February 1 2011
by John Backus

Startup America: Where’s the Beef?

At age 84, Wendy’s pitchwoman Clara Peller introduced Americans to the phrase, “Where’s the beef?”

As I read the much-hyped announcement from the Obama Administration about Startup America, I felt as if I was channeling Clara Peller. Where’s the beef, I ask?

I love entrepreneurs. At New Atlantic Ventures we see entrepreneurs every day who dream of changing the world. We funded 9 new ones in 2010, and 18 total since 2008. I applaud the concept from the White House to recognize that high potential start-ups have created all net new jobs in our economy in the past 30 years. That once venture backed companies account for 20% of all jobs in America today. That entrepreneurship, innovation, and risk-taking should be encouraged. But PLEASE!!! Don’t try to micromanage entrepreneurs and innovation through high-minded, well-meaning, but low impact policies. What do I mean?

The gist of today’s announcement is here: Am I missing something? What I see is a complete re-hash of existing policies, coupled with a bunch of private sector initiatives that are already underway. Let me explain.

1. Startup America proposes to extend the convoluted section 1202 of the tax code which provides a potential zero capital gain for individuals on an investment in companies under $50M in revenue, held for five years, with a cap of $10M or 10X the investment. This section of the code was originally enacted under the Clinton Administration and hasn’t moved the investing needle over the last 15 years. Why would it now?

2. Startup America will provide tax credits for startups in low-income communities. Makes for good politics. But the history of enterprise zones in America is not compelling. Last I heard, a job is a job is a job. Lets create jobs where the businesses want to create them. And not try to pay businesses to create jobs in a place they don’t want to create them.

3. The SBA will invest $400M per year over the next five years in low income communities, cleantech companies, and early stage companies apparently outside of the “over-served” areas of California, Massachusetts and New York. This against a backdrop of $21.8B invested by US VC firms in 2010. Do we really think that an increase in investments of less than 2% by the Federal Government, with strings attached as to what stage, what location, and what sector, will move the needle? I think not.

4. Intel, IBM, Facebook, NFTE, TechStars and more will continue to do what they do but will also fly the Startup America Banner in doing so. No news here.

5. What Washington does best: The SBA, veterans Affairs, Treasury, Commerce, PTO, will, among themselves, host conferences, conduct listening tours, and start multiple business accelerators to try to make sure that our Government is here to help.

The best thing about Startup America is Steve Case at the helm. Steve gets entrepreneurs. I am hopeful that he can use the bully pulpit which is Startup America, take the current hodgepodge of stale initiatives, and work with the Obama Administration and Congress to develop and pass policies that can make a real difference!

To begin that conversation, I would suggest a meal of the following beefy courses, designed to motivate entrepreneurs, angel investors, venture capitalists, and employees who might go to work for startups:

1. Introduce a five year zero tax capital gains rate for all investments held over five years. Good for individuals, partnerships, institutions, corporations, whomever. Real Estate. Public stocks. Small businesses. Private company stock. Good if you sell your company, take it public, or pass it along to your heirs via your estate. Don’t micromanage the hoops we need to jump through to qualify for this rate. Instead, encourage Americans to save and to invest, and to not treat stocks, houses and other investments as hamburgers, needing to be flipped on the grill every few months. Turn us into a nation of savers and investors – and deliver us from our recent evils of flipping assets for short term gains. Oh, and if you want to raise the short term capital gains period from one year to two years to pay for it, that is fine by me.

2. Quit beating up the venture capitalists. We are the best friends that high-potential entrepreneurs have. We invested $21B in start-ups last year. We can invest more this year. Why do you want to make it more expensive and less lucrative for us to do our jobs? Quit trying to tax our carried interest as ordinary income. Let us be the engine behind Startup America, and let us do our jobs as we have always done them.

3. Change the tax treatment of stock options in private companies from ordinary income to capital gains. Encourage people to take risks with their careers, and accept lower startup salaries, by going to high-potential start-up companies. And when that company is bought or goes public, tax their stock option gains at a capital gains rate. More and more people will consider taking the start-up risk if you do so.

So, today I ask, “Where’s the Beef?” But in turn I offer some real meaty ideas to make a real difference in our economy. What is your idea to encourage entrepreneurship in America?

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