[Senate Hearing 116-634]
[From the U.S. Government Publishing Office]
S. Hrg. 116-634
BETTING ON THE REST: EXPANDING AMERICAN
ENTREPRENEURSHIP OUTSIDE TRADITIONAL HUBS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COMMUNICATIONS,
TECHNOLOGY, INNOVATION AND THE INTERNET
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
DECEMBER 15, 2020
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available online: http://www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
52-922 PDF WASHINGTON : 2023
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
ROGER WICKER, Mississippi, Chairman
JOHN THUNE, South Dakota MARIA CANTWELL, Washington,
ROY BLUNT, Missouri Ranking
TED CRUZ, Texas AMY KLOBUCHAR, Minnesota
DEB FISCHER, Nebraska RICHARD BLUMENTHAL, Connecticut
JERRY MORAN, Kansas BRIAN SCHATZ, Hawaii
DAN SULLIVAN, Alaska EDWARD MARKEY, Massachusetts
CORY GARDNER, Colorado TOM UDALL, New Mexico
MARSHA BLACKBURN, Tennessee GARY PETERS, Michigan
SHELLEY MOORE CAPITO, West Virginia TAMMY BALDWIN, Wisconsin
MIKE LEE, Utah TAMMY DUCKWORTH, Illinois
RON JOHNSON, Wisconsin JON TESTER, Montana
TODD YOUNG, Indiana KYRSTEN SINEMA, Arizona
RICK SCOTT, Florida JACKY ROSEN, Nevada
John Keast, Staff Director
Crystal Tully, Deputy Staff Director
Steven Wall, General Counsel
Kim Lipsky, Democratic Staff Director
Chris Day, Democratic Deputy Staff Director
Renae Black, Senior Counsel
------
SUBCOMMITTEE ON COMMUNICATIONS, TECHNOLOGY, INNOVATION AND THE INTERNET
JOHN THUNE, South Dakota, Chairman
ROY BLUNT, Missouri BRIAN SCHATZ, Hawaii, Ranking
TED CRUZ, Texas AMY KLOBUCHAR, Minnesota
DEB FISCHER, Nebraska RICHARD BLUMENTHAL, Connecticut
JERRY MORAN, Kansas EDWARD MARKEY, Massachusetts
DAN SULLIVAN, Alaska TOM UDALL, New Mexico
CORY GARDNER, Colorado GARY PETERS, Michigan
MARSHA BLACKBURN, Tennessee TAMMY BALDWIN, Wisconsin
SHELLEY MOORE CAPITO, West Virginia TAMMY DUCKWORTH, Illinois
MIKE LEE, Utah JON TESTER, Montana
RON JOHNSON, Wisconsin KYRSTEN SINEMA, Arizona
TODD YOUNG, Indiana JACKY ROSEN, Nevada
RICK SCOTT, Florida
C O N T E N T S
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Page
Hearing held on December 15, 2020................................ 1
Statement of Senator Thune....................................... 1
Statement of Senator Schatz...................................... 3
Statement of Senator Wicker...................................... 4
Statement of Senator Klobuchar................................... 5
Statement of Senator Peters...................................... 33
Statement of Senator Moran....................................... 35
Statement of Senator Rosen....................................... 41
Statement of Senator Tester...................................... 43
Witnesses
David Hall, Managing Partner, Revolution's Rise of the Rest Seed
Fund........................................................... 6
Prepared statement........................................... 8
Raymond Hespen, Chief Executive Officer and Co-Founder, Property
Meld........................................................... 10
Prepared statement........................................... 12
Jan Garfinkle, Founder and Managing Partner, Arboretum Ventures.. 13
Prepared statement........................................... 14
Dawn Lippert, Chief Executive Officer, Elemental Excelerator..... 21
Prepared statement........................................... 24
Appendix
Response to written questions submitted by Hon. Kyrsten Sinema
to:
David Hall................................................... 51
Raymond Hespen............................................... 51
Jan Garfinkle................................................ 52
Dawn Lippert................................................. 54
BETTING ON THE REST:
EXPANDING AMERICAN ENTREPRENEURSHIP
OUTSIDE TRADITIONAL HUBS
----------
TUESDAY, DECEMBER 15, 2020
U.S. Senate,
Subcommittee on Communications, Technology,
Innovation and the Internet,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:30 p.m., in
room SR-253, Russell Senate Office Building, Hon. John Thune,
Chairman of the Subcommittee, presiding.
Present: Senators Thune [presiding], Wicker, Moran, Scott,
Schatz, Cantwell, Klobuchar, Peters, Tester, and Rosen.
OPENING STATEMENT OF HON. JOHN THUNE,
U.S. SENATOR FROM SOUTH DAKOTA
Senator Thune. Well, good afternoon and welcome to today's
subcommittee hearing to review the state of entrepreneurship in
America. I want to welcome everyone joining us today, both in
person and virtually. For much of our Nation's history,
entrepreneurship has enabled both American progress and
American prosperity. It is the bedrock of the American dream
and has led to the economic mobility of millions of citizens.
Over the course of the last 50 years, venture capitalists
played an increasingly important role in the continuation of
America's entrepreneurial spirit. The venture capital model has
led to tremendous economic growth in recent decades and venture
capital investment as a result in some of America's most
profitable and consequential companies. Many of these venture
capital backed businesses have enabled the technology we have
come to rely on during the COVID-19 pandemic, from food and
grocery delivery services to virtual health care applications.
Today, it often feels as if entrepreneurs and venture
capitalists go hand in hand, the former depending on the
latter, to scale and to realize their full impact. However, we
are here to not only talk about the relationship between
venture capital and entrepreneurship, but also where this
relationship is occurring and more importantly, where it is
not. In 2019, California-based companies received roughly 50
percent of all venture backed investment in the United States.
That same year, just three states, California, New York and
Massachusetts accounted for almost 75 percent. Although there
are many valid reasons why this is the case, which I look
forward to exploring with our witnesses today, however, this
geographic imbalance also means that a majority of regions
within the United States are often shut out from the kind of
investment that creates jobs, revitalizes communities, and
enables the pursuit of the American dream.
Fortunately, this is a problem the private sector is trying
to solve, and we have already benefited from the work of many
individuals, including those on the panel with us today. In
addition, initiatives like the expansion of reliable broadband
services to businesses across America, including many in my
home state of South Dakota, have already begun to provide
greater connectivity between these communities and the larger
economy, which helped spur more venture capital investment in
entrepreneurial support. While we have made progress, the
impact of COVID-19 make solving the investment gap all the more
important and all the more urgent.
At a time when there has been economic uncertainty,
entrepreneurs are the ones building businesses that will in
turn create jobs. It is likely that many of these new
businesses will continue to focus on innovation and technology,
an industry that historically has been supported by venture
capital. Without greater access to capital in underserved
regions, the flow of talent, wealth, and opportunity will
continue to move to only a handful of coastal cities and the
full range and diversity of American ingenuity will go
unrealized. I have seen firsthand what rural America has to
offer.
In my home state of South Dakota, we have entrepreneurs
working on therapeutics and other services to combat the COVID-
19 pandemic. We have technology companies delivering the next
generation of precision agriculture. And against increasing
competition from countries like China, I believe more
investment in American entrepreneurship in all regions of the
United States will better position us in the long run.
At the end of the day, it is not going to be politicians
and regulators driving the next wave of American innovation. It
will be the private sector that will ultimately expand economic
opportunities across the United States. And it is my view that
the best the government can do is to fully recognize this and
then actively try to not stand in the way. Today, I hope this
panel will shed light on this important topic and bring to
Congress's attention the diverse voices of the American
entrepreneurs, the entrepreneurs who live in San Francisco and
New York City, as well as the ones who call places like Boise,
Atlanta, or Rapid City, home. To explore this topic, we are
excited to have a panel today that represents the full
geographic range of American entrepreneurship.
We are joined by Mr. David Hall, who serves as the Managing
Director of Revolution's Rise of the Seed--Rise of the Rest
Seed, I should say, Fund, which is based here in D.C.; Ms. Jan
Garfinkel, CEO of Arboretum Ventures in Michigan; Mr. Ray
Hespen, who is the CEO and Co-Founder of Property Meld, a
technology startup in South Dakota; and Ms. Dawn Lippert, CEO
of Elemental Excelerator, a startup excelerator based out of
Hawaii. I want to thank you all for joining us here today.
I look forward to hearing your testimony and I now want to
recognize by screen Ranking Member Schatz for any opening
remarks that he would like to make. Senator Schatz, are you
with us?
STATEMENT OF HON. BRIAN SCHATZ,
U.S. SENATOR FROM HAWAII
Senator Schatz. Thank you, Mr. Chairman, I want to thank
the Chair of the Subcommittee, Senator Thune, and the Chair of
the whole Committee, Senator Wicker, for this important
hearing. Innovation drives the American economy and many
entrepreneurs turn to venture investment to get new concepts
off the ground. But in recent decades, we haven't just seen a
geographic concentration of these efforts, we have also seen
that billions of dollars and significant brainpower have been
invested in companies with products designed merely to make our
lives more convenient, all the while solutions to problems that
most threaten our world remain underfunded.
We must use our resources and ingenuity to solve our most
serious problems like hunger, homelessness, health care
availability, the pandemic, and climate change. We also have to
make sure that investments in resources and talent to solve
these problems are made across the country and not just at the
hubs that Senator Thune mentioned. To fully harness the power
of innovation in America, we must break away from private
investment targeted toward the usual tech hotspots and instead
work to spur innovation across the country so that we can
deliver new economic opportunities for all Americans. This is
especially true today as we work toward an economic recovery
after COVID-19.
Among the problems I listed, I will focus for the moment on
the climate crisis because we are so fortunate to have Dawn
Lippert of the Elemental Excelerator here today from Honolulu,
Hawaii. The Elemental Excelerator has proven our early stage
investments can help to develop clean technologies with very
impressive results. To date, it has seen over 5,000 new
technologies awarded more than $40 million to 115 companies and
has deployed over 70 projects in energy, mobility, agriculture,
water, and the circular economy. It has partnered with the
Hawaii Department of Transportation to reduce carbon emissions
from concrete construction and work with the state and local
businesses to identify opportunities for innovation in Hawaii's
wastewater management.
The climate crisis threatens to create a real drag on the
U.S. economy, and our future depends on bold innovation and
clean technologies to address it. It is time for private
investment to meet the scale of the problem with solutions that
reduce our reliance on fossil fuels and help us to become
resilient to climate impacts. Although some investors, such as
Ms. Lippert and the Elemental Excelerator, are putting their
money behind novel solutions to the climate crisis and showing
that this is profitable, we will need many more. If the global
marketplace is looking for climate solutions, meeting this
demand will drive the next technological revolution and growth
opportunities for American businesses.
Unfortunately, this growth opportunity has been largely
ignored by venture investors today and we need to fix that.
Venture investment must be mobilized toward fixing existential
problems like climate change, not just giving us new apps that
get us a burrito more quickly. And a key part of this is
realizing the enormous economic opportunity in addressing
climate change, in addressing farming, in having more venture
capitalists refocused from a short sightedness to focusing
brainpower and the power of capital on the problems that face
our entire society.
And so I look forward to hearing the witnesses' testimony
and having a productive conversation on these topics. Thank
you.
Senator Thune. Thank you, Senator Schatz. The Chairman of
the Full Committee, Senator Wicker, is with us as well,
virtually, and I will ask if Senator Wicker--Mr. Chairman, are
you there?
STATEMENT OF HON. ROGER WICKER,
U.S. SENATOR FROM MISSISSIPPI
Senator Wicker. I am here. Can you hear me?
Senator Thune. Yes, indeed. Please proceed.
Senator Wicker. Alright, good. Well, thank you so much. And
thank you also, Senator Schatz, for this important Subcommittee
hearing and for the discussion that is critical to the future
of rural communities, a subject matter that both of my
distinguished colleagues are very interested in. There is a
broadband gap between rural and urban America, and there is
also a venture capital gap. According to a map produced by the
National Venture Capital Association, the Southeast and the
Midwest regions received a little over 6 percent of capital as
a first this quarter, while the West Coast and mid-Atlantic
regions received over 60 percent.
That is 6 percent versus 60 percent. Such a disparity
between regions makes it vital that this committee continue its
work to provide rural communities with the tools they need to
compete for venture capital. These tools include access to 5G,
high-speed wireless networks, as well as educational
opportunities in science, technology, engineering, and
mathematics. The 5G economy is projected to create more than 3
million jobs, generate as much as $275 billion in new
investments for the wireless industry, and add up to $500
billion to our Nation's economy over the next decade.
5G will unleash innovation and entrepreneurship, providing
a high level of performance to support a wide range of new
applications and use cases. Next generation broadband
deployment has been a major focus of mine as Chairman of this
Committee. As the United States begins to deploy 5G networks,
it will be important to ensure a level playing field for rural
communities. We also need to make sure we have the talent
pipeline needed to capitalize on these new technologies. Let me
briefly mention one, a piece of legislation and one
collaboration with the university. I have worked across the
aisle with my friend and colleague, Senator Rosen, to introduce
the Rural STEM Education Act to provide rural schools with the
resources they need to take advantage of the opportunities
afforded by 5G. Rural STEM education, combined with increased
venture capital investment in rural areas, can help alleviate
the so-called ``brain drain,'' something Mississippi has
struggled with, bright young people leaving the state to seek
opportunity elsewhere.
In addition, Mississippi has been active in working to
increase capital flow into rural communities. A prominent
example is a Mississippi State University, which has partnered
with Georgetown University through the Rural Opportunity
Initiative to educate investors and lenders and promote
investment in rural America through programming, internships,
research, partnerships, and advocacy.
I am proud of Mississippi State's leadership and I look
forward to the Committee continuing to exercise leadership and
equipping rural communities with 5G technology and educational
opportunities in the STEM fields. Thank you very much, Mr.
Chairman.
Senator Thune. Thank you, Chairman Wicker. We now have my
neighbor to the east, Senator Klobuchar, from the great state
of Minnesota. She is going to make some quick opening remarks.
Appearing with us virtually, Senator Klobuchar.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Well, thank you so much, Chairman Thune.
Thank you, Ranking Member Schatz. Thank you as well to Chairman
Wicker and also Senator Cantwell, who I know knows a little bit
about entrepreneurship. So I got involved in this because I
live in our state and right next door to South Dakota, and
started the Senate Entrepreneurship Caucus with Senator Tim
Scott.
And the reason we did that is because after the OA
downturn, we realized there was a startup slump going on, and
we know that is how a lot of the jobs are created in our
country. And one of the things we immediately knew, and I think
we all knew it just from our own experiences, is that over 70
percent of all the venture capital being concentrated--is
concentrated in just three areas. That is Silicon Valley,
Boston, and New York. And so what happens is too often
promising startups aren't able to access the support they need
simply because of where they are located.
And I think if there is any silver lining to this pandemic,
it is perhaps that no matter where you are, you are going to be
able to access employees and the like as more people are
working remotely. But it is still a problem, and we have seen
it even more magnified as small businesses are closing at a
faster rate than big ones. And so in March, I introduced
legislation called the New Business Preservation Act with
Senators Coons, Kaine, and King to help new startups get the
capital they need. And I actually think this is the perfect
time as we go into the new year. We are doing emergency
legislation right now that is so necessary. But to look at a
bill like this. Because what it would do is, is it puts capital
into the areas that we need it.
It makes sure that we find a way to do this legally through
the states, and it makes sure that the money is going to areas
that don't have all the startups and that we don't miss the
next great entrepreneur just because they live in Bemidji,
Minnesota, instead of Silicon Valley. And what we know is that
the more startups we can have, the more problems we are going
to fix, and the more jobs we are going to create in this
country.
So as we see the light at the end of the tunnel with the
vaccine, I think it is a really good time for this committee in
the coming months to look not just at my bill, but into all
legislation that deals with how we can encourage
entrepreneurship and startups. So thank you very much. Thank
you, Mr. Chairman. Look forward to hearing from the witnesses.
Senator Thune. Thank you, Senator Klobuchar. I think we
will get on with our panelists here. And again, I want to thank
you all for being here. This is a great--a great group. As I
mentioned earlier, we have Mr. David Hall, who is Managing
Partner at Revolution's Rise of the Rest Seed Fund. And I
mentioned entrepreneurs in my home state of South Dakota.
Certainly, Ray Hespen qualifies as that, having started a
business in South Dakota back in 2015. It is a fast growing
maintenance automation software company, and it is creating a
lot of jobs in Western South Dakota.
Glad to have you here, Ray. Ms. Jan Garfinkle, who, as I
said, is Founder and Managing Partner of Arboretum Ventures.
