Obama’s $2 Billion Early Innovation Fund - And What it Really Means for Startups
The Obama Administration recently committed $2 billion for small business growth as part of Startup America, a new initiative to encourage investment in startups.  The funding includes $1 billion in public funds to be put towards early stage investment by matching the investments of VC firms into small business startups.  The Startup America Partnership, led by Steve Case, also announced over $1 billion in the form of services and resources for startups coming from private companies, including free legal and consulting services.  

On paper, this appears to be a positive boon for startups - but what are the real implications for the innovation economy? We’ve taken a closer look at some of the commitments:
  • Regulation A “miniofferings:”  Regulation A currently stipulates that offerings of investment capital can be made under an SEC simplified registration process if they are $5 million or less – a number that was arrived at in 1992.  This legislation would change the dollar threshold for exempt offerings to $50 million.  The Administration is touting this as a way to assist small companies in raising capital at a crucial stage in their growth.  A Kauffman study revealed that new companies are responsible for all the job growth in the US since 1977, so it makes sense to make it easier for startups to raise funds early on to go public – the point in a company’s life span during which Case says 90% of new jobs are added.  There are those in the tech community that say government regulation and the startup community are always going to be at odds but given that this provision simply updates the existing regulation, it seems the least controversial way of moving the needle on this issue.

  • Crowdfunding: The most controversial of the Partnership’s provisions is the bill to legalize Crowdfunding – small-dollar investments that use online fundraising and social media platforms to solicit investors.  The point of giving startups access to crowdfunding as a fundraising tool is to provide them with more opportunities to raise capital and thus create jobs.  This one comes with its own set of regulations to protect investors, including limits on contributions and measures against fraudulent companies soliciting capital.  Crowdfunding sites for startups, like IndieGoGo and Kickstarter, already exist, but until this bill is signed into law, companies that raise funds from investors that are not registered broker dealers are at risk of being in violation of federal and state securities laws.

  • Investment in an Innovation Economy: Obama’s Early Stage Innovation Fund, coupled with the Startup America Partnership’s commitments from private-sector companies, are both steps on the road to an economy that is predicated on entrepreneurship and production rather than consumption.  The provisions basically make it easier for individual investors to fund startups and to offer more capital.  While this arguably increases inherent risk for investors, no one is forcing any individual to invest.  It’s an individual decision, and one that happens to have the added bonus of growing our economy and job market. It’s not just monetary investment, though.  The Department of Education, as part of Obama’s commitment to the innovation economy, will launch a National Education Startup Challenge, for which students will create a business plan for a new company - encouraging entrepreneurship by getting them in at the ground floor, so to speak.

Critics on Capitol Hill dismiss the announcement as little more than a White House PR stunt, and while the immediate and tangible impact for startups is not completely apparent, it is at least a nod of support from the government and a commitment to the promotion of innovation and entrepreneurship.  Bottom line?  It’s more than a nice gesture, it could be a significant resource for startups. To truly create an economy based on innovation, education and growing government support are key.  These measures are, if nothing else, a positive indication of a turning tide of governmental support for entrepreneurship and the creation of a solid production based economy.