Startup Priorities in the President’s Budget Request

On Tuesday, President Obama sent his final budget request to Congress and it amounted to a whopping $4.1 trillion. In reality, the President’s budget request is typically little more than legally mandated political theater. It’s an opportunity for Democrats and Republicans to rally their bases and duke it out over fiscal strategy and funding priorities. This year’s budget request will likely go largely unfulfilled by the Republican-led Congress. In fact, it was declared “dead on arrival” by Republican lawmakers, and, in an unprecedented move, House and Senate Budget Committee leadership have elected to forgo hearings on the request entirely.

Still, if nothing more than a wish list, the President’s budget lays the groundwork for future policies and, this year in particular, represents a roadmap for the next Administration to espouse or eschew. There are a number of proposals in the President’s request worth highlighting—policies and programs that, if championed by Congress, would support innovation and entrepreneurship.

Investing in Tomorrow’s Workforce

One of the startup community’s most persistent challenges is accessing a pipeline of skilled talent in order to both help startups grow and create news ones. While the Obama Administration has been an unwavering champion of immigration reform to bolster the country’s pool of high-skilled workers, immigration represents only part of the solution (and unfortunately, neither high-skilled immigration reform nor comprehensive reform appears to be going anywhere for the time being). The other piece is ensuring that we are training tomorrow’s entrepreneurs and tech workers here in America.

The President’s budget request includes $4 billion for improved computer science education through its recently announced Computer Science for All initiative. The funding would support states’ efforts to expand CS programming and focuses largely on training teachers and expanding access to quality instructional materials. The Administration has also called on local leaders, educators, and the tech industry to get involved in expanding CS education.

The budget also proposes creating two new funds: a $75 million American Technical Training Fund, which would provide competitive grants to support evidence-based, tuition-free job training programs in high-demand fields, and a $2 billion Apprenticeship Fund, which would build on the Administration’s successful American Apprenticeship Initiative strategy and aim to spur new innovations in apprenticeship.

Finally, the budget proposes creating more than 50 new “Talent Hot Spots” that would “prioritize a sector and make a commitment to recruit and train the workforce to help local businesses grow and thrive, attract more jobs from overseas, and fuel the talent needs of entrepreneurs.” The Administration estimates that this program could create a pipeline of more than half a million skilled workers in just five years, talent that could feed entrepreneurial growth.

Expanding Broadband Access

Earlier this year, the Federal Communications Commission reported that there are still 34 million Americans (or about 10 percent of the country) who lack access to broadband at sufficient speeds. Startups depend on a healthy and competitive broadband market, and it is essential that federal policies encourage connectivity. The President’s budget request includes continued investments in existing federal programs that support the expansion of high-speed broadband to all Americans. Additionally, the budget request calls for future spectrum auctioning, which will allow for more internet service providers to participate in the mobile broadband market.

Promoting Innovation

Federal investments in research and development can help spur innovation in the private sector and the creation of new companies. The President’s budget includes $152 billion in funding for research and development, an increase over last year’s request. Much of this investment is targeted for innovative technologies such as Big Data services, supercomputing, robotics, and nanotechnology. The budget also includes $4 billion for autonomous vehicle R&D, representing an unprecedented level of investment by the federal government in this new market and a huge win for proponents of this growing technology.

Making the Tax Code Work for Startups

Finally, the budget request includes a number of proposals that would streamline and improve tax benefits for startups and entrepreneurs. The President proposes simplifying the existing Research and Experimentation (R&E) tax credit. Last year, the R&E credit was modified to allow small companies to claim it against payroll taxes, instead of income taxes. This made it available to startups, many of which could not claim the credit previously due to a lack of taxable revenue. Still, the process of applying for the credit remains complex and difficult to navigate for startups. The President’s budget proposes simplifying the credit’s formula, making it easier for startups to take advantage of.

The Administration also proposes quadrupling the amount of startup expenses (things like legal fees, office supplies, or recruiting costs) that entrepreneurs can deduct from their federal income taxes, increasing the deduction from $5,000 to $20,000. This will make it less costly to start a business and allow innovators to put more money back into their startup more quickly.

Looking Forward

The frustrating truth is that most of the President’s budget proposal won’t receive Congressional consideration. However, we hope that future policymakers can coalesce around some of the proposals outlined above, which represent reasonable policies that would encourage the growth of startups that drive our economic success and are responsible for all net new job growth in the United States. Finding common ground in today’s political climate is difficult, but it is essential to ensuring that America remains a place where the ideas of the future can grow and thrive.

