Start-ups are important drivers of economic growth, innovation and job generation. The global start-up economy creates nearly $3trn in value, according to the Global Start-up Ecosystem Report 2020.
A healthy start-up ecosystem also supports corporate innovation. Large companies are the principal beneficiaries of the ‘spillovers’ from VC-backed start-ups. According to research from Gartner, 90% of large companies with innovation programmes work directly with start-ups.
The US start-up ecosystem is especially influential. Silicon Valley is the blueprint for tech hubs that governments around the world have tried to replicate, and the birthplace of most of today’s tech giants.
Whatever impact Joe Biden’s presidency has on the US start-up scene, therefore, it is certain to have ramifications throughout the global technology ecosystem. And there are two topics on the Biden agenda that will directly impact start-ups: competition and immigration.
Bolstering competition in the digital sector
There is a growing consensus that the market dominance of the tech giants has a chilling effect on start-up innovation. While being acquired by Google or Facebook gives founders and their VC backers a lucrative exit, the propensity of Big Tech to acquire any potential competitors makes it less likely that innovative start-ups will reach any considerable size. Last year, the Federal Trade Commission launched an investigation to establish whether “large tech companies are making potentially anticompetitive acquisitions of nascent or potential competitors”.
Alex Petros, antitrust policy council at open internet lobbying group Public Knowledge, argues that the lack of competition in digital markets is a sign that antitrust regulation is needed. “We haven’t really seen a lot of start-up energy or market entry despite the fact that these are pretty lucrative markets to be in,” he says. “So as a regulator, that [would set] off alarm bells for me.”
Another way the Biden administration could revive competition in the tech sector would be to mandate interoperability between digital services. The theory runs that customers could move their data between service providers, the dominance of the tech giants would be weakened to the benefit of smaller rivals. The European Commission’s proposed Digital Markets Act, designed to boost competition, includes provisions to promote such interoperability.
“Something [is needed] to combat huge network effects from these large tech platforms,” says Petros. “They’ve been able to scale up so easily. But if you have some sort of interoperability, your chances of competing based on quality go way up.”
Biden has been tight-lipped on how he might tackle competition in the digital sector. He has appointed several Big Tech veterans to his administration, who are unlikely to back radical reform such as breaking up the tech giants. But attitudes towards these companies have hardened across the political spectrum, and less radical measures, such as promoting interoperability or scrutinising start-up acquisitions, could nevertheless have a meaningful impact. “You would hope to see companies expand out rather than be dwarfed by Google,” says Petros.
An influx of technology talent from around the world has been a crucial ingredient to the success of Silicon Valley. A study by the National Foundation for American Policy found that 55% of US start-ups valued at $1bn or more were founded by immigrants; and 75% of the finalists of the 2016 Intel Science Talent Search, a science competition for US high school students, had parents who worked in the US on H-1B visas. Silicon Valley “live[s] off immigration”, said Stuart Ellman, co-founder of RRE Ventures, during the 2017 Disrupt New York technology conference.
Donalds Trump’s presidency has been characterised by hostility towards immigration. Since entering office in January 2017, Trump undertook more than 400 executive actions on immigration affecting everything from border enforcement to vetting and visa processes.
Whether this hostility dented immigration depends on who you ask. The National Foundation for American Policy, a think tank, estimates that immigration to the US will have fallen by 49% between 2016 and 2021, but the Migration Policy Institute says there has not been a marked drop in the number of permanent immigrants, with the exception of refugee admissions (although Covid-19 has had a dramatic effect, it says).
Either way, the Biden administration has been clear in its intention to create a more welcoming environment for immigrants, and Biden began to reverse some of Trump’s executive orders in the first hours of his presidency.
“The stage has been clearly set under the Biden administration who have made it clear that they will make the US attractive for highly skilled foreign graduates… a U-turn on the Trump administration’s draconian measures,” says Nira Segaran, immigration senior manager at law firm Hudson McKenzie.
Biden is expected to update the rules surrounding the various working visas to the US. This is long overdue, says Kaitlin Davies, an immigration attorney at Davies Legal. “The United States immigration framework is already one of the strictest in the world, partly owing to matters being considered as if we were considering a workplace in the 1980s.”
One example is the L-1, a non-immigrant (temporary) visa that allows overseas companies to relocate employees to the US. The visa requires that a company has a “physical exclusive-used office”, which is often not the case for start-ups, Davies explains, especially since the pandemic.
Another visa that is relevant to start-ups is the EB-5, which allows foreign nationals to become permanent residents in the US (“green card holders”) by investing in a US business that will create jobs for at least ten Americans. EB-5 immigrant investor programmes can be an attractive opportunity for start-ups that are looking for funding outside of VC circles.
The Trump administration increased the EB-5 threshold to $900,000 from $500,000 in targeted employment areas or TEAs (regions with high unemployment and rural areas) and $1m to $1.6m in all other areas. “It will be interesting to see whether the Biden administration reverses this decision in order to encourage investment into the US in the wake of the pandemic,” says Davies.
Expanding immigrant visas, such as the EB-5, would allow Biden to boost the supply of talent without undercutting US citizens, adds Davies. “The big change, as I understand, is that he will propose vastly expanding the number of immigrant worker visas and seek to eliminate country quotas.”
However, Biden might not be able to implement changes in visa quotas by himself, as Congress sets the cap on how many visas can be issued. “That brings us to the legislative action he will propose,” says Steven D Heller, US immigration lawyer at Heller Immigration Law. “My understanding is that his proposal is strictly a benefits-based immigration reform – i.e. it does not address enforcement – which suggests it may not garner sufficient Republican support, but that’s a political calculus.”
Although it seems unlikely that Biden will introduce radical immigration reforms, the distancing from policies such as Trump’s travel ban and his manifesto pledge to expand the number of high-skilled visas will help the US start-up ecosystem to continue feeding its pipeline of foreign talent.