As the dust settles on the U.S. presidential election, the start-up community’s initial angst over Donald Trump’s victory is beginning to dissipate. Trump’s campaign promises, and the relatively few policies thus far adopted, have been a mixed bag for American start-ups—but perhaps not as devastating as most industry insiders at first feared.
“I’ve been waiting to see, like many, what will happen, trying to read the tea leaves,” says Marcelo Ballvé, research director at New York-based CB Insights, a provider of market data on start-ups and the angel and venture capital investors that fund them.
“What everyone felt in the venture ecosystem about the results of the election was a little trepidation around what direction policy would take under President Trump. That uncertainty has not dissipated. There’s a lot of smoke, but not a lot of clarity yet on regulation, tax policy and more specific policy questions,” says Ballvé.
Nevertheless, Ballvé hasn’t seen much of an impact on start-up investing since the election. “It has been sort of business as usual,” he says.
Macroeconomic conditions, the ability to raise capital and access to talent are among the biggest challenges facing start-ups. But policies and regulations issued by new administrations can also make or break innovative businesses.
“Certain aspects of his presidency should help the economy, especially sectors that expect to have their regulations reduced,” says Robert Fenwick-Smith, managing director of Boulder, Colo.-based Aravaipa Ventures, an early-stage cleantech fund. “For the cleantech sector, it’s more negative. His general disregard and dissing of science doesn’t help any industry that builds its growth on scientific innovation.”
Other new businesses will likely continue to attract capital regardless of who occupies the White House, says Kyle Stanford, an analyst with Seattle-based PitchBook Data, which provides market intelligence on venture capital, private equity and M&A activity.
“Software is still going to be the top dog,” says Stanford. “We’re such a connected society now. Developing an app can reach a lot of people very quickly. No matter what regulations come out, that won’t change.”
Indeed, Silicon Valley Bank sees a “long-term positive outlook for the innovation economy,” although some start-ups “will face challenges,” says the bank’s report, “U.S. Startup Outlook 2017.” The bank says there’s “more potential now for innovation to thrive than in the last 25 years.”
Jobs And Innovation
While some in the start-up community expressed apprehension over Trump’s election, others boldly moved forward. The CEO of Tokyo-based SoftBank pledged in December to invest $50 billion in start-ups that are supposed to create 50,000 new jobs in the U.S. The funds will come from SoftBank’s $100 billion technology fund, which includes a $45 billion commitment from the government of Saudi Arabia, according to Bloomberg News.
By sector, venture capitalists funneled $11.7 billion to life sciences (defined as pharmaceuticals, biotechnology and health-care devices and supplies), $4.6 billion to fintech and $2.6 billion to cybersecurity start-ups in 2016—just a few of the top areas for investment—according to data compiled by PitchBook for the National Venture Capital Association’s 2017 Yearbook.
Software companies received the largest share of venture investment last year, with $33 billion directed to 3,100 investments, representing 48% of the total amount invested, according to the report. Within the sector, social platform software companies received most of the capital, including those with apps that enable ride sharing, short-term rental property booking, photo messaging and cloud-based business management.
By stage, later VC investors accounted for over $38 billion of U.S. start-up investments in 2016. Early VC investors provided more than $24 billion of the funding, with angel/seed-stage deals accounting for almost $7 billion of the total capital raised, the report says.
Start-up investing is essentially a winner-take-all game. Successful angel and early-stage VC investors earn an average 2.5-fold return on their capital, according to a 2016 study funded by the Ewing Marion Kauffman Foundation and the NASDAQ OMX Educational Foundation. The savviest (or perhaps the luckiest) investors can realize a 10-fold or more gain. But the odds of striking out are high. Seventy percent of investments fail to return capital, let alone earn a profit.
Patience is also required for these typically illiquid investments. The average holding period is 4.5 years, and the largest wins take up to 10 years to realize.
Immigration And Trade
Overall, start-ups and their investors view President Trump’s emerging policies on immigration and trade as highly problematic. The “Buy American and Hire American” executive order, for example, which Trump signed in April, directs the government to enforce guidelines prioritizing the use of U.S. firms, labor and goods in federal projects.
The “Buy American” part of the order would curb outsourced manufacturing by favoring domestically produced goods. “People come up with great ideas they want to validate,” says Sandeep Sardana, managing director of San Mateo, Calif.-based BluePointe Ventures, a VC firm that invests in “frontier tech,” including artificial intelligence, virtual reality and augmented reality. “In China, it’s cheap enough to get a small batch of items produced at a high quality to show your customers the early product. If it catches on, bingo, you can capture a large market.”
Sardana says his investors helped to fund a company that used outsourced prototyping and production to quickly reach $150 million in sales. “The company would find it harder to do if there were tariffs on Chinese imports,” he says.
Domestic 3-D printing might compensate for some decline in offshore manufacturing, although it’s unclear whether onshore printing could meet demand. Start-ups that produce hardware may have a particularly tough time if Trump implements a threatened 20% tariff on imports, as these companies typically outsource most of their manufacturing to Asia, then import the finished goods.