs would continue to be pushed away to other countries like Canada that welcome immigrants who want to create high-growth companies.”

And while the US continues to generate the highest level of VC funding for start-ups, many feel this is an advantage that could evaporate in the future. US VC funding reached $70.4 billion in the second quarter of this year, according to a report from CB Insights. But Asia and Europe are also logging record numbers of activity.

Uncork’s Clavier points out the US will always have innovators, but there might be a more limited pool than usual going forward.

“We won’t entice more people to come here because it is so much easier now to raise capital anywhere, so they can go anywhere,” he says. “It’s easier to move to Canada, or France, or any other country that offers a start-up visa. They’ll go there, and we’ll be left with this limited pool.”

One of the countries that has already made it easy for start-up founders to relocate to its country is Canada. The Canadian government instituted its permanent Start-up Visa Program in 2018. Before the pandemic, processing times were only a few weeks, though current timelines have now been extended to 12 to 16 months. Still, many US-based VCs are concerned other countries will follow Canada in creating a fast-tracked start-up visa.

And as funding becomes more digital, accelerated by the covid-19 pandemic, foreign-born founders may find it easier to stay where they are. McEntee notes some clients do become disheartened with the immigration process and pull out.

Pushing for diversity

For Manan Mehta, founding partner of early-stage investor Unshackled Ventures, that difficult process to get a visa bars many possible entrepreneurs from building a successful business in the US. He says a start-up visa is a good first step to investing more in immigrant founders who will be bringing jobs in areas that really need it.

He compares easing immigration to companies pushing for more diversity.

“In an unfortunate way, this is a practice that is intrinsically discriminatory against people that could be extremely capable,” he says. “On top of that, they’re already in the US, either US-educated at our university system, or working in a corporation. We can abstract that to other populations that have faced discrimination.”

Mehta’s venture firm decided to bring in immigration lawyers as partners to help their founders, who are all immigrants, navigate this complicated process.

Both Mehta and Clavier believe that LPs understand that immigration can be a problem for many GPs and their VC-backed founders, but it’s not at the top of their minds. Investors think more about how they can get solid returns from their fund managers. And many institutional investors may not want to wade into something so politically charged.

Though Clavier acknowledges that some LPs have become more vocal about issues of diversity, unless they refuse to invest in companies without women or immigrants, it’s not going to push the needle in a positive direction.

Immigration continues to be a hot-button issue. The LIKE Act has not yet been put up for debate, but even before it was introduced in the House of Representatives, there had already been political moves to abolish programs like optional practical training and temporary work permits given to international students.

The hope of VCs and the founders they back are that some immigration issues, such as the Start-up Visa bill, get their fair shot. In their view, immigration brings economic benefits to the US by building new businesses and creating jobs. A start-up visa would ease their path to doing that and help them pursue the American dream.