And then, Ms. Dawn Lippert, who is Chief Executive Officer of
Elemental Excelerator. So what we are going to do is start with
Mr. Hall, and go to Mr. Hespen, and then to each of our--the
other two are going to be appearing virtually. Give you an
opportunity to make some comments. If you could, confine your
oral arguments--your oral statements to about 5 minutes. We
will make sure that your entire statements are included as part
of the written record of the hearing. But then we will have an
opportunity to ask you all some questions. So we will start
with Mr. Hall. Please proceed.
STATEMENT OF DAVID HALL, MANAGING PARTNER, REVOLUTION'S RISE OF
THE REST SEED FUND
Mr. Hall. Chairman Thune, Ranking Member Schatz, members of
the Committee, thank you for the opportunity to speak to you
today. My name is David Hall and I am the Managing Partner of
Revolution's Rise of the Rest Seed Fund, a Washington, D.C.
based venture capital fund started in 2005 by Steve Case, the
Co-Founder of AOL.
Our core investment thesis is that great entrepreneurs can
start great businesses and scale them anywhere. And in 2014,
Revolution launched the Rise of the Rest initiative, which is
our annual five city, 5 day bus tour, to shine a spotlight on
growing energy and momentum in startup ecosystems across the
country. This led to our first Rise of the Rest Seed Fund in
2017, followed by our successor fund in 2019, in which we
believe the next great company can start and scale outside of
Silicon Valley, New York City, and Boston. And since our
launch, we have invested in more than 150 companies and over 70
different cities across the United States.
We have learned an incredible amount about what helps and
hinders startups in communities across the country. And today,
I would like to discuss how venture capital and startup
ecosystems are good for the country, good for cities, and good
for Americans. But let's level set with facts. In 2019,
according to data compiled by the National Venture Capital
Association in Pittsburgh, there was approximately $133 billion
in U.S. venture capital invested in American startups. Of that
amount, approximately 73 percent was invested in just three
states: California, New York, and Massachusetts, leaving the
other 47 states and the District of Columbia to receive only 27
percent of this total amount.
In addition, and even more stark, less than 10 percent of
venture capital is invested in women led startups and less than
1 percent is invested in black or African-American founders. So
while we all may believe that talent is evenly distributed
across our country, the opportunity often depends on where you
live and what you look like. The future of America's economic
competitiveness depends on all of us addressing these
inequities. And you may ask, why is it important for Americans
to support startups and entrepreneurs across the country?
Well, in any given year, startups are responsible for the
majority of net new job growth in the U.S., according to the
Kauffman Foundation. This is true because of several factors,
including globalization and automation and other factors which
collectively drive down job growth. Good companies, jobs rise
and fall through mergers and divestitures, while small
businesses, which are still responsible for most jobs, tend to
remain relatively stable. Therefore, bolstering these young
startups is the best way for us to revive economies which have
been hardest hit by the shifts in the global economy. The major
companies of tomorrow have the potential to employ millions and
improve education, health care, financial services, and are
being built today as early stage startups, often outside of the
major tech hubs.
These entrepreneurs need our support to unlock the
necessary capital and accelerate and commercialize technologies
that can improve outcomes and continue to drive the U.S.
economy into the future. To date, our Rise of the Rest tours
have taken us to more than 40 cities, and while every city in
every region sees value in supporting startups, the most
successful cities that we visited have recognized their legacy
and strengths to attract and nurture innovation, entrepreneurs,
and the high growth and high impact jobs they create. For
example, in 2018 we toured Chattanooga, Tennessee, also
referred to as ``Freight Alley'' because of the concentration
of freight and logistics businesses, which with more than 7,000
white collar jobs, in addition to the thousands of drivers and
operators, are innovating a legacy industry for a 2-day
shipping reality.
Over the last decade, there have been many headlines
detailing the coming tech and talent exodus from Silicon Valley
and New York City. The COVID-19 pandemic has accelerated the
storyline of big name founders leaving hard hit coastal tech
hubs. And while some of this most recent displacement is likely
to be temporary, I do believe that a significant amount of
coastal tech talent will permanently relocate to take advantage
of a better standard of living. This has the potential to be
transformative in many emerging startup systems in places like
Pittsburgh, Detroit, Miami, Bozeman.
Beyond the proximity to family, the pandemic is driving the
boomerang of this talent back to rising cities because these
young people see comparable career opportunities in their
hometowns for the first time in a generation. Finally, I
believe the social injustice and racial animus of the past
summer has led to a tipping point in conversations around
diversity, equity, and inclusion in the startup and venture
capital industry. This has led to immediate calls for greater
access to capital for entrepreneurs of color, women
entrepreneurs, and other represented entrepreneurs who have
historically been excluded from the VC club.
At Rise of the Rest, we were so motivated we transformed
our COVID postponed bus tour to a virtual tour focused
exclusively on black founders. I believe that now is the time
for all stakeholders, including policymakers, corporations,
universities, investors and most importantly, entrepreneurs, to
accelerate the growth of regional tech ecosystems. It is up to
all of us and critical for America's future economic
competitiveness that all founders everywhere and from all walks
of life have access to the capital that can give them the shot
to build America's next iconic company. Thank you.
[The prepared statement of Mr. Hall follows:]
Prepared Statement of David Hall, Managing Partner,
Revolution's Rise of the Rest Seed Fund
Chairman Thune, Ranking Member Schatz and Members of the Committee,
thank you for the opportunity to speak to you today. My name is David
Hall and I'm the managing partner of Revolution's Rise of the Rest Seed
Fund. Revolution is a Washington, DC based investment firm launched in
2005 by Steve Case, the co-founder of AOL. Our firm has principally
invested in venture-backable companies under the thesis that ``great
entrepreneurs can start and scale great businesses anywhere.'' In 2014,
Revolution launched the Rise of the Rest initiative to shine a
spotlight on the growing energy and momentum in startup ecosystems
across the country. The lynchpin of that program each year is a five
day bus tour to emerging startup ecosystems where we spend time
understanding how cities are capitalizing on their unique strengths to
create a more robust innovation community. Interest in our bus tours
and our investment focus on rising cities in America grew and directly
led to the launch of the first $150M Rise of the Rest Seed Fund in late
2017, and the second Fund, which we raised in 2019. Both Funds are
backed by an extraordinary list of investors, executives, and
entrepreneurs who publicly support our belief that the next great
company can start and scale outside of Silicon Valley, New York City
and Boston. Since launching the first fund, we have invested in more
than 150 companies in over 70 cities across the United States. We have
learned an incredible amount about what helps and hinders startups in
communities across the country. Today, I would like to discuss how
venture capital and its ability to support the technology and startup
ecosystem is good for the country, good for individual cities and
states who actively participate in supporting startup ecosystems, and
good for U.S. citizens, particularly those in rising communities.
Despite the positive momentum we have witnessed with respect to
startup growth in a number of cities, it is critical to level set with
some facts around place and people, and understand startups crucial
role in job creation. In 2019, according to data compiled by the
National Venture Capital Association (NVCA) and Pitchbook,\1\ there was
approximately $133 billion in U.S. venture capital invested in American
startups. Of that amount, approximately 73 percent was invested in just
3 states: California, New York, and Massachusetts. California alone
received nearly half of this amount at over $65 billion, while the
other 47 states and the District of Columbia saw only 27 percent of
this total amount.
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\1\ https://nvca.org/wp-content/uploads/2020/04/NVCA-2020-
Yearbook.pdf
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In addition, and even more stark, less than 10 percent of venture
capital is invested in women led startups and less than 1 percent is
invested in Black or African American startup founders.\2\ So while we
may all believe that talent is evenly distributed across our country,
opportunity is not. The likelihood that one will receive venture
funding to scale really does depend on where you live, and to which
gender and racial identities you ascribe. It is critically important
that we address these inequities. And to do so will require the
commitment of the venture industry, academia, the larger business
community, and policymakers at all levels. The future of America's
economic competitiveness depends on it.
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\2\ https://news.crunchbase.com/news/untapped-opportunity-minority-
founders-still-being-over
looked/
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You may ask, why is it important for stakeholders--private sector,
academia, and public sector--to support American startups and
entrepreneurs all across this country? In any given year, startups are
responsible for the majority of net new job growth in the United States
according to research from the Kaufmann Foundation.\3\ This is true
because of several factors, including globalization, automation, and
other factors which collectively drive down job growth.
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\3\ https://www.kauffman.org/wp-content/uploads/2019/12/
firm_formation_importance_of_
startups.pdf
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Organic job growth at large corporations tends to wax and wane
through mergers and divestitures, leading to a flat to net reduction in
job growth. While small businesses, which are still responsible for
most jobs, tend to remain relatively stable. Therefore, it is mostly
through startups, that we see exponential net job growth. This is
important because bolstering these young businesses and job creators
are the best way for us to revive economies which have hardest hit by
the shifts in the global economy. The major companies of tomorrow that
have the potential to employ millions and improve education,
healthcare, financial services, and other industries, are being built
today as early stage startups, often by people who do not live in one
of the major tech hubs. These entrepreneurs need our support to unlock
the necessary capital from both public and private sources. Doing so
will accelerate and commercialize technologies that can improve
outcomes, drive down consumer costs, and continue to drive the U.S.
economy into the future.
To date, our Rise of the Rest bus tours have taken us to more than
40 cities. Each year, we visit five cities in five days to witness and
highlight how cities and communities are rising to the challenge of
supporting their burgeoning startup ecosystems. While every region sees
the value in supporting startups, the most successful cities that we
have visited have recognized its uniqueness, its legacy, and its
strengths to attract and nurture innovation, which, subsequently
attracts entrepreneurs and the high-growth and high-impact jobs they
create. For example, in Chattanooga, Tennessee, where we took our tour
in 2018, we learned that the city was referred to as ``Freight Alley''
because of the concentration of freight and logistics businesses.
Indeed, the industry employs locally more than 7,000 white collar
professionals, who in addition to the thousands of drivers, operators
and brokers, are working to build technology for a legacy industry to
better meet today's increased expectations and demands of rapid
delivery of goods and products.\4\ We were also fortunate to leave
Chattanooga with an investment in Freightwaves, a fast-growing data and
media platform serving the freight industry which employs 130 people.
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\4\ https://www.timesfreepress.com/news/edge/story/2019/oct/01/
moving-fast-freight-services-sector-riding-hi/504428/
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We also saw a similar impact in Indianapolis, Indiana, following
Salesforce's 2013 acquisition of Indianapolis-based company called
ExactTarget, which grew from a small startup to a major tech company.
Following the acquisition, Salesforce doubled-down on the Indianapolis
ecosystem, built a large Midwestern headquarters, and helped to
accelerate the transformation of Indianapolis into a major technology
and business-to-business software leader.\5\ In addition, we have seen
American innovation translate to entrepreneurship far beyond any given
geography.
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\5\ https://oneamericaworks.org/blog/how-did-indy-score-a-
salesforce-hq/
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Take Brevard County, Florida for example, which we visited in 2019
on our bus tour. Startups all across the country are innovating in the
space industry, and need to tap into the leadership and ingenuity of
NASA with its epicenter along Florida's famed ``Space Coast.'' This
critical industry, from a defense and commercial perspective, will
continue to be fueled by and benefit from startups innovating outside
of the major tech hubs, and in places like Central Florida, Southwest
Texas, and Alabama.
Talent is another factor to watch closely that can drive the
success of a startup ecosystem, particularly for individual citizens.
Over the last decade, there have been many headlines detailing the
coming tech and entrepreneur exodus from Silicon Valley and from New
York City. The COVID-19 pandemic has accelerated this storyline with
the media eagerly covering stories of big name founders leaving hard
hit coastal tech hubs. While some of the most recent displacement is
likely to be temporary, I do believe that a significant amount of
coastal tech talent will permanently relocate to take advantage of a
lower cost of living and less congested lifestyle. This has the
potential to be transformative in many emerging startup ecosystems and
will fill a critical gap in the human infrastructure so many ecosystem
leaders and entrepreneurs have been building for years in places like
Pittsburgh, Detroit, Miami and Bozeman. This is not exclusive to just
tech talent; we have also seen businesses recruiting fashion designers,
for example, to St. Louis to design swimsuits for our portfolio
company, Summersalt, a women's swimwear brand. It is also important to
remember that very few ``techies'' were born in the Bay Area or other
coastal tech hubs. Most grew up and received education in other
communities.
They moved to these hubs because of the promise of outsized
opportunity. Another one of our portfolio companies, Understory, a
Madison, Wisconsin company that is building a parametric insurance
company, actually relocated from Boston back home to Madison and saw
incredible productivity gains and huge cost savings. The pandemic is
definitely accelerating the boomerang of this talent back to hometowns,
not just for proximity to family, but also because they see potentially
comparable career opportunities in many rising cities for the first
time in a generation.
Finally, I believe that we are at a tipping point in conversations
around diversity, equity, and inclusion in the tech start-up and
venture capital industry. Amid much of the social justice and racial
animus of the past summer, in the venture capital industry, we
witnessed the immediate calls for greater access to capital for
entrepreneurs of color, women entrepreneurs, and other underrepresented
communities who have been historically excluded from the VC club. At
Rise of the Rest, we were so motivated that we transformed our COVID-
postponed tour to a virtual tour focused exclusively on Black founders.
We were able to source nearly 500 Black-led startups for a pitch
competition, and will invest in 3 companies: Rheaply, a physical asset
exchange manager; Kanarys, a platform that tracks diversity and
inclusion for corporations, and Zirtue, a person-to-person lending
platform. We also helped facilitate over 300 meetings between Black
founders and top investors across the country.
I believe that now is the time for all stakeholders, including
policymakers, corporations, universities, investors, and most
importantly, entrepreneurs, to accelerate the growth of regional tech
ecosystems. It is up to all of us--and critical for America's future
economic competitiveness--that all founders everywhere and from all
walks of life access to the capital that can give them a shot to build
the next iconic American company. Thank you.
Senator Thune. Thank you, Mr. Hall. Mr. Hespen.
STATEMENT OF RAYMOND HESPEN, CHIEF EXECUTIVE OFFICER AND CO-
FOUNDER, PROPERTY MELD
Mr. Hespen. Thank you, Senator Thune, Senator Schatz,
subcommittee members. Appreciate the opportunity to come here
and speak. My name is Ray Hespen. I am the CEO and Co-Founder
of a software company called Property Meld. Where we specialize
is actually in the rental business and maintenance
specifically. So what we do is we make maintenance a phenomenal
experience for both those who are renting, as well as those who
manage rentals.
We have hundreds of thousands of homes on our platform,
both here in the U.S. and even some in Canada. And just a
little bit of an idea of the genesis. We started the company
around 2015 with the idea and the problem. By 2018, we achieved
hypergrowth, so we went from two employees to four. And now in
2020, we are rounding out what will be around 44 for employees
going through COVID. So a little bit about myself. I grew up in
a small town in Wyoming. I eventually realized that I was good
at math and about nothing else so I went and became an engineer
at the School of Mines in South Dakota, and ultimately ended up
living there. So just a little bit around why this is so
exciting for me that we are talking about this.
I graduated South Dakota School of Mines and I really had
two choices. I could either stay in the place that I had fallen
in love with and forfeit opportunity, or I could choose to take
that opportunity and move elsewhere. And like many of my peers,
a lot of us chose opportunity. So I did what my wife and I like
to call went and dated the US. We went and lived in six places
in 9 years, went and tested out every time zone, figured out
which one we liked, but ultimately ended up back in South
Dakota. And unfortunately, I had to create my own job to do
that. So, you know, if we are thinking about as an engineer,
usually engineers are good problem solvers. I don't know
necessarily about me, but the thing that I didn't know what how
to do was really actually start a business. So the first thing
that you do when you start a company is you say, well, how am I
going to fund it?
Well, I went and talked to a few people that were familiar
with raising money and I asked them, you know, what is needed
to be done, and the fact that I didn't have an Ivy League
education or didn't have--haven't done this before, the
likelihood of raising money was actually just very low, low
likelihood. So like most entrepreneurs, I am not good at being
told no. So I figured out how to get the money elsewhere.
Friends and family is ultimately where I went to, which was a
little bit of a difficult network to tap.
At that time, I didn't know very many people that had money
to loan out or invest. And to later find out, some of them
actually borrowed the money to invest, which is actually crazy
in my opinion. And so, you know, so we are managing our
company, and 2018 was a pretty critical moment for us as a
company, ended up partnering with a mentor who really helped
create a fork in where our company was going, turning us from a
real ragtag group of people, just kind of figuring it out, and
helping turn us into a scalable operation that people could see
an investment making some real dividends, making it a real math
equation to put in a nickel here, get a dollar out there. And
this was critical for actually going and raising funds, which
we did go and do. So the mentorship was critical in helping
navigate this, but it was kind of interesting.