Startup News Digest: 1/22/2015

Our weekly take on some of the biggest stories in startup and tech policy. 

Safe Harbor Agreement Nears Deadline. With a January 31st deadline looming, there is more pressure than ever for the U.S. and EU to wrap up negotiations around a “Safe Harbor 2.0” agreement. In a letter sent to U.S. and EU leaders last Friday, industry stakeholders emphasized that “the consequences could be enormous for the thousands of businesses and millions of users impacted” if a deal is not reached. But another setback came this week when the Senate Judiciary Committee postponed consideration of the Judicial Redress Act. The bill, which would extend rights to judicial redress to citizens of the EU and other designated countries, is seen as essential to advancing an updated safe harbor agreement. This delay makes it even less likely that a deal will be reached in time, the ramifications of which could disproportionately impact startups.

Another Proposal to Weaken Encryption. Another week, another misguided state bill seeking to weaken encryption. The legislation comes from a California Assemblymember whose proposal would prohibit the sale of smartphones in the state with unbreakable encryption. A similar New York bill requiring a “backdoor” for encrypted technologies was covered in last week's digest. In an opinion piece, Christian Dawson of the i2Coalition does a good job breaking down why policies like these would stifle the Internet economy. He writes, “If the U.S. government were to institutionalize backdoors, it would be a heavy burden to businesses, and an operational lift that would likely force a large number of small companies to shut their doors.” We couldn’t agree more.

Verizon Joins the Zero Rating Crowd. Tuesday morning, Verizon announced a new sponsored data program, FreeBee Data, renewing debate around “zero rating” programs and whether they violate net neutrality principles. Under the FreeBee program, content providers have the option to pay Verizon a fee to exempt their content from customers’ monthly data caps. Verizon is the third wireless provider to offer a cap-exempt data program—AT&T has been running a similar sponsored data program since 2014 and T-Mobile has its own video-specific service, BingeOn (which has come under intense fire in recent weeks). The FCC’s Open Internet rules don’t explicitly outlaw “zero rating” programs, but the agency reviews them on a case-by-case basis whether the service harms consumers or businesses. They recently requested meetings with both AT&T and T-Mobile on their programs, and have said that they were notified by Verizon about FreeBee. We’re tracking.

A Grim Outlook for Startup Financing? Recent turbulence in the global stock market may have an impact on 2016 startup financing, the Washington Post reported this week. Volatility in the public markets has many investors considering whether some growing tech startups have been overvalued, a concern that's "likely to trigger a wider pause, denying funds for the innovators that disrupt industries and create new markets." Not good. And while 2015 was a banner year for VC investment, with $72.3 billion going into venture-backed companies in the U.S., (the highest since the dot-com boom), activity slowed by the fourth quarter, suggesting changing investor sentiment. Further, tech IPOs were significantly down in 2015 as companies are treading cautiously into the public markets. 2016 may prove to be an especially important year for policy that promotes greater capital access.

VC Sets New Diversity Standards. Kapor Capital, a longtime leader in its commitment to diversity in the tech industry, announced a new set of standards for its portfolio companies this week. TechCrunch calls it a “a four-part roadmap for startups to foster diverse and inclusive cultures early on.” This commitment will soon become one of the terms in all Kapor’s future investment agreements. Portfolio companies will be required to establish diversity and inclusion goals, invest in tools and resources that assist in mitigating bias, organize volunteer opportunities for employees, and participate in Kapor’s diversity and inclusion workshops. Way to put their money where their mouth is!

Startup News Digest: 12/11/2015

Our weekly take on some of the biggest stories in startup and tech policy. 

Net Neutrality Has its Day in Court. The net neutrality debate that has dominated tech policy headlines for the past two years finally got its day in court last Friday. A panel of three judges from the DC Circuit heard oral arguments in the lawsuit brought by a consortium of ISPs to invalidate the FCC’s net neutrality rules. Proponents of the FCC’s rules came away from the hearing fairly optimistic. A majority of judges seemed to side with the FCC in the most crucial aspect of the dispute: whether or not the Commission had adequate authority to reclassify Internet access as a “telecommunications service.” The court pushed back more significantly on the FCC’s authority to reclassify mobile broadband and the adequacy of the notice the FCC provided about the final rules it adopted. While we remain optimistic about the Court’s ultimate decision, the net neutrality debate will almost certainly not go away when the Court issues its ruling early next year. It seems likely that the case will ultimately end up before the Supreme Court, and Congress continues to ponder whether it should pass anti-net neutrality legislation.

