The “Hire American” side of the executive order—by far more troubling to tech companies—instructs federal agencies to evaluate the various programs that allow foreign workers to enter the U.S., with particular scrutiny on the H-1B visa program, a non-immigrant visa system that lets employers temporally hire skilled foreigners for specialized jobs.
“If immigration suffers, there could be downward pressure on venture investing. That’s been the No. 1 topic everyone’s discussing,” says Sardana.
Current laws and regulations are already encouraging some American start-ups to locate facilities or hire personnel for non-sales operational roles outside the country, according to the “U.S. Startup Outlook 2017” survey. Twenty-six percent of responding companies said they’d hired or moved operations overseas. Of those, 38% cited immigration policy, 32% mentioned tax policy and 30% said the regulatory environment drove their decision-making.
Further restrictions on immigration could have a profoundly negative effect on the ability of start-ups to recruit talent. Limits on hiring highly skilled workers from abroad could drive up wages for those already in the U.S., making it more expensive for companies to hire employees and potentially driving down profits.
And those newly arrived immigrants often start businesses, leading to further economic expansion. The U.S. had 87 start-ups valued at $1 billion or more as of March 2016, according to a study on entrepreneurship by the National Foundation for American Policy. Over half of these had at least one immigrant founder.
Taxes, Deregulation And Infrastructure
Despite the uncertainty surrounding many of Trump’s policies, it’s not surprising that investors are sanguine about the future of U.S. start-ups. America is still a global leader in innovation. A combination of more favorable tax treatment for corporate profits, a less burdensome regulatory environment and an uptick in infrastructure spending could encourage even more start-up investing.
In late April, the White House outlined a plan that would lower the nominal corporate tax rate to 15% from the current 35%. President Trump has proposed cutting taxes in part so that transnational corporations can bring capital held offshore back to the U.S.
If companies repatriate cash, that could spur corporate venture capital investing and fuel M&A activity. “Companies like Apple, Google, IBM, GE and Microsoft, because of the tax holiday, would bring back dollars. They could go on a buying spree,” says Sardana.
Large companies are likely to reinvest excess cash into new ventures because start-ups have in essence become outsourced R&D firms. Big companies are spending less on research these days, preferring to acquire cutting-edge technologies from smaller firms that assume the risks of developing and commercializing the research. “Repatriation of corporate cash could have a beneficial effect on the venture ecosystem. It could increase M&A activity at higher valuations,” says Ballvé.
Start-up investors generally rely on M&A activity, and less frequently on IPOs, to produce liquidity and exits. Mergers and acquisitions accounted for over 80% of exits in 2016, according to PitchBook.
In addition to tax cuts, angel and VC investors generally view deregulation as positive for early-stage companies. If the Trump administration pushes deregulation, that could allow new companies to more easily raise capital and bring products to market.
Sardana, whose fund has an investment in a company that produces software to control drones, wants to see rules eased in this area. “If that happens—fantastic. Drones and self-driving vehicles will get a nice shot in the arm.”
Another wild card is the potential rollback of the government’s rules on “net neutrality,” the concept that internet service providers should treat all data the same and not charge more for access to certain types of content, such as high-data-consuming video. “Every time there’s a change, it provides opportunity for companies that weren’t there before. Any gap that opens is immediately filled by a start-up trying to exploit the change,” says Stanford.
Yet for every start-up buoyed by regulatory change, another may sink. “I’m an investor in a company that benefits from net neutrality,” says Sardana. His fund is backing Tubi TV, a service that allows users to view free television shows and movies over the internet. “If net neutrality goes away, it will impact companies that are trying to innovate in the TV market,” he says.
Regulatory reform could benefit start-ups in many sectors, but there’s always the danger that failure to regulate could create chaos. “If you have a dysfunctional government that can’t pass any new regulations, it will cause damage to advanced technologies because they won’t have the regulatory environment to be deployed in,” says Fenwick-Smith.
Autonomous vehicles, for example, could minimize the total number of casualties in an accident. But their true impact remains to be seen. “Driverless vehicles is a sector that still needs a huge amount of regulation to be viable,” says Fenwick-Smith. Given the pace of innovation, he thinks a lack of leadership from Washington could affect the sector as early as next year.
During the presidential campaign, Trump promised major new infrastructure spending. Including technology in any such spending could boost start-ups in related areas. “Because of increased attention to infrastructure, we could see more opportunities open up in the “internet of things,” Wi-Fi, smart cities, transportation and cybersecurity for sensitive infrastructure,” says Ballvé.
Winners And Losers
Ultimately, President Trump’s policies are unlikely to slow the flow of capital to potentially game-changing start-ups. VC investments in artificial intelligence, for example, were off to a strong start this year, according to the Q1 2017 MoneyTree Report from PwC and CB Insights. AI deals rose to an eight-quarter high, with quarterly funding exceeding $500 million in seven of the last eight quarters.
On the other hand, some of Trump’s policies may eventually stall the economy. Tax cuts and spending hikes, coupled with anti-immigration and protectionist trade policies, could swell the national debt and stymie growth, tipping the U.S. into a recession. Major infrastructure spending might prove inflationary in the long run.
Experienced angels and VCs know that uncertainty about a new administration’s agenda can provide opportunities to invest in emerging industries and that start-up investing is a long-horizon play. “I’m excited about the infrastructure plan. Ease on regulations is good. The tax holiday is a pro for M&A,” says Sardana.
“In the immediate term, the only concern is immigration policy. We just can’t not get our engineers. That kind of disruption can show up pretty quickly. Outside of that, the rest of the stuff will balance out. We’ll get a few things, we’ll lose a few things.”