Investor Outlook 9 | Public policy possibilities
Our investors fear a divided Congress probably means few, if any, federal initiatives to help entrepreneurs.
Today’s Question: From a public policy perspective, what, if anything, do you expect out of the nation’s capital that could impact start-ups, either positively or negatively?
Derren Burrell, Founder, President and General Partner, Veteran Ventures Capital: Policy issues around immigration, energy, and labor will dramatically affect the tech companies that seek to automate and find solutions to the world’s challenges in these areas. Seeking to find the right balance in each area will cause tradeoffs and opportunities for LPs (limited partners) looking for an above-average return on investment while providing a double-bottom line impact.
Eric Dobson, Chief Executive Officer, Sheltowee Angel Network: I vehemently believe small business is the key driver for job growth in our economy and to sustain a vibrant middle class. To that end, I would love to see additional federal tax incentives for investing in start-up private equity companies. I think we are going to continue to see increasing interest rates to combat inflation resulting from the staggering amount of money that was printed during the pandemic. Both were unavoidable in my opinion. I do not believe we will have a hard landing and may avoid recession altogether, but I am not an economist. What I do not want to see is a change to the SEC (Securities and Exchange Commission) definition of “accredited investors” that would change the financial requirements. This would have a staggeringly negative impact on start-ups. Crowdfunding is here to stay, but it is not the answer to limiting the number of accredited investors in the market. The community of accredited angel investors is still the mainstay of start-up foundations and growth. I expect it to grow, but it only accounts for about five percent of the total capital invested in start-ups the last time I checked. We need angel investors to continue to engage and invest to continue the evolution of our entrepreneurial ecosystem for the foreseeable future.
Tony Lettich, Managing Director, The Angel Roundtable: In general, we expected minimal public policy-related legislation, which would impact the entrepreneurial community, to come out of Washington during 2023, due to the new makeup of Congress and the potential for gridlock. Regardless, we do expect potential focused regulatory legislation concerning the Crypto/Blockchain issues as we anticipate both political parties will have a mutual interest in addressing the recent issues such as the FTX bankruptcy and the related fallout.
Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital: This is a great question because it’s going to be interesting to see what happens with the new, divided Congress, and how the new Congress interacts with the current Administration. I am aware of a potential new version of the SBIC (Small Business Investment Company) program that is being contemplated at SBA (U.S. Small Business Administration), and the intention is that program would be focused on equity investing in young and small companies across the entire country. That could be a positive, but it’s hard to say at this early stage of the process. It remains to be seen if Congress is going to continue to dump truckloads of funding all over the country, or if they are going to slow spending. It also remains to be seen how the country (states, counties, municipalities) is going to fully digest all of the funding that already has been appropriated and allocated. Fiscal policy (how Congress appropriates funding) and monetary policy (what happens with interest rates) will affect the cost of capital and flows of capital. The unemployment rate and the labor participation rate (how many people who want to work cannot find a job), which are affected by monetary and fiscal policy, could affect how many people decide to start a company. There are a lot of factors and variables involved, and I’m not an economist.
Ken Woody, President and Partner, Innova: The Rural Business Investment Company (RBIC) program out of the USDA (U.S. Department of Agriculture) has been a real game-changer. It has brought hundreds of millions of dollars of investment to rural America. It is similar to the SBIC (Small Business Investment Company) program that allows banks and credit unions to invest in approved funds that meet rigorous criteria and invest in rural companies. This program should be expanded so that not just the coasts and the big cities continue to receive capital funding.
Jarrett Millsaps, Chief Operating Officer, Solas BioVentures: Bottom Line Up Front: A split Congress will make any substantive policy changes in the next two years difficult, and monetary policy will likely become much more of a hot-button issue for the next Presidential cycle than it has been the last couple of years. Lessons abound for both political persuasions from these midterms.
Monetary policy will be more and more center stage, but the reality is nothing will substantively change until the next Congress and President are inaugurated. Chairman Powell is in office until 2026, a split Congress now will make for much tighter negotiations on the Hill, and the President (regardless of the occupant) really can’t do much to/for a monetary policy without alignment from Congress and the Fed. Individual tax treatment issues like the 1202 rule and carry considerations will likely not get very far.
The continuing rise in interest rates will make private money more and more appealing. Venture capital will likely be better positioned than private equity (from a policy perspective) to capitalize on smart deals. The secret sauce remains the same – smart due diligence, not getting overextended, and preserving your silver bullet inventory.