Klobuchar Bill Pushes Start-Up Investment to Heartland States
The COVID-19 crisis has already started to hit Silicon Valley. Before the pandemic, venture capital was flowing freely: Tech valuations were at an all-time high, and there were 159 IPOs in 2019. Start-ups in San Francisco and New York were growing faster than their founding teams could keep up.
Now that cash frenzy is drying up. Nervous investors are putting a pause on future investments for at least a few weeks, and even, in several reported cases, pulling out of deals. Entrepreneurs who raised massive rounds before raising any real revenue are starting to regret that decision, as their cash flows dwindle in an increasingly arid economy.
For a lot of the country, though, this closed-door reception from investors is nothing new. In 2018, three urban areas -- Silicon Valley, Boston/Cambridge, and New York -- received roughly 80% of all venture capital investment in the United States (that’s up from roughly 60% a decade ago). This week, as congressional leaders debated a national response to America’s economic crisis, Sen. Amy Klobuchar introduced a bill that would stimulate the economy by incentivizing venture capital investment in parts of the country that don’t usually receive it. The New Business Preservation Act would be a boost for heartland start-ups at a time when they need it most.
Since the Great Recession, most economic growth in the United States has happened in and around coastal cities, leaving the middle part of the country behind. According to the Economic Innovation Group, half of all new businesses created in the U.S. between 2009 and 2014 were launched in just 20 counties clustered around four cities.
Minnesota is a case in point. In 2019, start-ups in that state raised a record $1.2 billion in venture capital funding. That might seem like a lot, but it’s less than 1% of total VC investment in the United States. What’s the reason for this disparity? Is it because Minnesota is not a large enough economy? Or because there simply aren’t enough good ideas coming out of the state?
Absolutely not, on both counts. Minnesota has more than 20 companies in the Fortune 500, and thousands of entrepreneurs who are building businesses that could only be created there. The retail industry, led by Target’s headquarters, makes the state a hub for retail innovation. And Minnesota’s booming health care industry, led by UnitedHealth, has launched start-ups such as Nice Healthcare and Bind Benefits. Minnesota can and should be a start-up hub, but data show that start-up investors invest close to home – and many of their homes are in California, Massachusetts and New York.
Klobuchar’s bill would try to change those VCs’ incentives. The idea in the bill borrows from a model used by Israel in the late 1990s to attract venture capital from the United States. The New Business Preservation Act is designed as a federal-state partnership that would allocate $2 billion in federal funds to states on the basis of population, to stimulate private investment in early-stage, high-potential companies.
The bill would require 1-to-1 private capital matching in all equity transactions. That means that although the federal government would be putting up the funding, all financial risk is shared equally by private investors. Indeed, the bill is carefully structured so that neither the federal government nor state officials would engage in “picking winners and losers,” but rather rely on private entities to source and manage investments in promising early-stage companies in every state. The program is also intended to be “evergreen,” with any eventual gains from investments used to incentivize future rounds of private investment in heartland start-ups.
We saw that Congress can make an impact on start-up funding when it passed the bipartisan JOBS Act in 2012, which eased securities regulations to spur funding of small businesses in the wake of the Great Recession. There's a need for lawmakers to step up again and do more now, at a moment when the economy badly needs jobs, and innovators badly need resources.
There are other compelling ideas being discussed in Congress to improve access to capital. For instance, Sen. Maggie Hassan has a bill to address the mounting student debt of entrepreneurs and Sen. Ron Wyden just introduced a bill to drive more capital to women-owned businesses by providing tax incentives to employers and investors.
Economic opportunity in the United States has become increasingly concentrated in a few coastal states. Now, at a moment of economic crisis, Congress can help fix that imbalance. As we rebuild the American economy, we need to make it one that works not just for the few, but for the many.