VentureBeat

I just got home from the annual meeting of the National Venture Capital Association, which was a fun experience. This may sound a little weird (especially since I’m not looking to get funding for a startup anytime soon), but it was actually kind of exciting to be in a conference room full of venture capitalists. They are, after all, the heart of what we cover at VentureBeat, but until now I’ve only been able to meet a few of them. Even better, I got to pick some of their brains.

The meeting’s highlight was watching famed venture capitalists John Doerr and Michael Moritz interview each other, but there were other events of interest. In this mobile post, I summarize some of the discussion on policy issues relevant to VCs (the short version — significant legislation is unlikely to pass this year) and talk about my general impressions of the conference.

Note: I mention the carried interest tax, but don’t go into much detail so as not to bore people to death. Those of you who are interested can read more at the NVCA’s website, as well as our article about why we support the tax.

Private Equity Week’s Dan Primack has a good follow-up on the debate about the new tax for venture capitalists and other investors.

A public backlash against these investors is encouraging politicians: The extravagant ways of Blackstone, the buyout firm that that just went public and where leaders were feasting on $300 stone crabs, haven’t helped. The tax proposal is gathering momentum.

And while most investors are upset about the tax, New York venture capitalist Fred Wilson (pictured left) says the tax is justified:

I strongly believe that long term capital gains should be taxed differently than short term capital gains. And I also strongly believe that capital gains should be taxed differently than ordinary income. The counter argument is that the economic incentives to take risk with your capital should be enough and you don’t need additional tax incentives. I don’t buy that. Human nature being what it is, most people are going to want to be conservative with their capital. Taking a risk with your capital, particularly on new business initiatives (whether its a new restaurant in the neighborhood or a cure for cancer), is something we need to encourage. And many of the developed countries in the world agree. In some countries, capital gains are not taxed at all. I don’t think we need to take the economic incentives that far.

But, and this is a big but that will annoy most if not all of my colleagues in the VC and private equity businesses, if you are generating those gains with other people’s money (OPM), then that is a fee you are being paid and it should be taxed as ordinary income. I really don’t see how anyone can argue otherwise with a straight face.

If congress is successful in taxing carried interest as ordinary income, it will massively increase the amount of taxes I pay. So be it. Someone has to pay the taxes to keep our troops equipped, our borders secured, our schools modernized, and our children healthy. It might as well be me and my wife.

Meanwhile, here’s the statement by Mark Heesen, president of the National Venture Capital Association (NVCA), which represents 480 venture capital and private equity firms:

The Bill proposed today by House Democrats to change the taxation of carried interest from a capital gains rate to an ordinary income rate is extremely concerning to the venture capital community. We assert that carried interest in the venture capital business model is a true capital gain and should continue to be taxed at that appropriate level. This proposed legislation could have far reaching, negative implications for the start-up community, venture capital investment, and the US economy. It is critical that legislators identify and fully comprehend the unintended consequences of this proposal as it could impact one of the country’s most important economic engines. We look forward to continuing a dialogue with members of Congress on this issue as the legislative process continues.

Another concern is how these VC and other partnerships will respond to such a tax. Some may try to exploit loopholes that let them move their entities offshore but continue to invest here, for example. Experience has shown that you can’t just levy a tax and expect a corresponding increase in receipts. Congress should keep this in mind, and raise taxes only in a way that doesn’t mean a decline in tax revenues as a result.

Sarbanes-Oxley, a batch of legislation passed in 2002 to tighten financial controls at public companies in the wake of the Enron and Worldcom disasters, is generally a good thing.

It has one major flaw, however: A lack of guidance to companies about exactly how to comply with the Act. It hits small companies hard, because they’re forced to hire expensive accounting and legal help to interpret what are often vague guidelines. They end up overpaying, to ensure they comply.

This is great for accounting companies’ bottom line, of course. But Mark Heesen, president of the National Venture Capital Association blasts the accounting industry for the shortcomings.

His critique comes in response to a report by the the Committee on Capital Markets Regulation, an independent, bipartisan committee composed of corporate and financial leaders formed in September to outline how to make U.S. capital markets more competitive.