We had kind of one or two options. Either we could partner
with a lot of the angel funds in the region, which would have
taken a lot of different deals to get done--small check sizes
or work with coastal VCs. Looking--hindsight, even some of the
things that we navigated there, some of the terms seem pretty
opportunistic and was really fortunate that we had some good
advisors to help us navigate that. We ultimately end up
partnering with an amazing regional fund that has been a great
asset ever since. So just kind of tell where we are at today as
a company, started in a couple of basements, like most great
stories, you know, do. Ended up joining a little bit of an
incubator. And then we are actually to the point where we are
building a new 14,000 square foot facility in Downtown Rapid to
help capture the growth and house all the employment that we
are doing.
Again, we are around 44 employees. But the big thing that I
really want to talk about is this is really a testament of the
power of a great idea and execution. And if I was to sit here
and, you know, make sure that there was something kind of left
with this is if I would have asked the question, could we have
done this with just capital and not the mentorship we received?
I would say it would have been doubtful to have the success
that we have had. And if it was the flip side where we had the
mentorship and not the capital, do I think it could have been
done?
And it would also have been a little doubtful in my mind.
And so the big thing is really understanding that as we think
about these things in helping entrepreneurs, how I perceive
helping entrepreneurs, is really make sure that we have got a
great infrastructure, both access to capital as well as the
support network to help grow their business. Thank you.
[The prepared statement of Mr. Hespen follows:]
Prepared Statement of Raymond Hespen, Chief Executive Officer
and Co-Founder, Property Meld
My name is Ray Hespen, and I'm the CEO and co-founder of Property
Meld, a software company that focuses on maintenance for the property
management industry. We started our company in 2015 to make property
maintenance a fantastic experience for everyone--renters, maintenance
personnel, and property management companies. Our company has grown
significantly and now helps improve this experience for hundreds of
thousands of renters and the people who manage the homes. A little
about my background, I was born in Wyoming and studied to become an
engineer in South Dakota, and I am fortunate to live there today.
For context, my family moved across the U.S. before arriving back
to South Dakota, where we ultimately wanted to live. I never wanted to
leave the Midwest after college, but like many of my colleagues, we had
to choose between staying in the area or moving for a better
opportunity. I chose opportunity. It hasn't been an easy journey,
moving around six times in nine years. The goal was to gain the skills
needed to move back into the area. But frankly, I had to create my own
job in order to move back.
My company was born to solve a real problem for renters and
maintenance. I was good at solving problems but turning an idea into a
business was completely new to me. I specifically remember talking to a
few fundraising people about raising money initially and was told that
it wouldn't happen. I was from a no-name school and didn't have the
credentials or connections of an Ivy-league school.
As any entrepreneur, I'm not good at being told 'no,' so I started
tapping my local network. Incredibly and fortunately, I raised some
money from people who liked me and trusted me. They weren't
professional investors, and looking back, I'm a bit shocked they did
invest considering what information we gave at the time.
Fast-forward, we started to have some success with early-adopters
in our industry. I specifically remembered a critical pivot in our
company when we met a key mentor in our growth. He had a fantastic
resume in software and scaling and brought our haphazard group, and
helped turn us into a scalable machine. This ultimately helped us
achieve growth rates that made this an interesting business.
It was at this point we became a legitimate investment opportunity
for venture capitalists (VCs). Our new framework helped established the
structure that would create a path to profitability for us and our
investors after investment.
Building the story for those VCs was hugely guided by this mentor.
Creating the formula for 'insert a nickel here, get a dollar out there'
but helped coach us to elevate our credibility during the entire
process.
The options for fundraising were minimal. It felt like it was
either regional angel players or venture capitalists from the coasts.
The angel groups often could only commit to small investments which
would have required a large contingent if we were to raise enough to
give us the runway we needed. Alternatively, we could participate with
the coastal VCs.
Even during this initial period of fundraising, we received some
term sheets that, especially in hindsight, felt opportunistic. Since we
were in South Dakota, we wouldn't notice some egregious terms. Due to
these mentors' advice, we were able to avoid some pretty serious
mistakes early in our company. Ultimately, we partnered with a
fantastic smaller regional capital partner who treated us fairly and
has been a great asset since the initial investment.
We started our company in 2015 and had a slow start. By the
beginning of 2018, we had grown to 4 employees. Since then, we have
accelerated our job creation and now employ 44 with no signs of slowing
down. Starting from a basement, moving to a local incubator, and now
building a 14,000 sq ft beautiful facility in downtown Rapid City, our
growth is an excellent example of what can be accomplished with the
right idea and the proper execution. We're having a real impact on our
local and national economy.
I ask that we not think of this as only capital. Hopefully, my
journey is an example of how both mentorship and capital are essential.
If I ask myself, ``could we have succeeded only with capital?'', I am
doubtful. Alternatively, if we would have succeeded with only a mentor,
also doubtful. It is my strong belief that both of these areas are
critical to the success of entrepreneurs like myself. I hope a
spotlight on our success will help set some framework and provide
insight on how we help other entrepreneurs do the same.
Thank you.
Senator Thune. Thanks, Mr. Hespen. And I was recruited and
thought long and hard about going to South Dakota School of
Mines, and perhaps if I had the background to do what you are
doing and be an entrepreneur and creating jobs, but I don't
think I probably have the skill set that you have. So great to
have you in South Dakota. Next up is Ms. Jan Garfinkle, and she
is appearing with us virtually. As I mentioned, she is the
Founder and Managing Partner of Arboretum Ventures. Jan.
STATEMENT OF JAN GARFINKLE, FOUNDER AND MANAGING PARTNER,
ARBORETUM VENTURES
Ms. Garfinkle. Great. Thank you, Chairman Thune, and
Ranking Member Schatz, members of the Committee. It is really
an honor to testify today. As Senator Thune said, I am Jan
Garfinkle. I am the Founder and Managing Partner of Arboretum
Ventures, which is located in beautiful Ann Arbor, Michigan.
This hearing has caused me to reflect on how my entrepreneurial
journey that took place outside of traditional venture capital
hubs can help your important work. Over the first half of my
career, I worked at startup medical device companies and
consulted with health care startups before deciding that I
wanted to join a venture capital fund. When I couldn't find a
venture job here in Michigan, I decided to launch my own firm
and so I went to irs.gov, filed for a tax ID number, and
started Arboretum Ventures back in 2002.
Arboretum was founded on the belief that through
innovation, we can drive cost out of our health care system
while still providing great clinical care. We have grown from
our first fund, which was $17 million, to managing now over
$700 million over five funds, and along the way we have
invested in more than 50 companies, helped over 8 million
patients, and currently employ 4,000 high skilled workers, most
of which are located in the Midwest. In fact, we have a
portfolio company in half of the states represented by the
Senators on this Subcommittee. Policymakers are right to ask
how venture capital and startup activity can be spread to more
of our country. After all, entrepreneurship is not proprietary
to the Bay Area, Boston, or New York. There are incredible
entrepreneurs throughout this country and it is important that
policy be established to help these entrepreneurs flourish.
Venture capital is a local, high touch investment into
entrepreneurial activities, and hence venture firms tend to
invest in portfolio companies that are in their geographies.
Unfortunately, the benefits of venture and startup activity are
not evenly distributed across our country.
Venture capital is too often seen as a monolith when in
fact it is really a collection of dozens of regional
ecosystems. Many look at Silicon Valley and wonder, why is it
so special? What is so special about it that makes so much
venture capital investment flow there? Well, Silicon Valley is
just an excellent example of a highly developed entrepreneurial
region. It is important to consider how we can curate local
conditions so entrepreneurs like me and like Ray can create
successful homegrown startups or venture capital funds in
under-ventured regions. To flourish, entrepreneurial ecosystems
outside of coastal hubs need support from the broader venture
capital industry and policymakers. As the Committee delves
deeper into this topic, I recommend you work to enact policy
that supports young, high growth companies that have different
needs than large companies or traditional small businesses. I
was deeply involved in such initiatives the last several years,
serving on the board of the National Venture Capital
Association, and most recently as its Board Chair. On the
policy front, I encourage you to prioritize the following areas
that will support emerging ecosystems.
First, Senators Young and Schumer have an excellent piece
of legislation called the Endless Frontiers Act, which is a
bold commitment to Federal basic research and technical
commercialization in critical technologies. Many companies are
spun out of universities and this legislation would help spur
new activity in emerging ecosystems.
Second, earlier this year regulators finalized reforms to
the Volcker Rule. One reform that is very promising to regional
ecosystems is the ability for banks to once again be investors
in VC funds. This will open a new source of capital for smaller
venture funds that are off the coast.
I encourage you to protect this reform at the Federal
level. Third, venture-backed startups tackle big problems, and
it often takes substantial research dollars to solve these
problems. Hence, they invest millions into the research as they
develop the product and then until they generate revenue. As a
result, startups need tax policy that allows them to take
advantage of tax assets such as net operating losses and R&D
tax credits that are generated as the company grows. My written
testimony provides examples of legislation that would achieve
that goal. It is also imperative that taxes not be increased on
carried interest, which is the share of capital gains that VC
fund partners receive if their funds are successful. I can tell
you from personal experience that carried interest in the
principal is the principal economic motivator for starting a
fund in an emerging ecosystem.
It is important to realize that the fee from small funds is
not enough to cover expenses, and hence venture founders often
go without salary for several years, as was my case. And
finally, the Startup Act is a smart bipartisan legislation from
Senators Moran, Warner, Klobuchar, and Blunt. One important
piece of the bill is the creation of a startup visa to pave the
way for immigrant entrepreneurs to start new companies in the
U.S. In our own portfolio, approximately one third of our
startup founders, are immigrant entrepreneurs.
So to conclude, I greatly appreciate your interest in this
topic and I look forward to your questions.
[The prepared statement of Ms. Garfinkle follows:]
Prepared Statement of Jan Garfinkle, Founder and Managing Partner,
Arboretum Ventures, Board Chair (2019-2020), National Venture Capital
Association
Introduction
Chairman Thune, Ranking Member Schatz, thank you for the
opportunity to testify before the Senate Commerce Committee's
Subcommittee on Communications, Technology, Innovation and the
Internet. The topic of spreading entrepreneurial activity is one I am
deeply passionate about as I have been investing in early-stage
healthcare companies for nearly 20 years. I founded Arboretum Ventures
in Ann Arbor, Michigan, in 2002 with the goal of enabling meaningful
healthcare system savings while maintaining excellent clinical
outcomes. From 2016 until earlier this year, I served on the board of
directors of the National Venture Capital Association (NVCA), and
during my last year on the board I served as its board chair. In that
capacity, I led industry initiatives to encourage the growth of
emerging startup ecosystems and venture capital in more areas of the
country.
As I prepared for this hearing, I reflected on my own
entrepreneurial journey that took place outside traditional venture
hubs. I would like to briefly share my personal story, along with my
experience in the Midwest venture capital (VC) ecosystem and my
thoughts on how startup success in under-ventured regions leads to a
virtuous growth cycle.
I grew up in California and graduated from the University of
California, Berkeley with a degree in bioengineering. After working for
Proctor & Gamble in manufacturing and earning my MBA at Wharton, I
spent 12 exciting years working for two medical device start-ups in the
Bay Area--both of which were acquired by Eli Lilly and ultimately
became the foundation of Guidant Corporation. However, while my career
was advancing, my husband was not happy with his job in San Francisco
and I became a reluctant trailing spouse as we moved to Ann Arbor,
Michigan. I had 3 daughters in 18 months, (a single and a double), and
then started a consulting business focused on local early-stage health
care companies. After 8 years of consulting, I decided I wanted to work
in venture capital but was unable to find a venture capital position in
Ann Arbor. So I went to IRS.gov, filed for a tax ID number, and founded
Arboretum Ventures in 2002.
Today, Arboretum is the largest venture capital firm in Michigan,
with over $700 million under management across five funds. 90 percent
of our capital is from institutional investors such as pension funds,
foundations, and endowments. We have invested in more than 50
companies, helped over 8 million patients, and created over 4,000 jobs,
most of which are located in the Midwest. In fact, we have at least one
portfolio company in half the states represented by the Senators on
this subcommittee. We have had 13 large exits, with 40 percent of those
being located just a few miles from our office in Ann Arbor.
I can say from experience that starting a venture capital firm from
scratch is never easy and is especially challenging in regions outside
traditional VC hubs such as San Francisco or Boston. There are a number
of structural barriers that exist in under-ventured regions. The lack
of investment capital constrains the number of startups that receive
funding. Subsequent trickle down effects include: a reduction in the
number of successful exits and secondary reduction of experienced
employees who know how to scale a company, which then leads to limited
investment capital due to lack of viable investment targets. This
downward spiral can be near-insurmountable and requires private and
public sector support to overcome.
My firm, Arboretum Ventures, owes a great deal of its success to
the early support we received from the State of Michigan, both directly
and indirectly. In 2002, when I founded Arboretum, the Michigan
Economic Development Corporation (MEDC) decided it wanted to stimulate
the formation of new venture funds. MEDC ran an RFP process with 17
competitors, awarding 2 winners with $250,000 each. The $250,000 was to
cover the costs of raising the fund, but not salaries, and was only
awarded once the fund had a first close of at least $5 million. We were
one of the two winners and had a first close on Arboretum's first fund
of $6 million. We continued to fund raise for the next two years and
our first fund totaled $17 million. In 2006, Michigan launched the $95
million Venture Michigan Venture Fund (VMF) to invest in VC firms
willing to open offices in the state. VMF served as a cornerstone
investor (limited partner) for Arboretum and persuaded several regional
funds to open Michigan offices and invest capital in local startups.
Michigan also created ``SmartZones'' across the state--incubators with
office space, entrepreneurship training, and other company incubation
services--and worked alongside private sector organizations to grant
millions to startups, leading to the creation of hundreds of jobs.
The actions taken by the state and private partners helped us
overcome the barriers inherent to under-ventured regions and
facilitated a culture of entrepreneurship in Michigan. Within
Arboretum, we have seen how our early successful investments, including
Ann Arbor-based companies HealthMedia (sold to Johnson & Johnson) and
HandyLab (acquired by Becton Dickinson) led to additional venture and
angel investor interest in our region and built an important base of
local talent. In fact, we recently had our largest exit (i.e.,
completion of a successful investment) ever in NeuMoDx, a company that
was founded by the two leaders behind HandyLab. Importantly, NeuMoDx is
a leader in the COVID-19 testing market. More broadly, Michigan
recently had one of its largest venture exits in cybersecurity, Duo
Security, which was founded by employees from a previous Ann Arbor
startup (Arbor Networks). This recycling effect is what propels local
ecosystems forward.
The burgeoning venture ecosystem in Michigan has also highlighted
that regions outside traditional hubs have unique advantages. With the
lower cost of living, companies can be more capital efficient. In fact,
the average Midwest startup only requires two-thirds of the funding an
equivalent Bay Area company would need to reach a successful exit. We
are also proud of the diversity in our region; Ann Arbor has one of the
highest rates of women-founded VC startups in the U.S.
In my recent role as NVCA board chair, I was able to leverage my
experiences and learnings from Michigan and became deeply involved in
industry-wide efforts to build out emerging ecosystems off the coasts.
Two examples of this, which I discuss in more detail below, are Venture
Capital University and the recent change to the Volcker Rule, both of
which greatly impact funds off the coasts. In addition, NVCA recently
created Venture Forward, a 501(c)(3) that focuses on education,
diversity, and inclusion, and ensuring best practices are shared
nationwide, in essence breaking down the information barriers that
provide incumbent regions built-in advantages over emerging ecosystems.
Michigan, the Midwest, and other under-ventured areas still have a
long way to go before they can match the entrepreneurial maturity of
the coastal hubs. In 2020, only 26 active VC firms were headquartered
in Michigan \1\. Further, while the amount of venture capital assets
managed by investors based in Michigan has grown steadily from $840
million in 2005 to over $4.3 billion in 2020, the amount managed by
Michigan investors today represents just one-half of one percent of the
Nation's total venture capital assets under management.\2\ These
statistics notwithstanding, accelerating the startup ecosystems in
Michigan and other under-ventured regions is more important than ever
considering how globalization and new industrial rivals have shuttered
hometown employers' doors and left many communities struggling. The
global economy is changing fast and communities across the country must
modernize and adapt or the challenges this country faces in terms of
access to opportunity, competitiveness, and economic growth will only
worsen. Purposeful and strategic policy efforts on the part of public
and private-sector leaders can help these communities thrive in the new
tech and knowledge-driven economy as the old economy fades from view.
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\1\ 2020 MVCA Research Report, Michigan Venture Capital
Association, available at https://michiganvca.org/wp-content/uploads/
2020/04/2020-MVCA-Research-Report-Final-version-from-EntryPoint-low-
resolution.pdf
\2\ NVCA 2020 Yearbook, data provided by PitchBook.
