The past year saw a new administration, a new Congress, and several policy conversations at the federal and state levels that could dramatically shift the landscape for the startup ecosystem in the U.S. both here at home, and abroad.
Overall, the startup ecosystem in the U.S. is healthy and growing, as discussed in the State of the Startup Ecosystem report released in April by Engine with the Charles Koch Institute and Startup Genome. The report examines a healthy startup ecosystem where more startups are earning more investment in more places across the country, and it demonstrates the integral role played by the recycling of capital enabled by successful startup exits—especially those via acquisition.
While the ecosystem overall remains healthy, it is not yet equitable. In November, Engine explored the barriers many underrepresented founders face across the startup ecosystem—including challenges accessing capital, training, and mentoring and networking opportunities—and shared recommendations for policy changes that could lead to more equity for founders, investors, and employees in our report on Making the Startup Ecosystem More Equitable.
2021 Policy Roundup:
Access to Capital: Many startups faced uncertainty as the pandemic continued into 2021. While Congress created the Paycheck Protection Program to provide loans to help businesses weather the economic downturn, many startups were unable to take advantage of the program, and policymakers should continue to prioritize recovery for small businesses, including the unique needs and challenges that startups face.
During the year, policymakers advanced a bill to boost funding for research into advanced technologies and the creation of regional technology hubs. While the Senate passed the bill—originally known as the Endless Frontiers Act and repackaged as the U.S. Innovation and Competition Act (USICA)—earlier this year, congressional leaders announced in November that lawmakers would conference the Senate-passed USICA with similar but narrower bills passed in the House.
Policymakers separately spent much of the year discussing various competition proposals, including one that could reduce the opportunities that startups have to get acquired. As we examined in our State of the Startup Ecosystem report, acquisitions are closely and positively correlated with investment, and they provide a critical exit opportunity for startups and investors. Additionally, acquisitions play an especially important role in startup ecosystems outside of places like Silicon Valley and New York City.
Intellectual Property: In 2021, patent law took center stage after a year of conversations dominated by copyright policy. The Biden Administration and 117th Congress have each taken promising steps to orient the patent system around themes of quality and balance. Against that backdrop, Engine launched the inaugural Patent Quality Week, to urge both branches to keep this positive momentum, highlight what it means to build a patent system focused on quality, and showcase why this matters across the economy—from startups, to main street small businesses, U.S. manufacturers, and doctors and their patients.
That said, much work remains. For one, Biden’s pick to lead the patent office still has to be confirmed. But once in office, it is critical that she remember all startups are stakeholders in the patent system and dedicate substantial energy to supporting a more diverse, inclusive innovation ecosystem and combating abusive practices that harm startups. Likewise, it has been ten years since Congress passed the America Invents Act—the most substantial patent law in recent memory. Several bills were introduced this year: proposals to increase diversity, restore patent quality mechanisms, and increase transparency in the system. Time will tell whether Congress can take any of these ideas across the finish line in 2022.
Intermediary Liability: Section 230 has continued to be a major focus for lawmakers concerned about content online, but much of the conversation in 2021 continued to be focused on large tech companies: including concerns about extremist content and misinformation, impacts of algorithmic amplification, and alleged anti-conservative bias online. While the law is often considered a benefit for large technology companies, it ensures that companies of all sizes can host user-generated content online and moderate that content in ways that make the most sense for their website or service and its users.
Content moderation has also become a hot-button issue at the state level, with several states considering bills that would punish companies for removing certain users’ speech. While the state bills that have become law are aimed at large technology companies, they would impact the entire Internet ecosystem, including startups. Engine joined other organizations on amicus briefs supporting the challenges of the Florida and Texas social media laws, both of which have been blocked by federal courts.
Privacy and Data Security: In 2021, several states followed California’s lead and considered—and in the case of Colorado and Virginia, passed—their own privacy laws. While the bills are similar at a high level in the rights they provide consumers or obligations they place on businesses, even minor differences in obligations under the laws can create a complex patchwork that is difficult and costly for startups to navigate.
While Congress has yet to pass a consumer privacy bill, policymakers have continued the conversations during hearings on what a national framework could look like, including consumer privacy protections, data security, and breach notification requirements. Looking ahead, and as we explained in a letter to a key committee earlier this year, Congress should create certainty for startups and strong protections for consumers by passing a federal privacy bill.
Talent: Immigration policy was a priority for many lawmakers in 2021, though ultimately nothing made it across the finish line. Democrats spent months trying to attach provisions that would provide a pathway to citizenship and then temporary protections to millions of undocumented immigrants to the Democrats’ Build Back Better reconcilliation bill—which only needs a simple majority to pass the Senate—but the Senate Parliamentarian repeatedly ruled that the policy provisions couldn’t be attached.
