The Hill: How Washington can make America the best place for innovation

Feb 14, 2017Predictions

This article was originally published February 13, 2017 on The Hill.

Early stage technology investing may seem to some like a deregulated endeavor. Should government play a bigger role? What can policymakers in Washington do to facilitate innovation for startups?

“I know that regulation can feel uncomfortable,” U.S. Securities and Exchange Commissioner Kara Stein has said “But we’ve learned that markets do not effectively regulate themselves and when basic rules aren’t followed, the results are detrimental for everyone.”

The problem comes when the rules become too restrictive. So how can policy help offset the key imbalances that restrain innovation today?

Skilled labor shortage

Most technology companies today are struggling to find skilled talent. Recent studies] estimate that major American companies—already begging for skilled so-called STEM workers, or those specializing in science, technology, engineering, and math—will need nearly 1.6 million STEM-literate employees for the workforce in the next five years.

Education policies that encourage young people to study STEM fields could counteract that labor shortage. They could take the form of scholarships, grants, subsidies, and low-interest student loans. But someone entering college today won’t hit the job market for several years, so the impact of education policy change on the economy takes years to materialize.

A faster way governments can help alleviate the skilled labor shortage is to allow companies to bring in talented engineers from other countries. The H-1B work-visa program is all about bringing well-qualified high-tech people from around the world.

Unfortunately, President Trump’s recent executive order limiting visas from certain countries put the status of H-1B visa holders in question. Silicon Valley technology companies have raised concerns that it could severely affect the pace of innovation because companies like Facebook, where more than 15 percent of the workforce is an H1-B visa holder, are considered dependent on this visa program.

Big minds on small problems

Silicon Valley attracts people who want to change the world and have big visions for it. Take Elon Musk, who founded SpaceX to take mankind to Mars, or Mark Zuckerberg, who wants to connects everyone and end all diseases. Anyone who’s had the opportunity to pitch an idea to a venture capitalist knows that they fund “disruptive ideas” and “billion-dollar opportunities.” Unfortunately, some startups still get venture funding even though they aren’t that bold. There are two reasons for that.

The first reason is that some big ideas take too long to materialize. We’re talking decades instead of years. Ventures capitalists are typically looking at returning a profit to their investors within five to seven years. As a result, they will pass on opportunities that they know take longer to materialize.

Policies that encourage research, such as the research and development tax incentives of the Obama administration, will buy a worthy idea the extra time it needs to develop and turn into a fundable business. Some countries give startups as much as 15 years with limited taxes.

Policies that allocate federal budget to research grants, such as the $7.5 billion annual budget of the National Science Foundation (NSF), are another way to support innovation with long lead times. In 1994 for instance, the NSF awarded a grant to a project led by Google founders Larry Page and Sergey Brin, which ultimately made Google possible.

The second reason is that some small ideas generate disproportionately high returns. Sometimes, it’s pure luck and there’s little policy can do about that. Sometimes, however, it can seem orchestrated from the inside and that’s a failure of governance. Policies meant to guide the composition of private boards could help in such unfortunate situations.

Privacy and data security

With the mobile revolution of the past decade, there’s a lot more data about everything and everyone than ever before. There’s no going back. This data can be manipulated by a person, a company, or a government.

A person using our identity is a criminal. We’re very clear about that as a society and have well defined policies and laws to prevent and punish identity theft.

A company using our identity is mostly welcome. We usually trade our personal data (for the purpose of advertising) in exchange for being able to use a service for free. We prefer a free service to a paid one and a relevant advertisement to a lousy one, so as a result, we generally are comfortable with companies using our data.

With the right policy, a government tracking our data can be very valuable. But what’s “right”? I believe that we need to have that debate and here’s why.

We rely today on very rough approximations to ensure our country’s security against threats like terrorism: nationality, race, gender, age. With the mobile technology however, we have access to much more granular data including who regularly communicates or meets with terrorists and where. That information could be invaluable to keep us safe. On the other hand, when government has had easy access to our information in the past, it has had nefarious consequences, such as turning into a surveillance state and persecuting dissidents.

My point here is that we need to stop relying on gross approximations like ethnicity when we could use much more reliable information to keep us safe, but that we need to do that ethically and responsibly. We need to have a real conversation about how much government intrusion is permissible and I hope it results in meaningful policy.

But policy for the sake of policy can be counterproductive. Take Title III of the Jumpstart Our Business Startups (JOBS) Act, which allows for investment “crowdfunding” since May 2016 and was aimed to make it easier for “emerging growth companies” to get to an an initial public offering. It’s early so the jury is still out on how successful it will be, but many professional early stage investors have stopped funding companies that took crowdfunded money because they represent an unqualified risk on the balance sheet.

Time will tell how the less regulated environment of the Trump administration will affect startups, but as Commissioner Stein put it, “There is no better place in the world to form a startup and follow your dream than in the United States—and we need to keep it that way.”