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Impact of Entrepreneurship and Venture Capital
Entrepreneurship has set the United States apart as the most
dynamic economy in the world. The Kauffman Foundation found that new
companies were responsible for nearly all net new job creation, and
companies less than one year old have created an average of 1.5 million
jobs per year over the past three decades.\3\ Venture capital has
played an instrumental role in startup activity, having backed iconic
American companies like Genentech and Google, to more recent creations
Zoom and Moderna.\4\ A research paper produced by Stanford University
found that of the 1,339 companies that went public between 1974 and
2015, 42 percent trace their roots to venture capital.\5\ Those
venture-backed companies account for an astounding 85 percent of all
research and development spending by companies that have gone public
since 1974.
---------------------------------------------------------------------------
\3\ The Importance of Young Firms for Economic Growth, Kauffman
Foundation, available at https://www.kauffman.org/resources/
entrepreneurship-policy-digest/the-importance-of-young-firms-for-
economic-growth/
\4\ Jeff Farrah (NVCA Blog), Creating the Next Moderna: What VC
Offers the World and 3 Public Policy Lessons, available at https://
nvca.org/creating-the-next-moderna-what-vc-offers-the-world-and-3-
public-policy-lessons/.
\5\ How Much Does Venture Capital Drive the U.S. Economy?, Stanford
Graduate School of Business (October 2015), available at https://
www.gsb.stanford.edu/insights/how-much-does-venture-capital-drive-us-
economy. 2 Id.
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Venture-backed startup activity has historically been dominant in a
handful of science and technology hubs, including northern California,
Massachusetts, and New York. In recent years, new regions have come on
the scene and show great promise for new company creation. A recent
NVCA report found that
Venture funding reached startups in all 50 states and the
District of Columbia, 242 Metropolitan Statistical Areas
(MSAs), and 397 Congressional Districts. Buffalo, NY, Boise
City, ID, and Richmond, VA saw the biggest growth rate for
annual number of VC investments over the past five years (for
those MSAs with at least 15 in 2019). Bend, OR, Rochester, NY,
and Grand Rapids, MI saw the largest annual growth for VC
investment over the past five years (for those MSAs with at
least $10 million VC investment in 2014 and 2019).
These are welcome developments for those of us who have worked to
establish emerging startup ecosystems. As an investor in Michigan, I
have been actively involved in encouraging these emerging ecosystems to
deliver the benefits of startup activity to more areas of the country.
I believe that policymakers, such as members of this committee, can
partner with local investors and entrepreneurs to speed progress.
Understanding the Workings of Local Startup Ecosystems
Before getting into Federal policy proposals that can spur greater
entrepreneurial activity across the country, I would like to explain
some of the workings of local startup ecosystems. Brad Feld, a VC in
Colorado who was an early leader in the growth of one of the most
successful noncoastal startup ecosystems in the country, succinctly
listed the various components of local ecosystems in his book Startup
Communities.\6\ The most important component, of course, are the
entrepreneurs, as without those individuals willing to take monumental
risks nothing else matters. The other components are local and state
governments, universities, investors, mentors, large companies, and
service providers (meaning law firms, accounting firms, banks and
others experienced in new company formation and growth). Each of these
components must be present and prioritize supporting the entrepreneurs
in the community in order to achieve success and further growth in
their communities.
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\6\ Brad Feld, Startup Communities, available at https://
www.amazon.com/Startup-Communities-Building-Entrepreneurial-Ecosystem/
dp/1531886035.
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While entrepreneurs are the most important, VCs are the glue that
brings this all together. We raise the funds, develop relationships
with other components of ecosystems, and help our portfolio companies
in their engagement with these entities. We are stewards of our
ecosystems, and our success or failure is a leading indicator to
investors in our funds of whether to deploy more capital to our
communities. Individual entrepreneurs come and go and hopefully their
companies are either acquired or go public and become incumbents
themselves. But while our portfolio companies either move up or out,
VCs only remain if we are successful. We can then raise another fund
and get to work finding a new set of startups.
Startup ecosystems are inherently local constructs. In emerging
ecosystems, many of the participants and much of the earliest stage
capital come from within the community where the startup is founded. As
I noted above, nearly half of Arboretum's biggest exits happened within
a short distance of our office. This is important to keep in mind
because it underpins my thesis for how to expand economic opportunity
in this country: prioritize policies that can empower local ecosystems
and facilitate success for more startups and local VC funds.
Often, venture capital is confused with hedge fund investing, which
through its focus on public companies has a more national and global
perspective. It is easier to invest in mature companies across the
country as investors can rely on revenues and other metrics to
determine whether to invest. But startups have few, if any, predictable
metrics. Our work as VCs is just beginning when we find promising
companies. Once the first investment is made, we must then work closely
with the management team on long-term strategy, plans to access further
capital, efforts to bring professional structure to the company, and
pretty much anything else that we can do to help achieve success. In
fact, sometimes venture capital investments are made on the promise of
the team as opposed to the technology, with the hope that we as VCs can
help them find their full potential even if the initial idea is weak.
It will often take 5-10 years of working with the entrepreneur, usually
at the board level, to create a successful company.
Focusing on areas off the coasts can have substantial impacts on
the local economy, and as successes occur, can create management teams
that continue to start new companies in the same geography. As an
example, in 2004 we invested in HandyLab, a diagnostic company founded
by two University of Michigan PhD students. Five years later it sold to
Becton Dickinson. Those two founders, along with the CEO, then went on
to start three more healthcare companies that, over the next ten years,
also became successful and sold to other large companies. The most
recent diagnostic company, NeuMoDx developed by this team, has shipped
over a million COVID-19 tests worldwide. The original two founders have
created a critical mass of health care entrepreneurs in Michigan, with
a substantial number of employees creating new technologies that
greatly improve the treatment for patients worldwide.
Another important factor of the success of the companies off the
coasts, is being able to attract new capital to that company from large
coastal investors. It is important to note that for every $1 invested
in a Michigan startup by a Michigan VC firm, an additional $45 of
investment is attracted from VCs outside of Michigan. An example of
this is from one of our earliest investments, Advanced ICU Care (AICU).
AICU provides remote monitoring of patients in the ICU, i.e., it is a
high-acuity telehealth provider headquartered in St. Louis, Missouri.
We led the first round of investment into AICU to get it off the
ground, and at the time the company only remotely monitored 22 ICU
beds. As the company thrived, two large coastal investors led the next
rounds of financings. Today, AICU serves nearly 100 hospitals and
health systems, monitors over 1,100 beds, and cares for over 95,000
patients annually. Notably, AICU has taken a central role in the COVID
crisis by helping hospitals manage their overwhelmed ICU units.
Building a successful new company is a herculean task where hard
work, skill, great ideas, and even a bit of luck are all required. Many
entrepreneurs do everything right and still do not make it in the end.
That is how difficult it can be to find success in entrepreneurship. In
order to facilitate growth in emerging ecosystems, all of the
components of startup communities must work together to prioritize the
success of startups. Many will nonetheless fail, but even one success
can create momentum to remake the long-term prospects of an entire
region.
A single successful startup exit can have multiple repercussions
for a regional economy. The exit puts the region on the map for
investors as a viable opportunity, the founders of the company often
become angel investors or VCs themselves, coaching and investing in the
next crop of entrepreneurs, and the VCs who were involved with the
company get a greater chance to raise another fund and invest in a new
set of local companies. Further, the company can become an important
part of the ecosystem, becoming an acquirer of locally produced
technology, as well as a source of potential entrepreneurs who work at
an incumbent before striking out on their own.
Facilitating startup success in local communities is the single
most powerful way to expand startup activity in a region. At Arboretum
Ventures, we went from that initial investment of $250,000 to being the
largest VC firm in the state, and we have created thousands of jobs
across the Midwest and brought dozens of new technologies to advance
American healthcare. But if our first fund had been unsuccessful, that
economic activity may never have happened.
Policy Recommendations to Support Emerging Startup Ecosystems
Early-stage companies and their investors are very sensitive to
policy changes, and perhaps emerging ecosystem participants are even
more so. Members of this committee can support entrepreneurs in their
state through the following policy proposals.
Technology Commercialization and Endless Frontier Act
As discussed above, commercialization of university research is a
tried-and-true way to create new companies and deliver benefits to a
university and taxpayers. Universities like Stanford and the
Massachusetts Institute of Technology (MIT) have nearly perfected
technology transfer, which has been a driver of entrepreneurship in
northern California and Massachusetts. For example, as a result of its
robust tech transfer practices, Stanford held equity in 203 companies
as a result of licensing agreements as of August 2019.\7\ In Fiscal
Year 2019, ``Stanford received $49.3 million in gross royalty revenue
from 875 technologies.'' \8\ These companies are major drivers of
economic activity in Stanford's region. Sadly, many other highly
regarded universities fail to commercialize technology as effectively.
The mentality of too many universities is that technology developed on
their campus is a nugget of gold that demands the highest upfront price
possible, and little thought is given to the long-term benefits of
establishing a pipeline of technologies that entrepreneurs, VCs, and
angel investors can develop. In this scenario, everyone ends up with
less gold. Policymakers can advocate with their local universities to
engage with the entrepreneurial community to smooth the path to greater
commercialization.
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\7\ Stanford University Office of Technology Licensing, 2019 Annual
Report, https://web.stanford.edu/group/OTL/lagan/
FY2019%20Annual%20Report/Stanford%20OTL-AR-2019.pdf.
\8\ Id.
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In addition, Congress should pass pro-innovation policies such as
the Endless Frontier Act, which reprioritizes a commitment to Federal
basic research investment and technology commercialization efforts in
emerging and critical technologies, such as artificial intelligence,
quantum computing, clean energy, and biotechnology. The legislation
recognizes the importance of innovation advancement occurring in
communities across the U.S. and leverages partnerships between
universities, business leaders, and other private sector entities to
encourage greater economic activity through development and
commercialization of technology.
To ensure success of the Endless Frontier Act and future proposals,
I strongly encourage lawmakers to focus on new company formation,
ensure the participation of both angel and venture capital investors,
and improve and simplify university technology commercialization
processes.
Protect Volcker Rule Reform
Earlier this year, Federal regulators finalized reforms to the
Volcker Rule, among them being a critical change that allows banks to
once again invest in local venture capital funds. This change will
encourage greater capital formation in emerging ecosystems. VC funds
were an unintentional victim of an overly broad definition of ``covered
fund,'' which intended to prevent banks from moving risky proprietary
trading from their balance sheets to sponsored funds for which they
would still be liable for losses. Prior to passage of Dodd-Frank, banks
played an important role investing in local VC funds that were
generally too small to attract attention from larger institutional
investors. Oftentimes, banks served as anchor investors in these funds,
and were critical to the VCs ability to attract additional investment
and deploy capital in promising local startups.\9\ The regulators'
action to open a new source of capital for venture capital funds is a
meaningful change, particularly for new and emerging funds, local
entrepreneurs, and startup communities. In fact, early interest in
utilizing this new capital following the recent October implementation
signals a long-term positive outcome for regional entrepreneurial
ecosystems.
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\9\ Charlotte Savercool (NVCA Blog), ``Let Banks Invest in Venture
Capital Funds Once Again'' November 15, 2018, available at https://
nvca.org/let-banks-invest-venture-capital-funds/.
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As lawmakers consider initiatives to encourage entrepreneurial
activity and growth throughout the country, I strongly encourage
continued support for this meaningful reform and opposition to any
efforts, through regulatory action or legislatively, to reverse the
change.
Startup Tax Policy
The innovative startup model generally uses investment capital to
focus on research and growth activities to create long-term value.
Investments in these activities often exceeds revenues for years while
trying to build an idea into a successful company. This basic model of
entrepreneurship necessarily generates net operating losses (NOLs) and
research and development tax credits that should be available to offset
income if the company becomes profitable. But because of the way
certain rules in the tax code under Sections 382 and 383 are written,
startups can lose the value of these tax assets for nothing more than
raising a new financing round or undergoing an IPO, which was never the
intent of the rules. For startups on a hypergrowth trajectory, this may
not matter much, but for startups in sectors where large research
dollars are required before any substantial revenue is generated and
thus have lower growth trajectories, these NOLs and tax credits can be
important for their future success.
The loss of the value of tax assets creates a significant drag on
startup values and venture returns in these areas and makes noncoastal
startup and technology investment in general less attractive.
Fortunately, there are several proposals introduced in Congress that
would help to solve this problem and protect startup tax assets,
improving the key metric for expanding startup activity, which is
improving financial returns:
American Innovation Act (Rep. Vern Buchanan) would create a
conditional safe harbor for startups from Section 382 and 383;
IGNITE American Innovation Act (Reps. Dean Phillips (D-MN)
and Jackie Walorski (R-IN) would allow growth companies to
monetize up to $25 million in NOLs and R&D credits in order to
provide liquidity to innovative startups to sustain their
activity through the economic crisis;
American Innovation and Jobs Act (Sens. Maggie Hassan (D-NH)
and Todd Young (R-IN) would expand the ability of startups to
offset payroll tax obligations with accumulated R&D credits.
Carried Interest
A tax increase on carried interest capital gains would have its
most damaging impact on small VC funds. As background, carried interest
is the share of capital gains that VC fund partners receive if their
funds are successful. For those that manage small VC funds, carried
interest may be the only economic reason to participate in venture
capital, as fees are often too small to even cover salaries. That was
the case in my story, where I went without salary for several years
because we did not have enough fee to all of our expenses, including 5
employees, rent, travel, accounting, and legal bills. In addition, the
long lifespan of VC funds make realizations of carried interest less
frequent than shorter-term investment classes. If taxes are increased
on carried interest, the impact will fall most heavily on small
regional funds, and in particular new fund formation. A lack of new VC
funds will counteract any positive policies passed by the government as
these are the glue needed when building up local ecosystems.
Startup Act
Introduced by Senators Moran, Warner, Blunt, and Klobuchar, the
Startup Act has been an effective vessel in recent years for carrying
pro-startup policies. For example, the Startup Act included tax
policies (now in law) that made the R&D tax credit useful to early-
stage companies. In addition to a number of other good ideas, the
Startup Act includes a crucial ``startup visa'' that is a dedicated
visa category for immigrant entrepreneurs. Foreign-born entrepreneurs
have made incredible contributions to the U.S., having founded iconic
American companies like HandyLab, Moderna, Tesla, and Intel. These
accomplishments are in spite of immigration policy; not because of it.
Presently, U.S. immigration law pushes away entrepreneurs who want to
launch high-growth companies in our country, as we do not have a
dedicated visa for foreign-born entrepreneurs like more than a dozen
other countries do.\10\ This means that immigrants who wish to create
new American companies must struggle to fit into other visa categories
that are not designed with the entrepreneurial model in mind. Emerging
ecosystems would benefit significantly from fresh entrepreneurial
talent brought in by a startup visa.
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\10\ Jeff Farrah (NVCA Blog) ``Immigration Policy Isn't Working for
the Economy. Let's Fix That.'' Available at https://nvca.org/
immigration-policy-isnt-working-economy-lets-fix/.
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Modernization of the SEC Definition of VC Fund/DEAL Act
Modernizing the SEC's definition of a venture capital fund to allow
VCs to acquire more shares from angel investors, seed stage investors,
and company founders without additional regulatory requirements would
increase liquidity and returns in the early-stage startup ecosystem.
Further, modernization of the definition could encourage venture
capital funds to become anchor investors in emerging VC funds, a
substantial opportunity for new and underrepresented fund managers
similar to the role that banks can now play after changes to the
Volcker Rule. These changes are especially important today as industry
data demonstrates a significant decline in first-time and seed
financings during the ongoing global pandemic.\11\
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\11\ NVCA Venture Monitor Q2 2020, available at https://
pitchbook.com/news/reports/q2-2020-pitchbook-nvca-venture-monitor.
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Leadership from Senator Mike Rounds (R-SD) and Representatives Trey
Hollingsworth (R-IN) and Ben McAdams (D-UT) provides a bipartisan
legislative solution to this challenge through the Developing and
Empowering our Aspiring Leaders (DEAL) Act. Action on this bill would
positively impact the venture capital industry, especially among early-
stage investors who help form the foundations of an emerging
entrepreneurial region.
Industry Initiatives and Ways Policymakers Can Support Emerging
Ecosystems
Beyond policy advocacy, the venture industry--led by NVCA--is
engaged in important initiatives to spread new company formation into
more pockets of the country. For example, I was pleased to serve on
NVCA's board when Venture Capital University (VCU) was created \12\ to
democratize access to venture education and increase diversity in the
venture industry.\13\ VCU has two components--VC University LIVE and VC
University ONLINE.
