Posted on 01/22/2024 6:10:27 AM PST by MtnClimber
For venture capitalists and startup entrepreneurs, 2023 was a year dedicated to the destructive phase of Joseph Schumpeter’s notion of creative destruction. Silicon Valley Bank collapsed in the second-largest bank failure in American history, 400,000 tech jobs were eliminated in what Wired dubbed “The Great Tech Layoffs,” and dozens of high-potential startups transformed from unicorns into “zombies.”
Destruction is a necessary ingredient to creativity. Not all ideas are good, and not all firms can make it. Economic dynamism is predicated not just on the rapid generation and growth of winning startups, but also on the implosion of failed companies, which frees up time, money, and talent for other, hopefully better, purposes. America has never secured its innovation edge by sustaining the walking dead.
It’s no surprise that the startup industry needed to retrench—that’s been clear to observers for some time. What is surprising, however, is the reaction of policymakers in Washington, D.C., who apparently see this moment of tech-industry weakness as an opportune time to hobble the innovation economy. Take the mess that’s become of Section 174 of the Internal Revenue Code. For decades, this section has allowed companies to expense their research and development costs for software in the current year, which means that salaries paid to software engineers are entirely deductible upfront. That’s a critical calculation for early-stage tech startups, since development costs are high and revenues are low at inception.
But as negotiators were finalizing the 2017 tax reform, they ran into a quandary: they needed to find an accounting gimmick that would add revenue to the bill so that it would be budget-neutral in the ensuing decade and pass muster with Congress’s arcane budget reconciliation process. Among other components, negotiators settled on a poison pill: five years on, starting in 2023, Section 174 accounting benefits would radically shrink, suddenly choking off the cash flow for America’s most innovative companies.
No one considered that the punishing provision would arrive just when startup innovation is shriveling in the face of higher Fed interest rates after the inflation-stoking over-exuberance of the Covid-19 economy. Industry publications and commentators have warned about the impending doom for more than a year. This week, a bipartisan group of legislators offered a path forward, coupling an antidote to the R&D poison pill with an expansion of child tax credits. But with days to go before companies must start calculating their taxes, the prospects are dim that Congress will pass the fix.
Hiring software engineers and technical talent just got a lot more expensive. But that’s not the only negative shift in the calculus of America’s startup economy. Adverse changes in antitrust policy and private-fund advisor rules are adding new burdens to an already-challenging environment.
Lina Khan’s Federal Trade Commission has cracked down on one of the most vital aspects of entrepreneurial success: the ability to exit a company for a profit and pay back founders, employees, and venture capitalists for years of work and capital investment. Under the guise of expanding antitrust enforcement, the FTC has moved to investigate and block several major transactions in December alone—including Adobe’s $20 billion purchase of design software Figma, Sanofi’s licensing agreement with Pompe disease-pioneer Maze Therapeutics, and OpenAI’s tie-up with Microsoft—sending shockwaves across the industry. As IPOs become rarer amid heavy regulation of the public markets, mergers and acquisitions have become the default way for innovative companies to make their exit.
All by design.
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Assuming it’s true, innovations will just have to come from China, I guess. Who gets the payments for making that happen?
Democrat D.C. won’t do anything to harm Silicon Valley they are some of their biggest donors.
What blithering idiot said this: “Destruction is a necessary ingredient to creativity”. ?
No. Changing course is not destruction. Creating something new does not require destroying something else in order to get the raw materials to create. This is not a zero sum game.
Has to be some Ahole who drove his company into the ground looking for an excuse to not be hung from a tree in the parking lot.
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