The decision comes months after a federal court ruled that the Deferred Action for Childhood Arrivals (DACA) was unlawful, shutting off opportunities for future recipients and creating uncertainty for those currently in the program. Engine joined a letter with other startup ecosystem members over the summer urging Congress to create certainty and a pathway to citizenship for DACA recipients and other Dreamers. Later in the year, we filed comments and startup ecosystem members wrote a letter to the Department of Homeland Security urging the administration to ensure protections for DACA recipients and Dreamers.
Also this year, lawmakers discussed creating a much-needed startup visa to attract would-be founders to build their companies and create jobs in the U.S. As we explained when the Let Immigrants Kickstart Employment (LIKE) Act was introduced by Rep. Zoe Lofgren (D-Calif.), a startup visa is critical to startup growth and U.S. competitiveness.
Tax: After years of proliferation of digital services taxes (DSTs) by countries around the world, 2021 brought steps toward a global solution. Following negotiations in multiple multilateral fora, 136 countries agreed to a global minimum tax of 15 percent and the removal of unilateral DSTs that threatened to increase costs for U.S. startups. As individual countries have dropped their unilateral DSTs as a result of the deal, the U.S. dropped its retaliatory measures. Heading into 2022, however, the global tax deal faces an uphill battle in Congress, and countries have already started lining up contingencies to impose their unilateral DSTs should the deal fall through. We have joined others from across the ecosystem to call upon policymakers to adhere to the spirit of the global tax deal, and make sure it gets across the finish line in Congress.
Domestically, tax-related issues have impacted startups as well, including a provision of the recently passed infrastructure bill that creates data collection and IRS reporting requirements for a wide swath of the cryptocurrency ecosystem. Additionally, the Build Back Better Act, as passed by the House and currently being considered in the Senate, stands to roll back Section 1202 of the Internal Revenue Code that contains how certain qualified small business stock (QSBS) is treated. Present tax treatment of QSBS provides incentives for investment in startups, as well as for founders and early employees to take on the risk of starting or joining an early stage company. We joined others from across the ecosystem to call for QSBS to be preserved as the Senate continues to consider the bill into 2022.
Telecom: Throughout 2021, and in response to the pandemic pushing more activity online, Congress passed measures to support expanding broadband infrastructure and closing the digital divide. The Digital Equity Act, the Affordable Connectivity Program, and the American Rescue Plan all take steps to make broadband more affordable, reliable, and accessible for more people, which creates more opportunities for innovation and entrepreneurship in the short and long terms.
The Biden Administration ended the year advancing nominees—then-acting Chair Jessica Rosenworcel and consumer advocate Gigi Sohn—to the Federal Communications Commission (FCC). Earlier this month, Engine signed a letter joining dozens of other organizations in supporting both nominees’ confirmations. Both have been longtime advocates of net neutrality protections, bridging the digital divide, and updating broadband maps—all issues that impact the startup ecosystem. Rosenworcel was confirmed in early December, and the Senate should quickly confirm Sohn so the agency can advance startup priorities.
Trade: Startups that serve users around the world rely on sound digital trade policies, like unencumbered cross-border data flows, for example. Unfortunately, the openness of data flows is trending downward, and 2021 has come and gone without a permanent solution to the July 2020 invalidation of the U.S.-EU Privacy Shield Agreement that had enabled data flows between the two continents and upon which startups overwhelmingly relied to conduct business in the EU. We joined voices from across the technology ecosystem—including across the Atlantic—in calling for an expeditious solution to enable data flows and promote alignment on other transatlantic digital trade issues. For its part, the Biden Administration has worked with EU counterparts—including through a new transatlantic body called the Trade and Technology Council—but those efforts have yet to yield a replacement agreement. One of the major issues that remains in the way is U.S. surveillance, as acknowledged by both American and European policymakers.
Governments around the world have stepped up their focus on regulating the technology sector, whether that be aimed at reigning in ‘big tech,’ creating new intermediary liability regimes, or regulating emerging technologies like AI. 2022 will see these trends continue and legislative proposals abroad progress toward becoming law.
Startup Roundup:
Highlighting the successes of members of the Engine Network. The Engine team is grateful for the startups in our network and the opportunities we have had this year to help elevate their voices in current policy conversations with lawmakers. As the year comes to a close and we get ready to start 2022, we want to highlight the incredible startups in our network whose work has contributed to a better and brighter startup ecosystem.