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\12\ VCU is jointly produced by NVCA, Venture Forward (the
501(c)(3) supporting organization to NVCA), and Startup@Berkeley at the
University of California, Berkeley, School of Law
\13\ More information about VCU is available at https://
venturecapitaluniversity.com
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VC University LIVE is a three-day educational program on venture
finance, held in partnership with universities across the country. The
program shines a spotlight on emerging ecosystems and expands the focus
on VC beyond traditional venture hubs. VC University LIVE served more
than 120 participants across its first two programs at the University
of Michigan and Tulane University in 2019. In November 2020, VC
University LIVE was held virtually with Southern Methodist University
(Dallas), with more than 60 participants.\14\ Full scholarships are
core to VC University LIVE. The most recent program provided 24 full
scholarships to individuals from historically underrepresented groups,
with the cohort composed of: 54 percent women, 29 percent Black or
indigenous people of color (BIPOC), 38 percent Hispanic, and 75 percent
based outside the three traditional VC geographic hubs. The next VC
University LIVE program will be held in partnership with the University
of North Carolina at Chapel Hill in June 2021.
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\14\ Press Release: SMU and UNC-Chapel Hill Announced as 2020-21 VC
University LIVE Hosts, available at https://nvca.org/pressreleases/smu-
and-unc-chapel-hill-announced-as-2020-21-vc-university-live-hosts
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Similarly, VC University ONLINE provides lectures, interactive
assessments and quizzes, office hours, interviews with leading VCs, and
monthly webinars, all of which teach participants the nuts and bolts of
venture finance through a virtual setting and the opportunity to earn a
certificate of completion. To date, the course has had five cohorts,
offering education to more than 740 individuals across the country,
including close to 100 full scholarships and 47 partial scholarships
provided to individuals from historically underrepresented groups. The
demographics of the most recent scholarship cohort is composed of 63
percent women, 73 percent BIPOC, and 75 percent based outside
California, Massachusetts, or New York.
Policymakers can help spur entrepreneurial activity by meeting with
entrepreneurs and investors in your local communities to understand
their specific needs. Often, a given city has special attributes that
may be leveraged to create new companies--perhaps a region benefits
from a strong academic department at a local university, such as the
exceptional robotics department at Carnegie Mellon that has led to the
university's partnership with Uber and positions the Pittsburgh area
well for economic growth. Each region must benefit from that which sets
it apart from others. Policymakers can serve as a bridge between the
various communities that are essential for a vibrant entrepreneurial
ecosystem.
As referenced previously, venture capitalists must raise a fund
from LPs. Large venture funds on the coasts tend to raise capital from
endowments and pensions that are motivated to write larger checks to
the funds in which they invest. Regional funds tend to be smaller and
therefore struggle to raise capital from LPs that want to invest larger
sums to meet their scale. Therefore, regional funds look to wealthy
individuals, family offices, and regional and local banks to invest in
their funds. Too frequently, local business leaders do not consider
regional venture funds as an investment opportunity and are more
inclined to invest their capital in public securities, real estate, or
funds outside the local area. A shift in mentality is needed among
these leaders to support emerging ecosystems. Policymakers can serve as
champions for their local ecosystems to surface the exciting
opportunities that exist to earn a return and create local economic
opportunity.
Conclusion
I am grateful for this committee's attention to this important
issue. Ultimately, there is much to be excited about regarding emerging
startup ecosystems in diverse geographies. A combination of policy
reforms and industry-led initiatives by national and local leaders will
bring these regions to their true promise and the true beneficiary of
this progress will be American patients, workers, and taxpayers.
Senator Thune. Thank you, Ms. Garfinkle. Next up, and I
think she is probably going to make us all jealous because she
is coming to us from Hawaii, is Ms. Dawn Lippert, who is the
Chief Executive Officer of Elemental Excelerator.
STATEMENT OF DAWN LIPPERT, CHIEF EXECUTIVE OFFICER, ELEMENTAL
EXCELERATOR
Ms. Lippert. Hello, Chairman Thune. Thank you so much.
Hello, Ranking Member Schatz, Senator Klobuchar, and members of
the Committee. Thank you so much for the opportunity to testify
before you today. As you noted, my name is Dawn Lippert,
Founder and CEO of Elemental Excelerator based here in
Honolulu. We are a nonprofit made up of 35 people in Honolulu,
Hawaii, and East Palo Alto, California. We work at the
intersection of climate innovation and social equity. And our
mission is to invest in solutions to climate change and deploy
these solutions in the communities that need them the most. We
are both urgent and optimistic in rising to this challenge
because entrepreneurs and communities are proving it is
possible every day. So let me show you the context for how
Elemental came about.
In 2008, the Hawaii Clean Energy Initiative was launched by
the state of Hawaii and the U.S. Department of Energy. Hawaii
was seen as an ideal place to create jobs and economic
opportunities as we transition to clean energy. And Federal
funding at that time was set aside for innovation, which seeded
the creation of Elemental Excelerator. We were initially
modeled after the RPE program at a Department of Energy. Now,
what is special about this is the idea that innovation centers
can be located anywhere in the country and that all innovation
didn't have to emanate from Washington, D.C. or these other
tech centers.
They can come from Cedar Falls, from Minneapolis, Kansas
City, Austin, Nashville, Anderson, Indiana, where we have
entrepreneurs, and my hometown of Seattle, Washington. Now at
Elemental we have raised over $95 million to invest in startups
and be able to create an innovation hub in Hawaii over the last
10 years, supporting hundreds of jobs and high wage
opportunities for youth, veterans, and really anyone who wants
to work in innovation. And this can be done anywhere. And
particularly in energy and climate technology, the market is
the best it has ever been and venture capitalists are taking
notice. Let me share a few examples of how we know about that
and where we see some bright spots in the space.
First, there are more and more investors entering the
climate technology space. Over $13 billion was invested in 2019
and we may exceed that in 2020 even with COVID. This has more
than doubled since 2016. And in 2020 alone, more than $4
billion of new funds have been formed for climate venture
capital. This includes funds from Amazon, the Climate Pledge
Fund, as well as Microsoft and others. And we expect this fund
formation in venture capital to accelerate in 2021. And this
makes sense because energy is one of the biggest markets in the
world and decarbonization will require over $2 trillion of
annual investment.
Twelve years ago, testifying before the Senate, John Doerr,
the venture capitalist from Kleiner Perkins called green
technology ``the mother of all markets,'' and this is even more
true now than it was 12 years ago. There are now 1,000
corporations who have pledged to reduce their emissions in line
with Intergovernmental Panel on Climate Change Reductions, and
the pace of new corporations making commitments has accelerated
in each of the last 3 years. These corporations are key
customers for venture capital backed companies, so investors
see the opportunity here. Second, as these companies grow, they
create good jobs that are beyond typical innovation jobs. These
are jobs installing solar and energy efficiency, or working on
transportation electrification.
Also, law firms, accountants and other parts of the
economy. In Hawaii alone, jobs and solar installation, energy
efficiency and renewable fuels totaled over 15,000 in 2016. And
these jobs are good paying jobs. They pay an average of $3 to
$7 higher than the state's median wage. And the jobs have
largely been able to endure through the pandemic. And third,
the reason we know this market is taking off is that winning in
climate technology is about American competitiveness. In the
last 5 years, $56 billion have been invested in clean
technology venture capital.
Now, 45 percent of that was in North America, but 45
percent of that was in Asia. Asia is gaining ground really
quickly on our venture capital ecosystem in clean technology.
And it is not just venture capital that is investing in this
part of our economy. Last year, six times this amount, so over
$300 billion was invested in project finance for clean energy
technology. So we know the market is taking off, but how can we
ensure that the economic and entrepreneurial opportunity that
is ahead extends beyond our Nation's traditional technology
hubs? In our first two years of funding startups, as Senator
Schatz mentioned, we funded over 115 startups from many of the
states in the Nation as well as from around the world.
And we have learned an important lesson, and this is that
companies need more than funding to succeed, they require a
strong ecosystem around them. And that is what has historically
drawn companies to Silicon Valley and other technology hubs.
But we have proven it is possible to build technology hubs
elsewhere, especially if they are sector based and focused on
the region's core competitive advantages. So based on our
experience meeting 5,000 early stage companies, and working
with over 115 very closely through investments, we see a few
key roles for the Federal Government in expanding
entrepreneurship beyond the traditional hubs.
The first is seeding regional innovation ecosystems. At
Elemental, every public dollar we have invested into startups
has brought in more than $40 in private capital. There are
currently policy proposals pending to create national
innovation pilot funds in the U.S. Department of Energy for
clean technology solutions in disadvantaged communities. There
is also policy proposals to enhance and accelerate a national
initiative to support regional clean energy innovation
ecosystem partners with $25 million across regional ecosystems.
This kind of seed funding for regional ecosystems can have huge
returns in terms of bringing in private capital and private
investment. Second, we could ensure that Federal policy
supports innovation.
Policy sets the stage and the rules for many of the--
[Technical Issue]--that we work in, such as energy, water,
agriculture, and mobility. One example in mobility is that
building our Nation's zero emissions transportation
infrastructure can create 1.4 million new jobs. And these are
jobs all over the United States, not concentrated in technology
hubs. There is a lot of opportunity in transportation. Right
now, there are 1.2 billion passenger vehicles on the road, but
only 1 percent of those miles are driven in electric vehicles.
And we know progress is possible. That is why today Tesla has a
market capitalization more than 10 times that of General
Motors. There is a lot of room to grow in electric vehicle
transportation.
Also in mobility, measures such as the accessibility
performance measure for the U.S. Department of Transportation,
which its legislation has pending in Congress, would change the
allocation of DOT funding to focus transportation funding on
what counts, getting people where they need to go instead of
funding increased highway speed. This kind of legislation will
unlock a huge wave of innovation across our country as
companies focus on how to increase access to mobility. And a
couple more examples of how government has such an important
role to play in setting the policy framework for innovation. In
aviation, just a couple of weeks ago, our portfolio company
Ampaire completed the longest flight ever taken by an
electrified aircraft.
The demonstration we are funding with them makes Ampaire
the first to also fly a hybrid electric aircraft on an
operational route between Kahului and Hana Maui. Electric
aircraft can cut fuel costs by more than half, and speeding up
this kind of innovation can help small airlines stay in
business in a challenging economic environment. The huge amount
of innovation we have seen in airplanes over the last three to
four years were unleashed by updated FAA regulations. And every
time we have supported a policy like this, it unleashes an
enormous wave of private capital. In the last 5 years, just 10
of the leading electric aviation startups have raised more than
$1.2 billion.
There are many other examples of how government can support
innovation, but I just want to share that now is the time to
invest in American entrepreneurship and competitiveness. The
stage is set for regional innovation to thrive and with
strategic government support, we can do even more together.
Thank you.
[The prepared statement of Ms. Lippert follows:]
Prepared Statement of Dawn Lippert, Chief Executive Officer,
Elemental Excelerator
Hello, Chairman Thune, Ranking Member Schatz, Senator Klobuchar and
members of the Committee. Thank you so much for the opportunity to
testify before you today. My name is Dawn Lippert and I am the CEO of
Elemental Excelerator.
About Elemental Excelerator
Elemental Excelerator is a non-profit growth-stage accelerator
program headquartered in Honolulu, Hawaii and East Palo Alto,
California. We accelerate solutions to climate change and deploy them
in communities that need them the most. Each year, we find 15-20
companies that best fit our mission and fund each company up to $1
million to improve systems that impact people's lives through project
deployment. We have focused on funding projects in three locations that
will be central to addressing climate change: Hawai'i, California's
frontline communities, and the Asia Pacific region. We are now
expanding this approach across the U.S. and globally. To date, we have
reviewed over 5,000 new technologies, awarded over $40 million to over
115 companies, and have deployed 70 projects in energy, mobility,
agriculture, water, and the circular economy.
In 2008, the Hawaii Clean Energy Initiative (HCEI) was enacted by
the State of Hawaii and U.S. Department of Energy and funding was set
aside for innovation. Stakeholders realized that in order to reach
those energy goals and transform an economy dependent on oil, we needed
innovative solutions. We initially modeled our program after ARPA-E,
where I staffed the very first call for technologies. In our first
couple of years, we saw that startups needed much more than funding to
succeed, and became interested in applying the new ``accelerator''
thinking to climate startups. Back in the early 2010s, there were tech
accelerators helping the Airbnbs and Instacarts of the world create new
markets. But none of these accelerators were supporting hardware or
climate technology.
We saw that as an opportunity to build one. We zeroed in on growth-
stage companies who were ready to deploy their technology for two
reasons: (1) there was a gap in available project funding to bring the
innovations being developed in a lab into the real world, and (2) we
saw the opportunity for the most learning and progress in bringing
together technology (startups), policy (government), and markets
(customers) to advance innovation. That led to what is now Elemental
Excelerator.
Elemental not only invests in startups with the potential to
address climate change, but we also co-fund projects alongside the
startups we invest in. We'd like to share two examples of projects
we've supported:
CarbonCure Technologies collaborated with HDOT and Hawaii
concrete producers to install its retrofit technology that
chemically mineralizes waste CO2 during the concrete
manufacturing process to make greener and stronger concrete.
The carbon-infused concrete from those producers was used in a
local infrastructure project saving 1,500 lbs. of carbon
dioxide, offsetting the carbon dioxide emissions from 1,600
miles of highway driving. Following this project, in April
2019, Honolulu, Hawaii became the first municipality to pass a
resolution that ``requests the city administration to consider
using carbon dioxide mineralization concrete for all future
city infrastructure projects utilizing concrete.''
SOURCE (formerly Zero Mass Water) worked with an indigenous
majority-owned and -managed business called Waddi Springs to
prove a new community scale water purchase agreement in
drought-ridden Queensland, Australia. With our funding, SOURCE
was able to deploy 600 hydropanels in the span of 4 months
where a conventional water treatment plant would've taken at
least a decade. This project has the capacity to produce
119,000 gallons of drinking water and displace approximately
748,000 plastic water bottles per year and also created new
workforce opportunities for native Aboriginals in the area.
SOURCE is now pursuing a similar project in the Philippines
armed with the learnings from their project and partnered with
an Elemental innovation partner.
Over the past 10 years, we have raised over $95M for Elemental to
invest in startups and been able to create an innovation hub in Hawaii.
The portfolio supports hundreds of jobs and high-wage opportunities for
youth, veterans, and others who want to work in innovation. We have
worked with some of the world's largest utilities and corporations, as
well as public-sector partners like the Navy and social change
organizations like Emerson Collective to commercialize these world-
changing technologies. In 2017, we launched a cohort of local
businesses that are committed to innovation throughout Hawaii. These
are groups interested in the insights we glean from deploying
transformative projects in our place, and have dedicated their time and
energy to building an innovation ecosystem in Hawaii with us. And our
model is not just unique to Hawaii. After a successful partnership in
Hawaii with Elemental Excelerator, the Office of Naval Research (ONR)
was able to replicate their successes by funding Launch Alaska
headquartered in Anchorage, Alaska. We have proven that our platform
can be replicated anywhere and that innovation does not have to emanate
from big tech cities.
The Energy and Climate Technology Market
The energy and climate technology market is the strongest it has
ever been with climate tech investment growing 3 times faster than
investments in artificial intelligence and 5 times faster than the
average growth of general venture capital. In 2019, over $13B was
invested into climate technology and we expect to exceed that number in
2020 even with the impacts of COVID-19. This figure is more than double
what it was in 2016. In 2020 alone, more than $4B of new funds have
been formed for the climate venture capital market and we expect this
growth to accelerate in 2021. Twelve years ago, John Doerr, the
chairman of Kleiner Perkins, testified before this very body called
green technology the ``mother of all markets.'' This is even more true
now than it was then. There are now over 1000 corporations who have
pledged to reduce their emissions with IPCC recommendations and the
pace of new corporations making commitments has accelerated in the past
three years. Energy is one of the biggest markets in the world, and
decarbonization will require over $2 trillion a year of investment
according to the Intergovernmental Panel on Climate Change (IPCC). This
is a marker of real opportunity for investors and a space for startups
to enter the market.
As startups grow, they create good jobs such as installing solar
and energy efficiency, working on transportation electrification, and
creating work for law firms, accountants, and a host of other jobs for
the local economy. In Hawaii alone, jobs in solar installation, energy
efficiency, and renewable fuel production totaled over 15,000 in 2016,
paying an average of $3 to $7/hour higher than the state's median wage.
Prior to the pandemic, the clean energy sector was one of the fastest
growing sectors in the United States expecting to add 175,000 jobs in
2020. Most of these jobs are geographically specific, and centered in
rural and suburban areas rather than just the major tech hubs.
Investing in energy efficiency, clean energy deployment, and other
decarbonization technology creates good jobs and new economic
opportunities in places that need it the most.
COVID-19 & Geographic Diversity
In September of 2020, about 14 percent of the Nation's energy
workers were still unable to return to work. It is imperative that we
support job growth beyond the 175,000 that was expected in 2020 to
support the economic recovery from the pandemic.