Feinstein Wants Tech to Report Terrorist Activity. As terrorists attempt to use Internet platforms to mobilize followers, disseminate propaganda, and coordinate attacks, working to diminish militants’ capacity to organize through social media is critical. But the Requiring Reporting of Online Terrorist Activity Act, introduced by Senator Dianne Feinstein (D-CA) earlier this week, is not the answer. The bill would require tech companies to report “any terrorist activity” that they have knowledge of to law enforcement. This obligation seems innocuous on its face, but as often happens, difficulties arise in determining how to actually apply this standard. Emma elaborates on all of the reasons the bill’s controversial (and previously rejected) framework could potentially do more harm than good here.

Computer Science in Classrooms. An education bill signed into law on Thursday acknowledges computer science as a foundational academic subject. By doing so, the bill puts computer science “on equal footing with other subjects when state and local policymakers decide how to dole out federal funds.” This new designation could potentially accelerate computer science's introduction into classrooms across the U.S. and ultimately help address the country's growing tech talent shortage.

Bill Would Cut Back H-1Bs. Senators Bill Nelson (D-FL) and Jeff Sessions (R-AL) introduced a bill this week that would reduce the number of H-1B visas available by 15,000 and also modify the way those visas are allocated—requiring they go to workers who will earn the highest wages. The H-1B program allows companies to hire foreign high-skilled employees, including those with expertise in science, engineering, and computer programming. While these visas are highly coveted within the tech industry, accounts of program abuse have galvanized members of Congress to restructure the program. “This bill directly targets outsourcing companies that rely on lower-wage foreign workers to replace equally-qualified U.S. workers,” Sen. Nelson said in a statement. While attempting to prevent bad practices by specific outsourcing companies, this bill would unduly harm the wider tech industry by further limiting global talent from contributing to U.S. companies, big and small. 2015 saw a record number of H-1B applications: 233,000 for the current 85,000 spots.

Investment Crowdfunding for Tech? Not So Fast. An article in this week’s Wall Street Journal highlighted a few of the shortcomings of investment crowdfunding, a new fundraising tool for startups made legal last month with the release of SEC rules. Those rules contain numerous burdensome requirements for companies raising equity from the crowd, potentially deterring high-growth technology startups. For instance, once a company takes on over 500 investors or grows to a certain size, it must file regular disclosures with the SEC: “It is all the pain of an IPO without the benefits of the IPO.” We’ve previously detailed some of the other issues with those rules, concluding that policymakers must continue to work to lower the cost of raising seed capital through crowdfunding or the impact of investment crowdfunding for startups will be modest.

What We Heard in Iowa: Earlier this week, Engine teamed up with the Technology Association of Iowa to discuss technology policy with Iowa entrepreneurs, caucus goers and two of the 2016 presidential candidates in Cedar Rapids. As the Cedar Rapids Gazette reported, the candidates agreed that education is “vital to innovation” but, not surprisingly, disagreed on the federal government’s role. O’Malley’s address focused on his track record as governor of Maryland. While Fiorina took a different approach, focusing on national security and technology “as a tool and a weapon” in those efforts. The forum offered a glimpse on where at least two candidates stand on a handful of important tech issues and as we look to 2016, we hope to hear a lot more.

Patent Suits Cost Universities. Universities have been getting more involved in patent reform policy and a recent Brookings article explains why. Its author also emphasizes that universities are turning observers off by engaging in offensive litigious actions, which is seen as contrary to the public mission of a university. Furthermore, it doesn’t make sense for universities to be involved in patent reform conversations since universities as a group do not have a financial interest in patenting: 87 percent of tech transfer offices operate in the red. Since there is a false belief among some that without patents there would be no innovation, it is important that the public voice of universities acknowledge “that the debate on the impact of patents on innovation is not settled and that this impact cannot be observed in the aggregate, but must be considered in the context of each specific economic sector, industry, or even market.”

