Editor’s note: Investor and entrepreneur David Gardner is founder of Cofounders Capital in Cary and is a regular contributor to WRAL
TechWire. Startup Spotlight is a regular part of our Startup Monday package that includes updates to our exclusive Triangle Startup Guide, a list of Triangle meetups, three posts focusing on future calendar events (Triangle, North Carolina, next month) and our recap of last week’s news via our Startup Rewind.
CARY – It’s hard to believe we are almost halfway through 2021! In the world of innovation and startups, the first two quarters have been a mixed bag. I’ll discuss these bags in three sections; the good, the bad and the mixed blessings.
The big news in NC is the possible reinstatement of the NC Qualified Business Venture tax credit. This is a credit that disappeared in 2013 for early stage investors. It has big advantages for both entrepreneurs and investors thus encouraging these much-needed seed-stage investments in NC. It helps entrepreneurs attract capital and lowers risk for investors by offering up to a 25% tax credit on their investments. The new iteration of this incentive would increase the total cap from $7.5M to $10M and include a 10% Diversity Bonus for investors that invest in companies located in rural counties or opportunity zones. Many of us have been campaigning for this incentive for years to put NC back on par with other states.
Between the American Rescue Plan and the American Jobs Plan, NC could be receiving literally billions of dollars in Federal aid to help struggling businesses and nearly all aspects of our economy. And it just keeps getting better as state judges are starting to decline to grant motions from big Internet service providers to delay implementation of net neutrality rules. This gives smaller companies and startups a level playing field in securing and paying for internet bandwidth.
There have been several major positive developments this quarter for entrepreneurship at both the Federal and State levels. The Biden administration announced that it will fully launch the International Entrepreneur Rule (IER) allowing foreign entrepreneurs who have raised
significant working capital to keep their ventures in the US. I have been a vocal critic of the previous policy but once again the best and brightest from around the world can bring their innovation, technology and jobs to the USA! For more on this see Forbes Biden Revokes Visa
Ban saying It Harms the US.
Just when we thought we were making progress in the areas of diversity, equality and inclusion on the venture front, a new DSI SocSend Report found that in venture fund raising gender and race discrepancies perssited and even grew in 2020. Female entrepreneurs are now raising 70% less capital than their male counterparts. It was very telling to learn that venture capitalists were 27% less likely to agree to a meeting with a female founder and spent up to 58% less time reviewing the products being pitched by female and minority entrepreneurs in general. Not without irony, the study also found that teams that were more diverse sexually and racially outperformed more homogeneous teams.
The Kauffman Foundation published another Report on Startup Financing Trends by Race supporting these findings. Cofounders Capital
supported and signed an open letter to Janine Scianna of the Office of Governmental Affairs encouraging diversity in investing.
It has been widely reported that President Biden seeks a significant increase in the Capital gains tax. Depending on their income bracket,
investors currently pay around 20% on long term investment earnings but the proposed increase would nearly double that rate to 39.6%. Although this tax increase will fund much needed infrastructure and other programs, some are concerned that it will be a disincentive to
I put this in the mixed section because of a silver lining we may reap. Pitchbook found that although VC funding continues to climb in 2021, 75% of all invested capital deployed still goes to late stage deals. Late stage companies are typically not where innovation takes place and there continues to be a growing shortage of early stage funding. Biden has pledged to keep the 1202 tax incentive in place which allows early stage investors to pay zero federal tax on most early stage investments held for five years or more. See my article What’s better than making money on a startup – paying no taxes on the gain. While the higher capital gains rate may discourage some later stage investing, it is my hope that some of those investment dollars will find their way back to early stage investments for the amazing tax breaks still to be had there