Technology, and specifically climate technology, provide a powerful
opportunity for job creation outside of typical tech hubs. The pandemic
has created an opening for many tech companies to go fully remote and
normalize business over e-mail and video calls. By virtually expanding
their geographic footprints, firms can widen their talent pool and
recruit from a variety of schools, regions, and backgrounds to create a
diverse and inclusive workplace.
Embracing remote work helps to level the playing field, shifting
the tech industry's concentration of talent that was deemed a necessary
condition for success. The pandemic has accelerated the migration out
of tech clusters into secondary cities as the transition to remote work
has made physical proximity irrelevant. An investment in Federal
funding to support new hubs could potentially precipitate a more
healthy spread of tech firms across the Nation. Federal innovation
money should be spread out more broadly to these cities and across
institutions from local universities to private sector companies and
local government in order to produce new pools of talent and
opportunity. We have seen this firsthand in Hawaii, with new talent
coming to live here and connecting to local business and education
networks.
The pandemic has brought many changes to our lives, but also brings
new opportunities to improve our current systems. Throughout the
pandemic, we have seen an incredible resilience of the entrepreneurial
spirit to tackle today's most urgent challenges. For example, we have a
local startup named Farm Link Hawaii. Farm Link Hawaii operates an
onsite logistics platform that connects local farmers to residents to
deliver thousands of pounds of local produce each week. In the first
few weeks of the pandemic, they rapidly pivot their services to home
delivery and modified their service to support thousands of residents
and local farms. Their online consumer marketplace soared past their
maximum capacity, and they quickly had to find a larger warehouse for
their operations. Farm Link Hawaii has risen to this challenge, and
their journey has been supported by the entrepreneurial ecosystem every
step of the way.
Beyond Hawaii, Elemental's portfolio company Goodr is using its
food chain data tracking software to bring meals to thousands of
students and seniors in Atlanta. And an Elemental portfolio company in
the mobility sector, Numina, has been using its data platform to help
cities across the country make decisions to help reduce the spread of
COVID-19 in New York City. Especially in times of crisis, an
entrepreneurial mindset and ability to rapidly prototype solutions are
invaluable assets for building community resilience. Entrepreneurs are
an important part of our communities and will be key to rebuilding our
economy.
The Importance of Federal Funding and Programs & Their Role in
Supporting Regional Innovation Hubs
The U.S. Federal government has a pivotal role to play in
supporting regional innovation hubs that challenge and advancing clean
technologies that will enhance U.S. competitiveness. The unique
capacity of the Federal government to invest in long-term R&D is
critical for the flow of new ideas and discoveries that fuel our
economy. While private sector R&D investments through VC have
increased, the government is often the first ``investor'', providing
early capital for new technology startups.
As the market takes off, it is imperative that the economic and
entrepreneurial opportunity extend beyond our Nation's traditional
technology hubs. Startups need more than funding to succeed and require
a strong support ecosystem around them. The Elemental Excelerator
platform has proven that it is possible to build strong technology hubs
outside of the traditional megacities--especially when they are sector-
based and focus on a region's core competitive advantages. Based on our
experience meeting 5,000 early stage startups and working closely with
over 100 companies in our portfolio, we see three key roles for the
Federal government in expanding entrepreneurship ecosystems:
1. Seeding regional innovation ecosystems--More than 80 percent of
our portfolio startups have been awarded Federal grant funding that
seeded their growth. Programs like ARPA-E have an outsized benefit in
underserved markets like Hawaii, because they are technical
competitions that can deploy funding to markets that don't have robust
VC funding available. At Elemental, every public sector dollar that we
have invested into startups has led to 40 more dollars in private
capital.
While organizations have placed emphasis on the Federal
government's support of U.S. DOE National Laboratories and ARPA-E, it
is also critical to find ways to bridge the gap for scientists and
entrepreneurs to scale startups--which is often done with support of
trusted intermediaries such as incubators and accelerators that have a
track record of success with commercialization. This is becoming
increasingly important in the pilot and demonstration stage for
startups when they are not ready for traditional VC and do not have a
network of trusted partners. Finding new ways for the Federal
government to act swiftly to support those companies not supported by
traditional funding networks and local and state partners is key to
growing innovation hubs. Ultimately, these investments will serve to
accelerate the transition of government funded research from laboratory
to marketplace.
2. Ensuring that Federal policy supports innovation--Policy sets
the stage and dictates the rules for the markets that our portfolio
companies work in: energy, water, agriculture, and mobility.
In aviation, our portfolio company Ampaire recently completed the
longest route ever flown by an electrified aircraft. The demonstration
Elemental is funding makes Ampaire the first to fly a hybrid electric
aircraft on an operational route--between Kahului and Hana, Maui. These
electric aircraft can cut fuel costs by more than half. Speeding up
this kind of innovation will help small airlines stay in business in a
challenging economic environment, cutting the cost of training pilots
as well as the cost of everyday operations. The huge amount of
innovation we've seen in airplanes over the last four years was
unlocked by updated FAA regulations. And every time we see supportive
policy enacted, it unleashes an enormous wave of private capital. Since
2015, 10 of the leading electric aviation startups have raised more
than $1.2 billion.
In energy, Federal government permitting is a huge factor in
startup capability for growth. One of our portfolio companies,
geothermal innovator Fervo, had a project delayed more than two years
by permitting processes at the Bureau of Land Management. For early
stage companies that typically have one to three years of cash runway
in the bank, long permitting processes threaten a company's ability to
develop new technology and get projects up and running. This project is
also located in a rural area that will see significant benefits from
the jobs and economic value created.
As an example in mobility, a recent study from the Transportation
Electrification Partnership (TEP) found that building out our Nation's
zero emissions transportation infrastructure can create 1.4 million
jobs. The recommendations for a $1.5 billion stimulus proposal
estimates 2.3 million jobs created across the U.S. and across sectors
beyond just technology. Another key opportunity is in the
electrification of transportation. There are currently 1.2 billion
passenger vehicles on the road and yet only 1 percent of those are
electric vehicles. But we know that progress is possible, and actually
inevitable. Globally, 30 percent of the buses in the world are
electric, with the lion's share found in China. We're optimistic about
the U.S.'s ability to catch up as we see companies like Tesla with a
market capitalization more than 10x that of General Motors.
Also in mobility, we believe measures such as the Accessibility
Performance Measure for the U.S. Dept. of Transportation (DOT) will
change the allocation of DOT funding to focus on what is important--
getting people where they need to go--rather than focusing on highway
speeds. These kinds of policy signals are what entrepreneurs look for,
and unlock waves of new startups and innovations when adopted.
3. Buying climate technology innovation--Through the Department of
Defense (DOD) and other government agencies, the government is a key
customer in many of our country's smaller cities and rural areas. By
being a customer and user of clean energy innovation, the public sector
is also acting as a partner, advocate, and supporter of technology
companies and creating good-paying jobs across these geographies. For
example, our portfolio company CarbonCure has proven that we can
sequester carbon dioxide in concrete and that it doesn't cost more.
Each mile of concrete pavement has the potential to reduce
CO2 emissions by 500,000 pounds, which is equivalent to
driving from San Francisco to Washington D.C. about 200 times. As the
U.S. invests in new infrastructure across the nation, we can specify
carbon-infused concrete--which will help us meet our climate goals
without needing to spend more.
On a global scale, climate technology is a battleground of American
competitiveness. In the last five years, $56B has been invested in
clean technology through venture capital. 45 percent of that was in
North America and another 45 percent was from Asia, with China gaining
leadership over the US. There has also been more than $300 billion in
project finance annually for the last 5 years with China leading
investment with around $100 billion per year, about a third of global
financing. Now is the time to invest in American entrepreneurship and
competitiveness. The stage is set for regional innovation hubs to
thrive. Strategic government support can create even more
opportunities.
Finally, to close, we'd like to share the following suggestions
from a coalition of incubators and accelerators across the nation--LA
Cleantech Incubator (LACI), New Energy Nexus, Elemental Excelerator,
VertueLab (formerly Oregon BEST), Greentown Labs, IN2, NYU Urban Future
Lab, Clean Energy Trust, Powerhouse, BRITE Energy, Prospect Silicon
Valley, Third Derivative, Launch Alaska, Activate, Forge, Tennessee
Advanced Energy Business Council (TAEBC), Austin Technology Incubator
(ATI), Cleantech Open (CTO).
The below provides some key actions that we believe Federal
government should consider:
1. Support regional clusters of energy innovation including an
emphasis on disadvantaged communities and underrepresented
entrepreneurs.
a. Create a $50M National Innovation Pilot Fund in the U.S.
Department of Energy for cleantech solutions in
disadvantaged communities.
b. Enhance and accelerate a National Initiative to support
regional cleantech innovation ecosystem partners with $25M
across regional ecosystems.
c. Utilize the Small Business Administration (SBA)'s Small
Business Investment Company (SBIC) $4B in annual debt
authority to support regional incubator investment funds.
2. Create a Cleantech Innovation Task Force ensuring Federal
government programs align with and support early stage
innovation and needs of diverse entrepreneurs.
a. For task force and launch
b. Review and evaluate existing programs as well as new programs
c. Within 180 days, come back with set of actions
3. Dedicate funding to the innovation ecosystem via SBA, Economic
Development Administration (EDA), and DOE for cleantech
incubators, startups, small businesses, job training and pilots
to accelerate small business innovation in response to the
economic impact of COVID
4. Dedicate $2.5 billion to the early stage clean energy innovation
ecosystem (direct funding to startups as well as through
intermediary organizations) to do the following:
a. Enable funding especially for pilots and demonstrations
b. Emergency loans and grants
c. Targeted funding for diverse founders
d. Operational funding
e. Job training and workforce trades and internships
5. Dedicated focused fund on a major climate challenge
transportation-energy nexus. To accelerate zero emissions
mobility via the Department of Transportation, DOE provides
funding for national and regional infrastructure, workforce
development and technology advancement.
a. $25 billion investment in the assembly and adoption of
electric and zero emissions vehicles along with supply
chain development.
b. $85 billon for electric vehicle charging and related
infrastructure investment
c. $25 billion for zero emissions public transit, active transit
and safe streets
d. $12.5 billion for workforce development, safety standards and
job training
e. $2.5 billion in innovation ecosystem for cleantech startups
and related small businesses, prioritizing those created by
underrepresented founders.
Thank you so much for the opportunity to testify on this important
topic.
Sincerely,
Dawn Lippert,
CEO,
Elemental Excelerator.
Senator Thune. Thank you, Ms. Lippert. Let's just start,
Mr. Hall in Washington, D.C. we hear a lot about two different
Americas and the growing political, cultural, and economic
divide that is occurring in this country. In your testimony,
you indicate that there is also a divide in venture capital
investment. What do you believe are the causes of the imbalance
of investment between different geographic regions in the
country?
Mr. Hall. Thanks for that question, Senator. I think a lot
of it is based in legacy. Some of the previous speakers have
talked about the efficient ecosystem that sprung up in places
like Silicon Valley and in places like Boston where ideas
literally can go from, you know, napkin to IPO without ever
getting on a plane. And that is just not the case for most of
the country and most Americans. And I think the ability to
start to support from the ideation phase, when it's sprung into
a young grad student's mind when they are sitting in the
university, how can you go from there to feet on the ground and
be a one or two person startup, as Mr. Hespen referred to, to
grow truly exponentially, 2, 4, 8, 20, 50, 200 employees, all
of this high growth startup in a number of years.
Having the resources that can support and the
infrastructure in an ecosystem that can support that type of
growth is really hard. And being able to do the pre-work, which
a lot of organizations have done in years past, to set up the
communities so that the meetups and the technologists who want
to come together and know what do I do, how do I join your
startup? Creating that infrastructure is critical to being able
to launch and scale and sustain these startups. And this can
happen anywhere.
We have seen it happen in community after community, but it
is required that--the investment in the infrastructure is
required ahead of time, but also being able to capture that
student or that entrepreneur who wants to start that company,
being able to meet them where they are with the right resources
at the right time can easily unlock this opportunity.
And it is part of the culture in Silicon Valley. And it
needs to be, you know, it needs to be advertised and marketed
in a lot of the other parts of the country so that this
entrepreneurial spark can be harnessed and really exploited in
all sorts of different countries--all sorts of different
communities across the country.
Senator Thune. Thank you. Ms. Garfinkle, as a venture
capitalist in Michigan, how do you perceive the geographic
investment divide and has it impacted your ability to raise
capital or to identify promising startups in which to invest?
Ms. Garfinkle. Thank you, Senator Thune. You know, there
definitely is a big divide, obviously, between Silicon Valley
and Ann Arbor, Michigan. And it was very difficult to raise our
first fund. It is, you know, it continued to be very difficult
up until we were basically on fund three and we had exits,
which means that we had companies that we had either sold or
taken public, and so investors that would want to invest in
Arboretum could see that we were being successful, picking
companies in our geography and helping them be successful so
that they then wanted to invest with us.
You know, I think of venture capital, honestly, as the glue
that holds the system together, if you will, the
entrepreneurial system together. And it is not--you know, the
venture capital firms providing capital, that is very true. But
really what they are also providing is their network of other
investors, of potential board members, of consultants, of
lawyers, of accountants, of team members, of recruiters. I
mean, there are so many different things that it takes to go
from a concept to a company that is ultimately successful.
And who is going to bring all of those pieces together. It
really is the venture firms and the experience that they have
from all the other companies that they have invested in, all
the other relationships that they have built that really helps
to basically bring that all together and be the glue of that
entrepreneurial ecosystem. There are policies that can be put
in place. There are states--and the state of Michigan had quite
a few initiatives to really help spur this entrepreneurial
endeavor here in the state.
We are a big automotive, you know, state, as everybody
knows, with GM and Ford and all the big automotive companies
here except for Tesla. And they really, about 20 years ago,
made a big initiative to try and spark some different
entrepreneurial activities and bring all of these different
pieces together. One of the core ones was to start some new
venture funds, and that is when sort of the birth of Arboretum
happened.
Senator Thune. Thank you. Mr. Hespen, you founded, as I
mentioned earlier, a successful technology company in South
Dakota, which would be considered by many a nontraditional
state to build a tech startup. Could you elaborate on some of
the challenges you faced, perhaps more importantly, the
advantages you had in doing so? And as a follow up, have you
seen any changes in the entrepreneurial landscape in South
Dakota since you started your company back in 2015?
Mr. Hespen. Thank you for the question, Senator. So I
certainly have connected and networked with other
entrepreneurs, some in California Bay Area. And so we
definitely got our opportunities to talk about some of the
challenges that we face, some of the advantages of being in the
Midwest. Certainly one of the challenges can be talent. So if I
was to go and seek SACS experienced folks in South Dakota, I am
probably not going to find them. So then I got to find a way to
either recruit them or grow them, which can be a challenge and
will probably be a challenge as long as we are growing as
quickly as we are. There is obviously some pretty supreme
advantages, though, as well.
For the same reason that I never wanted to leave, there is
plenty of other of my peers, other people that want to be in
the area. And so there is an awesome opportunity to capture
some of that talent as it is coming out or maybe wants to come
back. There is a legitimate thing around cost in managing an
office and personnel. Cash is king when you are in startup, and
how do you make sure that you keep the cash going as long as
you can to keep the doors open is critical. So I would often
joke with some of my peers and CEOs about office costs per
square foot and it would about make them throw up how much I am
paying for a renovated space and, you know, very close to
downtown.
And so there is definitely some advantage on cost wise, but
it presents its own unique challenges as well, mostly around
the personnel, which we have we have tried to do a good job
working with the community's workforce development to help
bridge some of those that we can continue to scale and build it
internally without having to, you know, overcome that
elsewhere.
Senator Thune. And have you see any changes in your in your
time, I mean in terms of the landscapes and starting your
company in 2015, as far as kind of the environment conditions
for entrepreneurial----
Mr. Hespen. Yes. So we obviously for the environment, we
want to be that story. And I think that is one of the big
things the city and the community around us is rallying around,
like how do we do more of these? But there is actually
something interesting that is happening too with COVID kind of
accelerating the working from home movement.
We have had an access to a lot more people that are moving
into the area that are thinking about either starting their own
business, you know they were with a company that they weren't
able to work remotely before, as well as talent coming to the
area. And so once you start having these great minds,
Microsoft, Netflix, people that achieved some really good
positions coming out here, we have got access to some new
headspace that we probably wouldn't have had 9 months ago, so--
--
Senator Thune. Great, thank you. Senator Schatz.
Senator Schatz. Thank you, Mr. Chairman. Thanks to all of
the panelists. Ms. Lippert, I remember a conversation I had
with a bunch of venture capitalists in Silicon Valley and I
said, you know, what is the future for clean tech? This was
several years ago. And one of them sort of leaned in to me and
said, you know, the problem is it lacks an exit strategy.