Where are the Women in Tech? A new list was published on the “Best Cities for Women in Tech” and Washington, DC topped it, with women making up about 37 percent of the tech workforce (New York, NY comes in at number five and San Francisco, CA at 23). Kansas City, Missouri (at number two) was one of the only two cities in the study where women in tech don’t face a gender pay gap. Recruitment of women and underrepresented groups in the tech community remains a large part of the diversity conversation: language used in outreach and job descriptions could be turning well-qualified applicants off from even applying. One startup, Textio, is trying to address this problem with their product that “applies a form of artificial intelligence (AI) called natural language processing (NLP) to study the verbiage in documents” and can help highlight words with certain negative connotations.

SEC Hosts Forum to Discuss Capital Access Issues for Startups

Last week, Engine participated in the Securities and Exchange Commission’s (SEC) 34th annual Government Business Forum on Small Business Capital Formation, where industry and government experts shared their perspectives and made recommendations on capital access issues for small and emerging companies.  

A lot has happened since the last forum in 2014. In March, the Commission adopted rules to implement Title IV of the JOBS Act, also known as Reg A+, which allows private companies to raise a limited amount of capital without having to meet many of the onerous disclosure and reporting conditions required of publicly-traded companies. And just last month, the Commission finalized crowdfunding rules that will allow startups to raise capital from everyday investors over the Internet, marking the completion of the Jumpstart Our Business Startups Act (JOBS Act) rulemaking process.

While it will take time to assess the impacts of these newer rulemakings, the SEC and other stakeholders have been closely monitoring other developments in small business capital markets to help glean lessons to guide future Commission policy. In 2013, the SEC lifted the ban on general solicitation, allowing companies to publicly advertise that they’re raising money. AngelList, a leading equity crowdfunding portal for accredited investors, allows issuers on its site to use general solicitation. However, AngelList’s COO Kevin Laws noted that in the past six months, only two percent of deals on the platform took the public, general solicitation route. The other 98 percent were limited to a private list of investors.

This data from AngelList affirmed what SEC Chairwoman Mary Jo White’s noted in her welcome remarks (and something we have lamented): compared to traditional private capital-raising options, general solicitation still makes up an extremely small portion of the offering market. So why the poor showing? Startups are wary of this funding path because of the unclear definition of what exactly constitutes “general solicitation,” as well as onerous requirements for verifying accredited investor status. The good news, though, is that the Commission has “not observed widespread fraud, as some had feared would occur.”

The use of Reg A+ has also been tepid since becoming effective in June. While the SEC has not yet compiled comprehensive data on the impact of these rules, Sara Hanks, CEO of Crowdcheck, reported that she has seen only around 25 filings of variable quality. She attributed this lackluster showing to a number of factors (it takes a long time to do a Reg A+ filing and the rules are still relatively young), but emphasized that state-level registration requirements for companies seeking less than $20 million are a huge deterrent. We have expressed concerns about this and echo Sara’s wish list for improvements to the coordinated review process, a single filing form, and a single payment process. Each of these changes would simplify the Reg A+ process and incentivize participation by small and emerging companies.

Finally, participants were eager to discuss the Commission’s most recent rulemaking: investment crowdfunding for non-accredited investors. While the rules will not be effective until May 2016, stakeholders (including Engine) are already advocating for modifications to ensure the crowdfunding market achieves its full potential.

One improvement recommended by Kevin Laws was to allow non-accredited crowdfunding investors to participate in alternative investment vehicles like the syndicates common on AngelList. Syndicates, which have been enormously successful in the accredited crowdfunding market, allow for known investors to create funds in which other investors can participate, allowing less experienced investors to benefit from an insider’s expertise (for a more detailed explanation of how they work, see AngelList’s FAQs). Under Title III of the JOBS Act, syndicates, funds, or other special purpose vehicles (“SPVs”) are not eligible for the crowdfunding exemption due to limits on which entities can raise capital through non-accredited crowdfunding. But as we’ve argued, syndicates and other SPVs allow for additional investor protections and portfolio diversification while simplifying the fundraising process for issuers. Congressional action on this piece would make investment crowdfunding in the U.S. safer and more profitable for non-accredited investors.

As the impacts of the JOBS Act are realized, we will see both successes and failures. And importantly, modifications will need to be made. The early, meager response to both general solicitation and Reg A+ should not discount the enormous potential they represent. Instead, it should incent policymakers to pursue solutions that will improve upon the statute and regulatory framework. It is important that constructive conversations like those that took place at last week’s forum continue. A dialogue between those on the ground and those in government is essential to realizing the the original intent of the JOBS Act: facilitating access to capital for innovative entrepreneurs to launch tomorrow’s startups, create jobs, and drive economic growth.

