Over the past decade, our regional economy has benefited tremendously from enormous and unsustainable spending by the Federal government, first to respond to the attacks of 9/11 and then to combat the effects of the financial crisis. We’ve seen unemployment and income growth rates substantially better than other parts of the country, a trend that continues today. Given that the spending of the past decade was unsustainable in the first place, however, it’s imperative that we acknowledge that we cannot count on the Federal government to be our jobs engine for the next decade.
So what is going to create jobs in our city going forward?
If you look carefully around DC, you can see the answer emerging already: startups. Across our economy over the past 30 years, high-growth startups have created the vast majority of all net new jobs. As the Federal government retrenches, we’re lucky in this region to be benefiting from the tireless work of people like Peter Corbett and Jonathon Perrelli to build a sustainable, grassroots startup economy in the city. Month after month, you can see the number and quality of startups improving, which leads directly to creating high value new jobs.
Given all the positives regarding the growth in DC startupland today, it would seem that all policymakers need to do is sit back, not mess things up, and let our entrepreneurs do their thing. In general, I strongly agree with this view, except when it comes to issues of scale. Startupland is growing significantly in the city, but it’s starting from a humble base and the urgent need for job creation is immense. We don’t need to merely continue the growth of startupland, we need to inject rocket fuel into it. We need order of magnitude growth in the number of high quality startups that are being launched.
The lifeblood of high-growth startups is capital, talent, and connections. Organizations like Startup DC are working hard at tackling all three of these challenges. We worked with area universities over the winter to launch the Startup DC Student Career Fair, connecting startups and graduating students in the region. We recently launched Reboot to connect our startups with established businesses in the region. There remains much work to be done, but we’re making progress.
The third critical ingredient for scaling up startupland is capital. Once a startup has gained some traction, venture capital in America has become remarkably fluid. Sophisticated venture capitalists from across the country will cut checks anywhere they see an opportunity. At the earliest stages though, getting a company off the ground continues to rely upon angel investors taking a leap of faith on a passionate and credible entrepreneur. Without angel investors, there is no startupland. Simply put, if we want an order of magnitude increase in high quality startups in our region, then we need an order of magnitude increase in the amount of angel investing.
All of this brings me to the Technology Sector Enhancement Act, which stands before the DC City Council today. The Act seeks to reduce the capital gains rate paid by angel investors in the city who invest in technology startups in the city, from 9% to 3%, making our capital gains tax rate competitive with other jurisdictions. I’ve advocated for this Act as have other leaders in the startup community.
Yesterday, however, the DC Fiscal Policy Institute released a blog post advocating against the Act on the grounds that it unfairly benefits wealthy investors (read it here). On the face of it, the DFPI argument is appealing. We do have a ludicrously complex tax system in America at the Federal, state, and local level, which generally serves to distort incentives and protect entrenched industries. It also seems unfair to many Americans that a billionaire often pays a lower tax rate than his secretary or janitor. It’s never been clear to me that giving a wealth individual a super low tax rate on their capital gains from buying stock in Exxon Mobile or Best Buy will really have any “trickle down” impact on creating quality jobs in America.
In this case, however, the DFPI is focusing in the wrong place. The Technology Sector Enhancement Act isn’t about the investors, it’s about the entrepreneurs. The simple reality is that angel investing is an incredibly risky game. For every angel who cuts an early check into a LivingSocial or an OPower, there are many more who lose their investments or make modest returns. The benefits to the city of these angel investments however are immense. A $50,000 or $100,000 investment at a key juncture is what turns a great idea into an engine for creating hundreds or thousands of valuable jobs. The Technology Sector Enhancement Act isn’t giving a handout to fat cat investors lording over their ill gotten returns. It’s sending a powerful signal to high net worth individuals in the city that as a community we care passionately about startups and want to reward people who take significant risk in ventures that have the potential to benefit to our community for many years.
The pragmatic truth is that DC and other cities and states across America provide tax incentives for various industries all the time. For once, DC isn’t considering whether to give a handout to favored insiders, but to provide incentives to create more disruptive new startups that are going to rock the status quo in the city and create the jobs of the future. Our Council should be applauded for passing this Act and I encourage all of you today to email your Council member and share your strong support for the Technology Sector Enhancement Act.