And there was a sort of snobbery around the profitability
or perceived profitability around clean tech, because what you
are doing is making things work better potentially over the
long run as opposed to having that one time liquidity event. Is
that still something that you run into? And if so, how do you
work around it or overcome it?
Ms. Lippert. Yes, it is a great question. I think the
market has changed significantly in the last couple of years.
So I mentioned that we are seeing a lot of investment in
aviation, for instance, and some of the companies that are
investing there are Jet Blue, Toyota, these big companies that
can buy interesting electric aviation companies.
So I think it is really corporations kind of coming to the
table in the last few years in a really serious way which
provide a pretty important exit strategy for some of these
companies. Because ultimately, if you venture capital funding
to either sell the company or go public or somehow, you know,
generate returns for investors. So those are a couple of the
ways that we have seen folks really leaning in on corporate
venture capital and corporate investment.
Senator Schatz. Why do you suppose that has changed? Is
that because the corporations are, like you said, they are
aligning with the IPCC goals and they have got to figure out
ways to align their investments with these goals?
Ms. Lippert. Yes, I think they are seeing--corporations are
seeing--they are also seeing some success in previous
companies. So as Ms. Garfinkle said, you know success breeds
success. So if you look at Tesla, the success of Tesla has
really been impactful for the public markets this year. So the
climate technology, the special purpose acquisition companies
are outperforming the overall market on the whole pretty
significantly. And a lot of that is driven by electric
vehicles.
And sort of the appeal of looking at what has happened with
Tesla and some of these other companies and seeing that some of
these other electric truck companies or alternative fuel
companies could be, sort of, the next Tesla. So I think there
is some sense of success coming in there. And then I also think
that we have seen a huge amount of talent kind of coming in
from traditional technology like the product space.
So, you know, a gentleman before mentioned Netflix and
Google and others. We are now seeing founders that are coming
out of such traditional technology who really know how to grow
companies coming in to climate because they have experienced
wildfires, they have experienced hurricanes, they have
experienced the impacts of climate, and a lot of them have
children and they want to be part of the difference in making a
change.
And so I think it is a couple of things together. But when
you have really talented entrepreneurs coming into the space
and a lot of sort of corporate interest, and I think just a
recognition that decarbonization is inevitable so there will be
a huge amount of money spent on companies that are achieving
these decarbonization. It has made for a much more attractive
investing environment and people are coming into the space
because that.
Senator Schatz. You know, I am very familiar with the
success of the Excelerator. I meet with your companies whenever
I can. What is it about what you are doing that is unique? And
I guess to put it bluntly, I worry that it is so unique that it
becomes not replicable elsewhere. So persuade me and the rest
of the panel that what you are doing can be scaled?
Ms. Lippert. Well, that is e great question. It has
actually already been scaled and in multiple places. So, for
example, in Alaska, we have replicated this model through
Launch Alaska, which is another rural market that has some
really interesting opportunities for entrepreneurs, in
aviation, and they have a lot of sort of oil and energy
expertise in Alaska that can be redeployed for batteries and
solar and other kinds of industry. So it is happening in
Alaska.
It is actually happening in many other cities and states
around the country as well. So we see really strong development
in Houston, in Austin, in Los Angeles, across sort of the
Midwest region anchored in Chicago, and many other of these
regions that are able to sort of start aggregating capital and
aggregating talent around climate technology. So I think in
some ways it is unique, but in other ways it is being
replicated elsewhere. I think one of the really key things for
Elemental is the power of the public, private partnership.
So we have significant funding that was seeded from the
Federal Government, and it has enabled us to attract a lot of
private funding from foundations, from philanthropists, from
corporations, that sort of see the momentum, see the interest
in innovation, and want to be part of it. So I can't emphasize
enough the importance sometimes of the Federal Government kind
of leaning in, going first, and seeding these innovation
ecosystems and seeding these ideas so that entrepreneurs like
me and like our team can build something really interesting
around that.
Senator Schatz. Thank you very much.
Senator Thune. Thank you, Senator Schatz. Senator
Klobuchar. Senator Klobuchar? Did you punch on mute? OK.
Alright, we will come back to her. We will move next door to--
well, not exactly next door, but we will move to Michigan.
Senator Peters.
STATEMENT OF HON. GARY PETERS,
U.S. SENATOR FROM MICHIGAN
Senator Peters. Close enough, Mr. Chairman. Well, thank
you. Thanks to our witnesses here today for your testimony. It
as an important subject. And my first question is to Jan
Garfinkle. And I know you are remote. You are in Ann Arbor
right now, I believe. A wonderful place. And certainly your
entrepreneurial journey is a true success story, and it is a
testament to some of the talent and opportunities that exist in
Michigan. So it is great to have you here today and to hear
your testimony. In that testimony, in your opening, you
highlighted the commercialization of university research is
certainly a tried and true way to spur innovation.
I think you mentioned Carnegie Mellon as one example in
that testimony. And certainly you know very well from being in
Ann Arbor with the University of Michigan, that we are at the
forefront of scientific research and not just at U of M, but we
have other large research universities in our state, as many
states do. There are federally funded labs and grants that are
provided. You could talk a little bit about what we can do to
better incentivize private investment in technology that comes
out of these universities, perhaps? What is working now, and
what more we need to do to attract more VC interest into those
areas that may be blessed with one or more research
universities in their community?
Ms. Garfinkle. Thank you, Senator Peters. Nice to see you.
Appreciate you joining us today. You know, it is a great
question. And when I look at our portfolio, I mentioned that we
have 50 companies that we have invested in over the life of
Arboretum. And I think about 13 of them are actually in
Michigan. So this is the idea that venture capital really is a
local investing endeavor. And when I look at those 13, I think
7 or 8 of them are University of Michigan spinouts.
It is a critical component because it basically provides
the raw material that creates the company. It is the research
that is done at the universities. In one case, what is really
interesting that there were two PhD students that came up with
an idea of a lab on a chip, is what I will call it, and created
a company called Handy Lab. We invested in that company in
2004. It sold to a large strategic corporation in 2009. Those
two founders, along with the CEO, then went on to create three
more companies. And so four companies came out of what was
originally sort of core technology out of the University of
Michigan. And all of those companies had successful exits and
were located maybe a mile, two miles from our office. So it
really is important to do that.
I think there is one piece of policy that is, or a bill,
that is being considered at this point, which is the Endless
Frontiers Act, which I do believe will provide a lot more
research dollars to the universities to help create this sort
of core patent portfolio that each of the universities can
learn how to commercialize better. And, you know, we have
invested in many. As I said, we represent I think half of--our
portfolio companies represent about half of the states of the
Senators sitting on this panel today. So many of those are
coming out of the university.
So what we are experiencing in Ann Arbor is nothing
different than what could be experienced in any of the other
geographies where there is research universities. So I think
that is a really great place to focus on, thinking about trying
to create an ecosystem that is really supportive to those
researchers as they spin those companies out. And the
universities have come a long way with regards to how they put
the terms together when these companies spin out. But it is a
difficult--it is difficult. Just because you have an idea, that
doesn't ultimately make it a successful company. It takes the
talent, it takes the venture capital, it takes the accountants,
and it takes the lawyers, and it is a whole group of people,
like a basketball team, that need to all come together to help
that company ultimately be successful.
And I would really think about some new policies, including
supporting that Endless Frontiers Act, Senator Klobuchar's new
Act may be another one that I think would be helpful, I am not
as familiar with it, but those would be the ways to really
stimulate around these research universities in particular as
sort of the core areas to try and put some extra effort into.
And then just get out of the way of the entrepreneurs and let
them do their thing once they have that raw material all
together in those geographies.
Senator Peters. Well, thank you for that answer and thank
you for mentioning the Endless Frontiers Act. I am proud to be
one of the co-sponsors of that bill. And as you know, it is
focused on areas such as AI, machine learning, computing,
robotics, automation, advanced manufacturing. But as a
successful venture capitalist, is there something we are
missing on that list? Is there something else that we should be
looking at in terms of investments in emerging technologies
that VCs will be interested in investing in the future?
Ms. Garfinkle. So there is a broad category of
biotechnology listed there, which is really more drugs and
genetics. It is missing medical devices and diagnostics. I
would really encourage you to include medical devices and
diagnostics. As you know, with COVID right now, diagnostics has
been an incredibly important area. And right here in Michigan,
we were an investor in one of these four companies that I just
mentioned that sort of created a critical mass of diagnostic
expertise here in Ann Arbor, was a company called Pneumatics
that developed one of the very first COVID-19 PCR tests. We
have now sold over 1 million, 2 million tests, I have lost
track honestly, worldwide of COVID-19 tests.
And it is the best COVID-19 test because it can take the
nose, the nasal swab sample and in 80 minutes give you a PCR
result. It is not the antibody result. It is not the antigen
result, which is not quite as reliable. It is a PCR result
telling you if you are infectious or not. So there are some
really important technologies in the diagnostics space and I
would encourage you to add that and medical devices to the
list.
Senator Peters. Right. Thank you for your testimony.
Appreciate it and appreciate your work you do in Michigan every
day.
Ms. Garfinkle. Thank you. I appreciate yours too.
Senator Thune. Thank you, Senator Peters. Senator Moran.
STATEMENT OF HON. JERRY MORAN,
U.S. SENATOR FROM KANSAS
Senator Moran. Chairman Thune, thank you. And witnesses,
thank you for your presence here today. This is a topic that we
have been engaged in for a long time. In my early days in the
Senate introduced legislation called the Startup Act, which was
generated in large part by policy recommendations by the
Kauffman Foundation in Kansas City. And it is my view that our
responsibility is to keep the American dream alive and well.
And that means giving more people the opportunity to pursue
their dreams, create jobs for themselves, their families and
those who work for them.
So we want to be helpful. The Startup Act has generally
broad support, but has not become law in significant part, I
think, because it involves issues related to immigration and a
workforce that is not just here currently. Let me ask a couple
of questions about provisions that are in the Startup Act. This
one would be for Ms. Garfinkle. A component of previous drafts
of the Startup Act, which was actually enacted into law, was
the creation of an R&D tax credit, payroll tax offset. What is
your view of how tax policy can support startups?
Ms. Garfinkle. Thank you, Senator Moran. I do believe that
tax policy is really important to helping startups, and I
appreciate that the ones that were included in the Startup Act,
there is a need for the NOLs and the R&D tax credit to be
provided to startups.
As you can imagine, these startups--the startup is a raw
idea and it takes a lot of research dollars to go from that
concept through development to generating revenue. And it can
take five years. It can take $50 million, $100 million to get
all the way through that entire process. And so you can imagine
there are a lot of R&D dollars that could be offset from a tax
standpoint and it would benefit the startup company that it
would be going to.
So I really encourage you to continue forward with both of
those. I think they are very, very important and really would
be a big help to the startup community.
Senator Moran. Thank you for your testimony and that
encouragement that it includes. Mr. Hall, what other tax
proposals would support startups and incentivize venture
capital investment in my home state of Kansas?
Mr. Hall. Thank you, Senator Moran. I am not an expert in
tax policy, but I am definitely in favor of and really support
the taxation policies that enable faster access to capital, to
different pockets and different fund managers who can more
easily get that capital deployed into startups. I think also,
as has been spoken before, these entrepreneurs really invest
their heart and soul into their companies and sometimes take,
you know, take very little in compensation, particularly
competitive compensation that a lot of these really smart
engineers and product managers could do in the private sector.
And so they see that their startup is their key to being
able to accelerate. And so thinking about making sure that
capital gains and things like that are preserved for some of
these entrepreneurs who have really invested their time and
energy into their businesses is important.
And I think, you know, obviously as Ms. Garfinkel has said,
small fund managers, people who are running really early funds,
$5 million, $10 million funds, the fees generated on those
funds aren't going to, you know, line the pockets. And so the
carried interest opportunity for fund managers, particularly
emerging fund managers, and particularly those fund managers
who are either women or fund managers of color, they rely on
the carried interest as being part of their compensation, if
you look at it more holistically. So those are a couple that I
would highlight. But I would be happy to get back to you on
more specifics.
Senator Moran. Happy to hear anything that you would like
for me to know. Thank you. Thank you, Mr. Hall. Ms. Garfinkle,
let me go back to you. The Senator from Michigan sort of down
this path. I want to pursue it a little bit further about tax
payer funded research. The goal ought to be to bolster regional
commercialization strategies and converting research into new
products and services. I chair the Appropriations Subcommittee
that has jurisdiction over the NSF, the National Science
Foundation, and other science-based spending.
I remain interested in supporting commercialization and
continued Federal investment. But what recommendations, either
legislative or non-legislative, do you have for the Committee
to further improve the commercialization of Federal research?
And while Mr. Peters focused, I think, generally on university
research, is there something that the Federal Government in
particular can do with the research that is conducted by the
Federal Government, at NIH, NSF, those kind of places?
Ms. Garfinkle. Thank you, Senator Moran. You know, I think
one thing that would be really helpful is the basic research
that is done--I mean, you are asking more about commercializing
it, which to me is taking that idea and making it a product.
One big piece that I think is often missing and really does
need funding is the idea that there is a prototype that gets
built and a market study that gets done. And I know I am
getting very specific here, but I sat on a state initiative
that was trying to do the very same thing, which was
commercialize technologies out of the universities. And often
the researchers don't think about is there a person or a
company that will buy this product, ultimately.
What is the problem they are trying to solve and will
somebody buy that product? And I think that research needs to
be done at an earlier stage than after all the research dollars
have gone into it, and then they try and figure out, oh, gee,
is this a product that somebody will buy? So I would really
encourage that the research that is done, not only is it done
for sort of the basic research and then as it gets into
translational research, it would incorporate market studies,
patent assessments, and then prototypes being built.
Because the one other issue is there is really no other
dollars that go to those activities and so somebody, you know--
they call this the area of gap funding. That gap funding could
very easily be provided by the government. It is not that
expensive. It is an extra $100,000, $200,000, depends what it
is. But it would be very smart money spent to really figure out
if the product is worthwhile, if the product will be bought,
and have a prototype being built so it can be more easily
explained and tested.
Senator Moran. That is very useful. Thank you very much.
Senator Thune. Thank you, Senator Moran. Senator Klobuchar,
are you available now?
Senator Klobuchar. Hello. Thank you so much, Mr. Chairman.
Thank you, all of you. And I wanted to actually start with you,
Mr. Hespen. I so much enjoyed when Steve Case came to Minnesota
on the Rise Rest Tour. It was amazing. And all the
entrepreneurs gathered there. And I am really excited to talk
to you just about the concept of our bill, which is to make
sure that we get, and I really would like to, I was thinking as
I listened to this hearing, how I am going to reach out to some
of our Republican colleagues to see what we can do to finesse
the bill some and get them on board, because I think that would
be a really good idea.
I am coming from a state that has a lot of startups,
particularly medical device, thank you, Ms. Garfinkle, in
Minnesota. But we are nowhere near the startup money of some of
the other areas. And I truly believe it is best for the whole
country if you have those kind of incubation areas outside of
the three main ones. And I see you nodding your head as well,
Ms. Lippert. So could you, Mr. Hespen, just comment on that?
Mr. Hespen. Thank you, Senator, for the question. So I
think in just, if I am following your question correctly, is
how do these sort of support functions work with some of this
funding as they are launching? Is that what you are referring
to?
Senator Klobuchar. Yes. And then I will go to Mr. Hall
about the Rise of the Rest. Yes.
Mr. Hespen. Alright. Thank you, Senator. So I think that is
actually one of the key things. I think one of the
misconception, and I think Mr. Hall actually made a great point
about meeting entrepreneurs where they are at and being able to
apply the right resources to get them to that next stage. There
are different phases in a company. The first one being, do you
have a business, you know, a viable product.
Ms. Garfinkle pointed out to that. Is it even something
that can be sold, validating that. Now how do you get early
product adoption and distribution early on to determine if this
is something that you can actually get to the market? There is
this different mentorship or a different sort of support
network there. Then there is a component where you start
bringing people who can really assist in building out a machine
scaling, understanding what are going to be the next problems
and pitfalls that the company's going to need to do.
Because, frankly, even with capital, if you don't solve
some of those problems early on, you can't even deploy the
capital efficiently. So--.
Senator Klobuchar. OK.
Mr. Hespen. So I think just making sure those support
networks are in place and evaluating the different functions of
the where the startups are at.
Senator Klobuchar. OK, thank you. Mr. Hall, do you want to
get to the Rise to the Rest piece of this?
Mr. Hall. Yes, thank you very much, Senator Klobuchar. I
love speaking about the work that we do. It is so important,
but it is so rewarding to be able to go into a lot of these
communities and talk to the men and women that are building the
companies, you know, outside of the coastal tech hubs. And the
number one thing that we see and it is so amazing to see is the
domain expertise, the lived experience of these folks who are
working in industry, who are working, you know, directly in
line roles, who say there must be a better way.