Startup News Digest: 11/6/2015

Our weekly take on some of the biggest stories in startup and tech policy.

More Eyes on EU Data Laws. Congress examined international data issues at two separate hearings this week, covering everything from cross-border data flows to U.S. surveillance reform. But the main focus was the recent EU safe harbor decision. Negotiators have until the end of January 2016 to find a replacement for safe harbor. However, businesses of all sizes are already beginning to weigh whether they should simply move their data to European servers over concerns that alternative compliance mechanisms may not be valid. We’ve noted on our blog (and others agree), forced data localization would be incredibly costly - especially for smaller companies - and would have a chilling effect on internet innovation. We’re tracking.

Pros and Cons in SEC’s Crowdfunding Rules. The release of the SEC’s long-awaited investment crowdfunding rules is a huge victory in itself: it facilitates an entirely new form of fundraising for cash-strapped startups. But, are the rules themselves any good? We’ve written previously about changes we wanted to see to the proposed crowdfunding framework, and the SEC’s rules incorporate a few of the items on our wishlist. Specifically, funding portals are now allowed to subjectively decide whether or not to list certain companies on their platforms and may take an equity stake in issuers, too. But, while the new rules ease some of the high disclosure burdens of the proposed framework, they do not go far enough to make investment crowdfunding affordable for small companies. A more detailed look here.

Comprehensive Immigration Reform: Not Happening. Earlier this week, newly elected Speaker of the House Paul Ryan confirmed a suspicion most immigration reform advocates have sensed for years now: that the House will once again refuse to consider comprehensive immigration reform legislation. “I do not believe we should advance comprehensive immigration legislation with a president who’s proven himself untrustworthy on this issue,” Speaker Ryan announced emphatically on “Meet the Press” and repeated in an op-ed Tuesday. But while we won’t expect to see immigration reform on the legislative agenda, we at least expect to hear about it in the 2016 election cycle.

Anti-Airbnb Measures Fails in SF. On Tuesday, San Francisco voters struck down a measure that aimed to curb Airbnb rentals (and those offered by other homesharing services) in their city, where the convoluted conflict between tech and housing is alive and well. Winning the the vote 55-45, Airbnb far outspent its opposition with an $8 million television, billboard, and canvassing campaign against the measure. Among the lessons learned from its victory? Airbnb representatives have said its user base of hosts and guests is willing and ready to mobilize on the company’s behalf, a movement we could see in more cities as Airbnb and other companies come up against new regulatory challenges.

Internet for Everyone in Arkansas. The Arkansas legislature has promised it will have a plan to deliver high speed broadband access to every home, business, and institution in the state by October 2016.  The “call to action” was inspired by similar broadband expansion efforts in nearby states like Kentucky and Tennessee. Arkansas’ House speaker noted that broadband “has become the 4th rail of economic development. It is just as important as your transportation infrastructure, your educational and workforce infrastructure, your tax structure.” We couldn’t agree more and are pleased to see states acting to ensure all of their citizens have access this essential resource.

Former Twitter Engineer: Diversity is Difficult. An essay by a former lead engineer at Twitter is gaining momentum and attention, highlighting the challenges the tech industry continues to confront in making its workforce more inclusive. Leslie Miley recounts his efforts to increase employee diversity at the company, describing frustrating conversations with senior engineers who referred to diversity efforts as “lowering the bar.” The tipping point for Miley was when he pitched his proposal for hiring a ”Diversity Engineering Manager” and was met with suggestions from higher-ups that underscored “the unconscious tendency to ignore the complex forces of history, colonization, slavery and identity.” It was the culmination of these conversations and the refusal by leadership to acknowledge their own “blind spots” that drove Miley to leave.

Podcasting Tech Policy on a16z. Engine Executive Director, Julie Samuels, spoke with Techdirt’s Mike Masnick and the host of the Andreessen Horowitz podcast earlier this week. Together, they covered a “whirlwind tour of current policy issues in tech  -  from patents and IP in China to cybersecurity, privacy, and Safe Harbor in Europe…And the gig economy, talent, and immigration.” That’s a lot of tech policy, and all in under 60 minutes. Listen here!

#VetsWhoTech. In anticipation of veterans day, Engine is highlighting the success stories of veterans who’ve made strides as developers and founders in the tech industry. These stories showcase the great potential of this community to become leaders in the industry, as well as the ways in which government support for their efforts is falling short. Follow the series on Medium.