Editor’s note: This week’s Startup Showcase features investor and entrepreneur David Gardner, founder of Cofounders Capital in Cary and is a regular contributor to WRAL TechWire.
CARY – It was an interesting election for sure and there is a lot of speculation about how it will affect US innovation, entrepreneurship and tech investors. I found it particularly interesting how venture capital firms came out in support of Biden. They contributed $69.7M (nearly twice as much as in 2016) with nearly 80% of those campaign donations working against a Trump reelection. Many well known VCs like Steve Case of Revolution and Michael Moritz of Sequoia Capital were particularly vocal in their support of a Biden presidency.
Large fund VCs have a reputation for being wealthy and somewhat coin-operated in that they rarely do anything against their own self interest. So, why would they overwhelmingly support a presidential candidate who has repeatedly said that he will raise taxes on anyone making over $400K per year and tax long-term capital gains (over $1M) at ordinary income level; a much higher tax rate? Apparently, these sophisticated VCs believe that whatever Trump is doing is more harmful to their industry, portfolio companies and pocketbooks than Biden’s obvious pound of flesh.
The consensus in the VC community is that a Biden presidency would be better for those doing venture tech investing and better for their portfolio companies even if they have to pay more taxes on their gains. There are many reasons for this but some of the biggest involve Trump’s policies regarding science, startups and immigration.
At the top of this list has been Trump’s policy on H1B immigration. Although the Trump administration has worked to curtail all immigration to the US, his ban on legal H-1B visas for highly skilled foreign workers hit tech companies particularly hard. Fast growing tech companies need a lot of highly skilled workers. These technology workers are often very difficult to find and recruit in the US. There just aren’t enough software developers and engineers to meet the demand and this is often cited as the single greatest limiting factor in growing US tech companies today. If a portfolio company’s ability to grow is artificially held back by government policy, everyone suffers especially those who put up that high risk early stage investment capital.
There are several other issues whereby Biden and Trump differed dramatically such as the net neutrality laws. The government initially funded the development of the internet in much the same way as it did the building of our interstate highways. It was built as a public service equally open for all to use but the Trump administration has consistently worked to tear down these laws allowing internet service providers to charge more to smaller companies and limit their bandwidth. This has empowered mega corporations to use their wealth to impede other technology companies from innovating, growing their businesses and competing on an even playing field. Tech investors have often accused the Trump administration’s policies of favoring the profits of mega corporations over startups and new technology innovation.
International Entrepreneurs Rules
The National Venture Capital Association has fought the Trump administration in court repeatedly over its efforts to undo the international entrepreneur rules. As I have written on this topic before, America has historically been viewed as the land of opportunity encouraging the best and brightest from all over the world to bring their technology, their patents, their startups and their jobs to the USA, but VC say that the Trump administration has made it increasingly difficult for entrepreneurs to do this and thereby limited the dealflow and opportunities for US tech investors. Less technical innovation in the US hurts tech investors the most initially and all of us eventually.
1202 Exemption and Other early-stage investor Incentives
I have written about and promoted the 1202 tax exemption much in the past as a major incentive to do early stage investing. Along with several other incentives developed or expanded under the Obama administration, these tax breaks encourage investors to invest in early-stage startups and local innovation. They help to offset some of the high risk associated with startup investing and encourage investors to keep their money in startups for at least a five year stint. A Biden presidency is expected to maintain and possibly even expand upon these incentives which foster more startups, more entrepreneurs and more dollars towards US innovation.
Along with specific concerns like those mentioned here, VCs in general believe that Biden will invest more federal resources towards R&D and advancements in science. They also know that they exist because their fund investors not only want to invest in US innovations and jobs, they also expect to make a good return. If they stop making good returns then they will take their dollars elsewhere. VCs don’t like paying higher taxes but when it came to backing Trump or Biden, they concluded that paying higher taxes on investment returns is still far better than not having any returns to pay taxes on.