April 18, 2019Newsletter

Does the U.S. Have a Startup Strategy?

“The U.S. is behind,” said Cisco’s former CEO John Chambers during his recent keynote speech at the Forbes Magazine 2019 CIO Summit in Half Moon Bay, California. “We’re the only country in the world without a digital strategy, without a startup strategy.”

Far be it for me to question one of the great titans of technology, but I respectfully disagree. The U.S. has for more than 50 years now absolutely dominated the startup innovation world, raking in well over half of all the tech risk capital investment in the world. If the U.S. doesn’t have a startup strategy, my conclusion would be that it doesn’t need one.

But of course, we do have a tech startup strategy. It is rooted in two key federal policies. The first is found in 1979 amendments to the “prudent man” rule found in the Employee Retirement Income Security Act (ERISA). Until these changes, pension funds, as a legal matter, and many other large pools of capital as a practical matter, were more or less prohibited from investing in venture capital. In the decade after the 1979 ERISA changes, pension fund investments in venture capital went from a few hundred million dollars a year, to more than four billion dollars – and aggregate annual venture investments went up an order of magnitude to roughly ten billion.  Without those ERISA changes – deliberate strategic changes to a fundamental public policy – the startup world be a small fraction of what it is today.

Then there is the Bayh-Dole Act (1980) that established practical mechanisms by which technology advances, resulting from federally funded research at universities, could be transferred to the private sector for development and commercialization. Bayh-Dole has had an enormous impact on startup investing in the U.S., across many innovation sectors. The greatest impact has been in biotech – an industry that might very well not exist at all but for the ability of entrepreneurs and their investors to access core technologies resulting from mostly National Institutes of Health (NIH) investments in university-based research.

The ERISA changes and the Bayh-Dole Act have something in common: they are public policies that foster private investment. They are based on the notion that government bureaucrats should not try and pick startup winners with money appropriated from taxpayers; rather, government should facilitate markets where private investors can sort out the startups most worthy of investment – and place bets with their own money.

No doubt, John Chambers knows a lot about the innovation and startup worlds. And no doubt, the U.S. needs to evolve public policy regarding the same over time. However, our U.S. startup policy is firmly rooted in the 1979 changes to ERISA and the 1980 Bayh-Dole Act, and has created a startup and risk capital investing engine that exceeds that of the rest of the world combined.

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