During his opening remarks at a hearing last week, House Small Business Chairman Sam Graves (R-Mo.) questioned “whether differences between start-ups and small firms are in fact substantial enough to necessitate different policies.”
In the discussion that followed, several entrepreneurs made it quite clear that, as one of them put it, the needs of “a storefront” are very different than the needs of “a rocketship.”
“We are not a small business, we are a big business in the making,” Anton Gelman, founder and chief executive of Cont3nt, a news content distribution start-up in Dulles, Va., added during the hearing, later noting that he helped his parents operate their small business when he was young.
“I have run small businesses since I was 12, and I have a tremendous amount of respect for people who do that, but the start-up that I run right now is a very different thing,” Gelman said. “We act very differently, we think very differently, and we require very different resources.”
Small, local businesses and fast-growth, technology-driven start-ups have often been lumped together in Washington, but policymakers are starting to take notice of the sometimes subtle yet important distinctions between them. In fact, during those opening remarks, Graves cited research showing that “it is a particular subset of small firms — start-ups — that are actually leading the way in job creation.”
Still, Gelman says his and other firms could be creating even more, with just a little help from elected officials.
“When a start-up grows from one person to 100 people in a year, or in two years, that pace has not been met with policy or legislation that is appropriate for how they scale,” he said, challenging lawmakers to “find ways to address these incredibly fast-paced companies.”
But how? Gelman and his fellow entrepreneurs on the panel offered a list of recommendations. Here are the top items — the five I’s, if you will — on their wishlist for Washington.
Intellectual property protection
Allison Lami Sawyer, co-founder and chief executive of Rebellion Photonics, a technology company in Houston that builds gas-detection cameras, told lawmakers that one of her greatest concerns is the country’s patent laws, which she says leave her company vulnerable to “cheap and dirty” schemes from so-called patent trolls and large technology firms.
“I’m always afraid larger companies or patent trolls are going to sue me, even when they know they’ll lose, and they will lose, because our IP is very strong, but they will sue me just to put me out business just so they can get a cheaper acquisition price on my company,” Sawyer said, noting that start-ups simply don’t have the capital to win legal battles with their larger competitors or firms that specialize in patent litigation.
“It literally keeps me up at night, because even though we have worked so hard, it could all be taken away because of a lousy trick like that,” she added.
She asked the legislators on hand to push for patent reform bills like the one known as the Innovation Act of 2013, which was approved by the House Judiciary Committee on Wednesday and is meant to curb the number of frivolous patent-related lawsuits. However, she criticized some proposed amendments that would expand the list of data-related products and services eligible for licensing lawsuits.
Investor tax credits
Several of the entrepreneurs on the panel threw their support behind tax incentives that encourage individuals to invest in promising young companies — an idea initially raised by Jeff Reid, director of the Georgetown Entrepreneurship Initiative at Georgetown University’s McDonough School of Business.
Reid highlighted the success of North Carolina’s Qualified Business Investor Tax Credit, which gives investors a 25 percent tax credit up to $50,000 on the value of their investments in certain companies, including early-stage start-ups.
“It leverages the private investment, and I think it should expand to other states and perhaps the federal tax system, as well,” Reid said. He later responded to concerns from lawmakers over the lost government revenue by saying, “I’m pretty sure this would be one of the best deals you could get.”
Adam Arredondo, one of the founders and chief executive of Hoopla.io, an events marketing start-up in Kansas City, said a similar program is working well in his home state. There, it is called the Kansas Angel Tax Credit, and it too provides up to a $50,000 annual tax credit to start-up investors.
“That is a huge draw, and almost anyone in Kansas City that has a high-growth start-up becomes a Kansas company because of it,” Arredondo said.
Improved government contracting
Most of Sawyer’s cameras are being built for oil and gas firms, which help them detect leaks of poisonous and explosive gases, though her company has done some work in the past for the Department of Defense.
It could do so much more, she said, but it isn’t worth the hassle.
“It’s really quite tragic, because we have the designs ready to go for a stunning drone camera,” Sawyer said, explaining that her firm’s cameras produce in real time the chemical imaging the military used to locate and later kill Osama bin Laden. Currently, they must run camera footage through a supercomputer to collect that type of information, which can take days.
“Our drone would see in real time. It’s a very cool product that could have very real consequences, but you won’t get it for a decade, minimum,” she said, explaining that her firm is passing on the opportunity “because defense procurement is so complex and the infrastructure we would require is not worth it.”
In fact, Sawyer said “it’s virtually impossible” for her to pitch directly to the Army or the Air Force, because procurement officers generally require small firms to partner with large, long-established contractors on government projects — “but when you go to do a deal with Lockheed, they want to own all the IP,” she added. “All we’re worth is our IP.”
She urged policymakers to take a fresh look at procurement policies and find ways to give preference to nimble, innovative young firms rather than giant defense contractors, many of whom have cut back on research and development under the pressures of sequestration and other budget cuts.
“America is so great because of our free-market system, and through the procurement process, the Defense Department has blocked themselves out of a free market,” Sawyer said. “Right now, it’s not about how quick you can get the product done or how good it is. It’s about how long you can draw it out.”
Innovation program accelerated
On the other hand, Sawyer applauded certain government efforts that encourage private-sector innovation, like the Small Business Innovation Research (SBIR) program, which offers R&D grants to small companies. Still, she says it could be improved.
“It’s really good for research, but when it comes to actually developing products, it’s a little slow,” Sawyer said of the SBIR program, pointing out that the three-phases of the program require firms to move through it over the course of at least eight years. Sometimes, it can take up to 14 years.
“I can do a product in basically a year and a half, maybe less,” she said. “It doesn’t take me eight years to develop a product, it’s just unnecessarily slow.”
One subject that garnered passionate pleas from all four entrepreneurs on the panel was immigration reform. Despite House Speaker John Boehner (R-Ohio) recently shooting down the chances of a bill passing this year, all four sounded hopeful that lawmakers will take steps to at least ease restrictions on highly trained and entrepreneurial immigrants.
“Half of my team is abroad, and they are all U.S.-educated entrepreneurs, they graduated college here, they couldn’t get a visa, they had to go abroad,” Gelman said. “Now they are in Ukraine, Cambodia and India, so now we work with them over there. We have to, because that’s where the minds are.”
Right now, the number of applications for what are known as H-1B visas, which are reserved for highly trained foreigners who want to work in the United States, consistently outpaces the number allotted under the nation’s longstanding immigration laws. Lawmakers on both sides of the aisle have introduced bills to lift the cap, but they have been held up by disputes over exactly how many visas to allow as well as feuds over more contentious immigration issues (think border security and a path to citizenship).
“If there is any way to keep more of those people here, that would go a long ways,” he added.
Arredondo agreed, saying his “biggest issue” is a shortage of visas for skilled workers.
“Talent is in short supply, and you see a lot of people offshoring development work,” he said. “If there’s a way to stem that tide, I think the United States would benefit greatly.”
Added Reid: “One of the reasons we are such an amazing country for entrepreneurship is because we have welcomed some of the most amazing entrepreneurs as immigrants over the 200 plus years of our country.”
Still, simply increasing the number of visas may not go far enough to help start-ups.
“Even if we double the number of people who come in on an H1-B visa, we probably wouldn’t be able to get one,” Sawyer said, adding that her seven-person company will still be left competing with the likes of Microsoft, Yahoo and Facebook for a limited number of work-based visas.
“I would really like to see, when we do get more visas for tech workers, if some of those could be cornered off for small businesses, for us little guys without the legal department,” she said. “If you could just give me a little corner to fight in to get those, that would be really helpful.”