The Big Story: Startups call for better access to capital for entrepreneurs of color
On Wednesday, startup founders advocating for a more equitable startup ecosystem sent a letter to members of the Senate Banking Committee, urging support for two bipartisan bills aimed at improving access to capital. The letter highlighted the ongoing race-based barriers founders of color face when securing capital and emphasized the importance of community development financial institutions (CDFIs) and greater investor diversity in addressing these inequities.
Expanded and equitable capital access is critical to growing the startup ecosystem, and the bills would direct capital to founders of color in multiple ways. The Community Development Investment Tax Credit Act would establish a tax credit to direct investor capital to CDFIs, improving diverse founders’ access to debt capital. The Expanding American Entrepreneurship Act, meanwhile, would improve access to equity capital by expanding the number of investors that can participate in certain funds that invest in startups. Those funds, called 3(c)(1) funds, are private funds that under current law can have no more than 100 beneficial owners (who are accredited investors) or 250 beneficial owners for funds under $10 million. The Act would raise the number of permitted investors to 500 and the cap to $50 million, allowing more investor participation at lower levels, greater participation of accredited investors of color, and more diversity amongst startups that receive funding.
The legislation to expand 3(c)(1) funds has passed the House, but the Senate has yet to take up the package. As the letter explains, both pieces of legislation are critical for entrepreneurs of color—CDFIs represent “an important alternative for new and small business owners of color,” and to improve access to equity investment, it is critical to diversify the pool of startup investors, as “investment funds led by managers of color are three to four times more likely to invest in entrepreneurs of color.” Policymakers should swiftly act to pass these bills to ensure the strength and diversity of our innovation ecosystem.
Policy Roundup:
Immigration agency clarifies processes for foreign entrepreneurs. On Monday, the U.S. Citizenship and Immigration Services published updated information about the International Entrepreneur Rule, which enables foreign talent to launch and grow startups in the United States. The updated information clarifies which investments qualify, expounds upon the evidence requirements of adjudicators, and clarifies that startups must demonstrate the potential for rapid growth through prescribed investment levels or “alternative evidence.” The International Entrepreneur Rule was broadly supported by the innovation ecosystem, but has thus far had limited success, in part due to application wait times. The administration should continue its work to bring clarity to the program’s requirements so the U.S. can attract and retain talented innovators from across the globe, strengthening our startup ecosystem.
Circuit court judges skeptical of California Age-Appropriate Design Code constitutionality. A panel of judges for the Ninth Circuit heard arguments Wednesday in a case challenging the California Age Appropriate Design Code, a law requiring all “businesses that develop and provide online services”—including startups—to perform impact assessments regarding the nature of content on their services. The court questioned the constitutionality of that provision, with a judge asking the State’s lawyer if she was “confessing that the state is trying to regulate the content.” The case, NetChoice v Bonta, is being heard in the court after the state appealed a preliminary injunction granted by a district court. The outcome of the case is being closely watched since several states have followed California’s lead by passing similar laws that will effectively force companies to collect additional data from users or block some lawful content and features from all users.
E-Rate program expanded to address the digital and educational divide. On Thursday, the Federal Communications Commission voted to expand the E-rate program, giving schools and libraries the ability to purchase and loan Wi-Fi hotspots and wireless Internet services to students. This move carries on the successful effort of the now defunct COVID-19 pandemic’s Emergency Connectivity Fund in connecting students without reliable Internet access at home. Accessible high-speed Internet access plays a crucial role in creating an equitable innovation ecosystem. As the Affordable Connectivity Program remains unfunded, the E-Rate modernization will further efforts to close the gap in access for students, our next generation of technology entrepreneurs.
Patent office clarifies eligibility for AI inventions. On Tuesday, the U.S. Patent and Trademark Office issued updated guidance clarifying whether an AI invention’s subject matter is patent eligible, a debate that is important for ensuring only quality patents are granted. As prompted by the executive order on AI, the update includes three new AI invention examples to illustrate eligible, non-abstract subject matter as determined through the Supreme Court’s Alice/Mayo test. These examples include the use of an artificial neural network to detect anomalies, AI-based methods of analyzing speech, and an AI model that personalizes medical treatments to patients. As AI innovations rapidly develop, providing these fact-specific examples on subject matter eligibility increases access to patents while also mitigating the potential for the abuse that arises from low-quality patents.
Startups stand to benefit from AI-ready data resources. This week, Engine and the San Diego, Calif.-based startup Benchmark Labs weighed in on a Commerce Department open data effort to urge the creation of AI-ready government data assets. Startups are using government data to create innovative solutions that address key problems in sectors across the economy, from agriculture to business services. Increasing access and lowering barriers to using that data, especially for AI applications, will help promote innovation and startup competitiveness.
Startup Roundup:
ICYMI #StartupsEverywhere: Green Bay, Wisconsin. The video game industry is concentrated in a handful of locations, leaving incredible talent in underserved areas frequently overlooked. Ben Kvalo started Midwest Games to change that narrative, supporting underrepresented game developers because increasing diversity in game development leads to better products and bigger markets. Ben recently joined us to talk about Midwest Games, the challenges of raising capital in the Midwest, the importance of small developers in maintaining a healthy video game ecosystem, and the potential benefits of AI for the industry.
