The U.S. Lacks Innovation Policy

Why Federal Policies Supporting Startups Matter for All Citizens

By Collin West and Matt Harris

There is no question that startups and venture capital create jobs. However, there is divergent thinking on how to support these industries, including the importance of innovation policy.

This is our fourth paper in collaboration with Draper Associates and Startup Genome. You can find our other three papers here. In this round, we compare U.S. tech hubs to their global counterparts and discuss how federal policy can help create high-paying jobs in our economy.

The Current Situation

For decades, venture capital was mostly a U.S.-focused industry.

Although the United States continues to have a robust VC ecosystem, data from the National Venture Capital Association (NVCA) shows that U.S. venture capital has diminished from 90% of the total market in the 1990s to 80% in the 2000s and 50% today.

Yes, the U.S. has Silicon Valley and New York City. But what about all of the other markets? And how do U.S. startup hubs compare other startup cities around the globe?

According to Startup Genome, the leading research and policy advisory organization committed to startups, U.S. startup cities have been growing but not at the same pace as some other startup hubs around the globe. Their research ranks ecosystems based on startup performance, funding, market research, talent, connectedness, knowledge, and infrastructure (source).

The Startup Genome top 10 ecosystems are: Silicon Valley, New York and London (tied), Beijing, Boston, Tel Aviv and Los Angeles (tied), Shanghai, Seattle, and Stockholm. The U.S. currently holds 5 of the top 10 but risks losing its lead due to the lack of innovation policy.

How We Can Strengthen the U.S. Tech Industry

We have put together three areas of investment that the United States needs to prioritize to reverse these trends in 2021 and beyond.

1. Immigration Policy

Our regressive immigration policies have hurt the United States. 

There are currently 30+ countries with startup visas, allowing individuals to immigrate by starting a company and creating jobs. Examples include Australia, Canada, Denmark, Finland, Estonia, The Netherlands, New Zealand, Singapore, and Spain – who are attracting top talent while we are shutting these innovators out.

The United States is a nation built by immigrants, but ad hoc policy changes have eroded confidence. It’s simple, people do not want to travel across the world and worry about their visa getting revoked at a moment’s notice.

Clarifying the immigration and renewal processes would create a more attractive environment, allowing the United States to maintain and grow its global position. We know immigrants and first-generation Americans start companies at a higher rate than the average population, and that should continue to be encouraged.

Furthermore, several reports have found that international student applications at U.S. graduate programs have been dropping, with organizations noting stricter immigrantion policies as a factor (source).

In particular, the U.S. could lose up to 30% of foreign-born students, which in turn “could threaten U.S. global leadership in science and engineering by shrinking the pool of talent available to carry out academic research” (source).

2. Higher Education

Across the country, the most vibrant tech hubs are built around top universities. The Bay Area tech scene is backed by Stanford and Berkeley; San Diego biotech was largely built off of UCSD, SDSU, and USD; Boston can thank BC, BU, Harvard, and MIT for its success; medical research from Raleigh comes from North Carolina State, Duke, and UNC Chapel Hill; and Austin is the center of the University of Texas system.

This is due, in part, because of the talent that graduates from universities each year provides opportunities for startups in these regions to grow.

By losing our competitiveness in research, we also harm U.S. startup ecosystems as research projects are often spun out of universities and become category-defining companies. Companies as diverse as Google, Qualcomm, and Gatorade all started as university research projects.

And, as our economy continues to advance, there is demand for people with the right technical skills. The United States is desperately looking for talent to fill positions in software, hardware, drug discovery, and healthcare. Supporting continued university research is key to our innovation economy.

3. Startup Funding

While the U.S. accounts about 50% of venture capital funding globally, there are still gaps by stage and geography that need to be addressed.

Canada, for example, is a great example of how government policy can directly fund R&D and contribute to the overall startup ecosystem. South Korea is investing billions in startup funding and easing startup regulations, with the goal of creating over 20 unicorns.

Federal grants and discovery-oriented, long-term R&D are opportunities to create significant change. Technologies like the internet, global positioning system (GPS), magnetic resonance imaging (MRI), barcodes, and more also started with U.S. government funding.

So many major U.S.-based innovations in the last century were heavily influenced by federally funded R&D primarily via organizations like NASA, DARPA, the Department of Defense, NSF, NIH, or temporary groups like the Manhattan Project.

There are other factors that go into creating a dynamic ecosystem too. “You don’t start your company where the capital is, there has to be something else. There has to be talent, customers, and other benefits too,” shared Startup Genome Founder & CEO JF Gauthier.

Startup founders, mentors, angel investors, large corporations, universities, and business-friendly policies all contribute to the success of an ecosystem.

Conclusion

Even from a purely self-interested point of view, we should support immigration, higher education, and R&D funding. These factors greatly improve your local economy, not to mention that inventions build on one another and create new opportunities.

Startups create high-paying jobs and have a multiplier effect, increasing spending throughout their entire community. That’s why we want to see startup ecosystems across the country, to create opportunities for all.

Unfortunately, the conversation is often stuck in the past. We look at policy as a way to create more red tape and obstruction, instead of investing in areas with a proven ROI.

Many U.S. cities are dropping in the rankings. This is due, in large part, to the diminishing competitiveness of the United States in terms of supporting entrepreneurs and entrepreneurship.

Technology will continue to be a source of job growth and positive change. The federal government needs to invest in infrastructure, talent, and customers if we want to regain our competitiveness and build our economy.