The report comes two weeks before the Securities & Exchange Commission begins to debate how to reform Sarbanes-Oxley. Specifically, the report suggests that small companies — those with a market capitalization less than $75 million — be allowed to defer compliance to the Act. That’s a good start.

However, Mark Heesen, president of the National Venture Capital Association, singles out the accounting community for special criticism. He says the industry’s footprints were all over the report, and says it doesn’t go far enough in making accountants more accountable:

…that the accounting community is charging huge fees for 404 and not taking any responsibility as to decision making authority to decide what is material and what is not material is mindboggling.

Here’s where you can find a copy of the group’s report.

For those who live and work in Silicon Valley, the positive impact of foreign nationals on the region is obvious. The area has long been a magnet for the best and brightest students, entrepreneurs and professionals from all over the world to thrive. Just look at some of the companies that were founded by these individuals and you start to get a sense as to their value • to our lives and to our economy.

Imagine if Jerry Yang had stayed in Taiwan and had not been able to immigrate to the US as a child? Or Andy Grove remained in Hungary? Or Sergey Brin was now living in Russia? Companies that have changed the way we live, work and think would certainly not be headquartered here • and maybe wouldn’t exist at all.

The venture capital community has long understood the importance of making sure the cream of crop continues to come to the US to build businesses. In the past, based on anecdotes, we had estimated that at least half of our member’s portfolio companies had at least one immigrant founder. But no one ever made a serious attempt to quantify it until now.

Today the National Venture Capital Association (NVCA) is releasing a study that reveals some astounding numbers regarding the national prevalence and the contributions of immigrant entrepreneurs to our economic health • and highlights again the urgent need to fix our immigration policies before the US loses its global innovation leadership.

NVCA has been involved for years in the effort to reform H1-B visa and green card policies. But given the increased rancor of the immigration debate this year, the focus on illegal immigration, and the strong sense within the venture community that these issues impact US competitiveness we decided we needed hard data to really make the case. The study speaks for itself in terms of the dramatic impact immigrant entrepreneurs have had on the US economy.

In terms of positive impact, the numbers are impressive:

• Companies founded by immigrants and initially backed by venture capital account for more than $500 billion of total U.S. market capitalization.

• Over the past 15 years, in fact, immigrants have started 25 percent of all the venture-backed companies that have gone public.

• Immigrant-founded, venture-backed public companies today employ an estimated 220,000 people in the United States and over 400,000 people globally

Quality may be more important than quantity, however, as these companies • concentrated largely in cutting edge sectors • tend to generate white collar jobs that pay high salaries, which in turn help to create wealth and raise living standards.

We also looked to test the premise that half of the current venture-backed companies had at least one immigrant founder. We surveyed these companies and garnered more than 340 responses from around the country. It appears our intuition was in the ballpark. Of those responding to the survey, nearly half (47 percent) of the founders of private companies were immigrants, and almost two-thirds (66 percent) of the immigrant have already started or intend to start more companies in the United States.

While the successes have been great for our industry and the US economy, they also suggest an alarming reality: The US is essentially stunting its own growth by not reforming its immigration system with the proper urgency.

Responses to the NVCA survey bear this out:

• More than 2/3 of immigrant entrepreneurs agreed with the notion that U.S. immigration policy has made it more difficult than in the past to start a business in America.

• Sixty-six percent of respondents who use H-1B visas indicated that “current U.S. immigration laws affecting skilled professionals harm American competitiveness.”

• Among companies who use H-1B visas, nearly 40 percent said the lack of H-1B visas •has “negatively impacted [their] company when competing against other firms globally.”

• One-third of the respondents indicated that the lack of H-1B visas had influenced their firm’s decision to place more personnel in facilities abroad.

Fortunately, it’s not too late. According to the research, 95 percent of the immigrant founders in private companies would still start their companies in the United States if given the choice today. By raising the H-1B cap, among other measures, we can ensure that America continues to draw the world’s best and brightest minds • and thus share in the wealth that they create as crucial participants in the US innovation economy.

To view the entire report • including methodology, etc. • please go to www.nvca.org/pdf/AmericanMade_study.pdf