I have got a great idea on how to innovate my industry. And
what has typically happened is there has been this experience
gap specific to venture capital where they struggle to figure
out how do I raise that first round of seed capital? How do I
have the conviction with capital to leave my current job and go
out on a limb with this entrepreneurship? And one of the things
that we are advocating with Rise of the Rest is take the leap
and build the ecosystems that can help really extend that leap
into, you know, the first step of, you know, seed funding,
which is followed by follow on funding and hopefully allows
that company to hit that escape velocity into the big leagues
of capital.
Because what we noticed is that a lot of times regional
capital, the first couple of investments made into the company,
are the ones that really solidify the company's trajectory.
Because our coastal investors are happy to jump on a plane to
come out and lead a growth equity round. But it is those first
couple of investments, that the regional funds and the micro-
funds that are in region in these communities, the angel
investors, and the investment clubs that pony up the first risk
dollars, are the ones that really, really help influence it.
And being able to leverage in some of the legislation, some
of the policy pieces that you have authored, Senator Klobuchar,
and are leading, is really important to continue that pipeline
and continue driving that innovation forward, and continue
giving those entrepreneurs the shot to take their leap and
continue to innovate their industries.
Senator Klobuchar. Thank you. Thank you so much. And this
is my last question Ms. Garfinkle, Ms. Lippert, one of the
things that we have seen is that we don't have enough women and
minority startups, as you know. One of the things in this bill,
and we should review it, is to not just focus on regions of the
country, but in areas of the country that already had the three
areas, have major startups to direct more of the resources to
women and minority entrepreneurs. And could you talk a little
bit, either one of you or both, quickly about how the pandemic
has disproportionately affected these entrepreneurs and why it
would be, this is pretty much of a softball, good to have more
women and minority owned businesses and startups. Take it away,
whoever wants to answer.
Ms. Garfinkle. OK. Thank you, Senator Klobuchar, I really
appreciate that question. You know, women and minorities are
definitely underrepresented, both at the venture level and
venture funds and in portfolio companies. What is interesting
is, if you look at geographies off the coast, that is not the
case. In fact, in our portfolio, I think about a third of our
venture founders of our portfolio companies are women or
minorities.
So it is really interesting that off the coast, I think
people that are not in the industry, if you will, are willing
to take more risk. And so I think there is actually a really
significant opportunity to help support that, off the coast in
particular. And, you know, I really encourage you to do that.
My, and I am sorry I haven't read the bill in detail, but at
the high level, my one suggestion for the bill would be to
invest in venture funds that have that as an emphasis. If there
is a woman who is part of it, maybe that is what you are doing.
But it sounded more like the states would be investing
alongside venture funds, not in venture funds.
I would just encourage you to do both honestly because the
venture funds are really the glue that will start and help
provide all of the infrastructure to help those companies be
successful.
Senator Klobuchar. OK, thank you. You want to add anything,
Ms. Lippert? Thank you.
Ms. Lippert. Thank you so much for the opportunity, Senator
Klobuchar. One thing I would add is I think the government has
a big role to play on the funding side, as Ms. Garfinkle has
said, and really supporting sort of those funds and funding. In
our company this last group that we funded, 50 percent of the
founders were women, about 50 percent of people of color. So
they are there. I think the more than 80 percent of our
companies have received some sort of government seed funding
for research or for some sort of idea.
So that funding is really important on the front end. But
then there is another really important role for government as
it relates to bringing opportunity to more kinds of
entrepreneurs. And that is as a procurement and actually buying
things from people as well. So it is really on creating that
market. So we see this as particularly important off the coast
because in places like Hawaii or other smaller markets or rural
markets, Department of Defense is a really important customer
as is the Department of Transportation for many of these
technologies.
So really thinking about that full suite of how government
can support both from procurement perspective and on the front
end as well.
Senator Klobuchar. OK, well, very good. Well, thank you
guys so much, and I look forward to working with you on our
bill and look forward to working with the members of the
Committee as well. I truly believe this is the moment because
post-pandemic, wanting to get these startups going again, just
gives us an ideal opportunity to as you say, do something good
and then get out of the way so you guys can do your work. So,
thank you. Thank you.
Senator Thune. Thank you, Senator Klobuchar. I think
Senator Young is trying to connect. And until he does, I will
ask another question or two here. But I will direct this to Mr.
Hespen and Ms. Garfinkle. One of the issues that I think
effectual areas, and has been a focus of this committee for
several years and will continue to be a priority of mine in the
next Congress, is expanding reliable broadband services across
the United States.
And I am wondering what role you think reliable Internet
services plays in growing a startup ecosystem. You talked about
the ecosystem and how important that is, Mr. Hespen. So, could
you talk a little bit about how important Internet services
are, in particular, in the more rural parts of the United
States?
Mr. Hespen. Thank you, Senator, for the question. So one of
the things that's really important that you kind of realize
once you don't have it is when the Internet goes down. So we
are a company that actually--I mean, we have, you know, in this
new building that we are in before we transition to the new
one, we don't have even telephone lines. So our entire
salesforce for customer success groups, they rely heavily on
VoIP, which is Voice over IP. All of our tools are primarily
cloud based.
So when we lose Internet connection, it is a really big
deal and about everything shuts down. And so for that reason,
we were fortunate enough to be able to get fiber optic into our
company. But that is a huge lift for a company and it was very
expensive even for us when we went to the new building. But
especially as technology moves more toward what I think we are
doing, it is absolutely critical. And the reliability of that
and the speed is just--it is absolutely critical for us to
operate.
Senator Thune. Ms. Garfinkle?
Ms. Garfinkle. I totally agree and, you know, it is just
such a shame that there is so many pockets of areas where there
is not broadband Internet. You know, we invest in health care
companies and we are dealing with patients and we have health
care IT companies, we have cancer--I am sorry, companies
focused on cancer that are waiting for their genomic
information. And when the Internet goes down or if they are in
an area where the Internet is very spotty, it is really life or
death in some situations.
And so it is absolutely critical that we get broadband
everywhere. Everybody needs access to it. And especially for
these small startup companies, it is one of the critical sort
of infrastructures that needs to be there like a telephone in
order to be able to do what they are saying they are going to
do for their customer, for their patients. So it is absolutely
100 percent critical.
Senator Klobuchar. Chairman Thune?
Senator Thune. Senator, yes? Senator Klobuchar.
Senator Klobuchar. If you are going to go to someone else,
do that first. I just want clarification for Garfinkel and
follow up our discussion.
Senator Thune. OK, Is it a question or do you just need to
clarify?
Senator Klobuchar. Well, I wanted to clarify that the
funding does actually--we are not going to have the government
pick the companies. The funding goes through venture funds, as
you suggested. But we have set it up in a way that makes it
clearly legal and it goes that way. And I think instead of the
government picking which startups, it goes through the venture
funds.
Ms. Garfinkle. That is excellent. That is the perfect way
to do it, because then you are getting the double benefit of
the venture funds being ultimately successful and the portfolio
company. So that is fantastic.
Senator Klobuchar. Alright. Thank you. Thank you, Mr.
Chairman.
Senator Thune. Thank you for your important clarification.
We--yes, we don't want the government picking them.
Senator Klobuchar. But that is because I want to get you on
the bill, so----.
[Laughter.]
Senator Thune. Thank you, Senator Klobuchar. Alright.
Senator Rosen, I am told, has connected. Are you there?
STATEMENT OF HON. JACKY ROSEN,
U.S. SENATOR FROM NEVADA
Senator Rosen. I am here. Can you hear me OK?
Senator Thune. Yes.
Senator Rosen. I had some audio problems earlier this
morning, but thank you, Chairman Thune and, of course, Ranking
Member Schatz. Appreciate you and all the witnesses for being
here. But I want to build upon Senator Klobuchar's comments and
questions on venture capital and minority-owned businesses,
because the coronavirus pandemic has been devastating to small
businesses in my home state of Nevada and across the country,
putting millions of people out of work and closing many of our
small businesses, closing them for good. Many minority-owned
businesses have been particularly hard hit through the lack of
access to capital in Nevada.
We have one of the fastest growing AAPI communities in the
country and over a quarter of our population is Latino. So more
than 70,000 of our small businesses are owned by a person of
color. When it comes to funding though, entrepreneurs of color
are at a disadvantage. Only 1 percent of black founders and 2
percent of Latino founders who seek venture capital receive it
compared to 77 percent of other founders, and so the real
economic ramifications for not addressing the inequality in
venture capital funding. Studies show that if black
entrepreneurs were provided equitable funding over the past 20
years, we would have seen the creation of 6 million more jobs
and an additional $13 trillion in our Nation's GDP.
And so I just want to really address these benefits and we
can add billions of dollars to our gross national product. So,
Ms. Lippert, Mr. Hall, I have questions to you. Angel
investment--angel and venture capital investment are important
phases for emerging businesses. So what do you think are some
of the ways we can show that minority owned startups and small
businesses, especially in my state of Nevada, have access to
these type of investment opportunities?
And in your view, what can we do to ensure that all
businesses have equal access to venture capital funding? So I
guess we can start with Ms. Lippert.
Ms. Lippert. Thank you so much for that question. So I
think it is a really important point. And over the last 10
years, female founded companies have been slowly gaining ground
in getting venture capital investment. And last year they
raised more than $20 billion across thousands of deals, which
was compared to just 10 times more than about a decade ago. So
we have been gaining ground. But as you mentioned, COVID has
been pretty devastating and hit women led businesses much
harder than male-led businesses.
So the deal value for female founded companies was down
over 30 percent in 2020, which is about twice what it was for
male-led businesses. So this is a really critical issue. And
what we have seen in our portfolio, we have about 100 companies
active in the portfolio, is that women-led businesses and
businesses of people of color were hit particularly hard this
year. And one of the key things that have kept them alive has
been the PPP. So that has been particularly important, I think,
for companies outside of the traditional sort of technology
hubs that already have more challenging access to capital and
follow on funding.
You know, it is harder to, sort of, meet entrepreneurs--
meet investors and make sure they can invest in a company. So
the PPP has been a really critical element in keeping people's
businesses going. The other thing I just want to mention
briefly as we think about equity in having businesses, have
equal opportunity, is that in a pandemic we have seen that some
of these businesses that are started locally, have a unique
ability to address their local challenges, and that has been
doubly important during the pandemic.
So one of our technology companies is Guter. They are based
in Atlanta, Georgia. And through their technology platform,
they have been able to take food that would otherwise go to
waste and provide it to seniors and youth all over the country
through their technology platform. So really serving the needs
of their local community and then being able to grow that
beyond. It is a woman-led company. And I think being sort of
empathetic and responsive to the needs of the community is in
her DNA and has been a really important element of making an
impact for her.
Senator Rosen. Thank you. Mr. Hall, what do you think that
we can do to be sure that--I really want to focus in because
some of us who don't have these really large urban centers, how
can we get support for our minority businesses, women-owned
businesses? Mr. Hall, you want to speak to that in just a few
seconds I have remaining?
Mr. Hall. Yes. Thank you so much, Senator. I really
appreciate the question. It is obviously a personal question
for me. I think that, you know, the pathways for particularly
black and Latinx-owned businesses, small businesses and
startups in particular, which is what I know better, is harder
because for a lot of them to have that first investment, they
don't have the friends and family. They are often the friends
and family in those ecosystems that are sending back the
capital. So I think a couple of things.
Number one, creating the pathways that can help expedite
capital, help break down some of the historic biases around
capital being funded into black and Latinx businesses is huge.
I think investing in the networks so that those folks are able
to get access to some of the conversations around capital
flows. At Rise of the Rest, we were able to recently run a
pitch competition in which we sourced nearly 500 black-led
founders to participate in our virtual tour focused on black
entrepreneurship. And we were able to, I am happy to announce,
invest in three businesses, all black led.
And more importantly, we were able to connect some of those
founders with over 100 different venture capitalists across the
country, breaking down some of those network barriers so that
those conversations, those founders can make it to the decision
room and actually pitch their business to the decisionmakers,
as opposed to having to start, you know, building the network
and doing the sort of grassroots networking.
So I am really proud to be able to apply effort in breaking
the networks. But I think a lot more is needed for capital. A
lot more is needed to encourage other businesses to be
customers of these black and brown led startups. So I think
that there is a lot that needs to be done. And I am really
excited about conversations, Senator, that that encouraged that
type of entrepreneurship and that type of investment capital
into these small businesses.
Senator Rosen. Well, thank you both. I look forward to
working with you on this public, private partnerships. And as
we like to say in Nevada, spur innovation. So there you go. I
yield back. I went over my time. Sorry, Mr. Chairman.
Senator Thune. Thank you, Senator Rosen. Senator Moran has
a follow-up question he would like to ask.
Senator Moran. Chairman Thune, thank you. Again for Ms.
Garfinkle. You indicated in your testimony you point out that
foreign born entrepreneurs provided a pretty significant
contribution to the U.S. economy. Provisions in the Startup Act
would establish a conditional immigrant visa for up to 75,000
qualified alien entrepreneurs to stand up a business and create
jobs in the U.S.
I wanted to give you the opportunity to get in the record
for perhaps my benefit as we work to accomplish the goal of
passage of this legislation. What would you--what do you think
the impact of a program like that would be to the U.S. economy
long term? Would economic competitiveness in the global economy
and increased jobs result from this type of policy?
Ms. Garfinkle. Yes, thank you, Senator Moran, I appreciate
you bringing that up. In my intro, I did mention the Startup
Act and I do believe the Startup Visa in particular is
critically important. And when we look at our portfolio, about
a third of our entrepreneur founders are immigrants. They tend
to be PhD students in universities that come up with a great
idea. They are fantastic to back and we have had great success
with that. So I am very, very supportive of it.
I think it is really critical. The two founders that I
mentioned earlier ended up in creating four companies here in
Michigan and probably a thousand jobs. So it is absolutely, you
know--there is a direct correlation between these immigrant
entrepreneurs and the number of jobs that they are able to
create. And I would be very, very supportive of it.
Senator Thune. Thank you, Senator Moran. My understanding
is my neighbor now to the west, Senator Tester, is joining. Is
Senator Tester out there?
STATEMENT OF HON. JON TESTER,
U.S. SENATOR FROM MONTANA
Senator Tester. Chairman Thune, thank you very much. And I
appreciate your patience. I got hung up on a telephone call, so
I had to, you know, anyway, you know, the same thing that
happens to everybody. First of all, I want to thank everybody
who has testified here today, not only for the work you do
every day and the jobs you create every day, but hopefully the
quality of life that you are improving every day. I very much
appreciate your work. I want to go to an area that you may or
may not know about, and that is Indian country.
The Chairman knows in our large land based tribes,
particularly those that don't have gaming, are--I mean, it is
poverty, a Third World nation stuff, honestly. Unemployment
through the roof. Now, we have done some stuff to try to make
it more easier for businesses to do business there and give
them some tax breaks and those kind of things. Have any of you
had occasion to invest in Indian country in general? Yes, or
no? If it is yes, talk and otherwise I will assume it is a no.
Ms. Lippert. I can give potentially one or two examples,
Senator. Thank you so much for that. I actually think it is
really important. So a couple of our portfolio companies have
been quite active at doing things in Native American regions on
particularly installing solar, which is really--can be really
important and can help save money for different tribes there.
And then also one of our companies called Source Global has
provided a lot of basically water panels. They are sort of like
solar panels, but they make fresh water from the sun and the
air in Indian country, too. So I think that is--those are a
couple of examples of companies that are using innovation and
really prioritizing and working with tribes in Native American
regions.
Senator Tester. So is there--I mean, I know Mr. Hespen
talked about mentorship being as important as money. And by the
way, I think that is a really, really good point. The question
is, what is lacking in Indian country? Is it too high a risk
because they are sovereign nations? Is it the fact that maybe
we are not doing a good job encouraging entrepreneurship so the
folks aren't out there? Can you give me any idea? Because we
deal with that stuff all the time in Congress because of the
trust responsibility we have to Indian tribes.
Ms. Lippert. Yes, I will give you sort of just two thoughts
and then we can follow up with more. One is that, I actually
think what the Senator was mentioning before about the rural
STEM education gap is one really important element of this. And
this is sort of outside of traditional tech hubs where we see a
lot of success. There is also really strong STEM programs and
youth really see an opportunity to intern in tech companies or
somehow provide that connection. And that has been really
critical.
For the second thing that I would say which is, when it
comes to bringing innovation into some of these areas, we have
seen that community-based organizations and partnerships with
community organizations have been just a critical element in
success. So they already have the trust of the community about
a long term relationship. Unfortunately, I think the way that
some of the government funding goes to funding research or
funding demonstrations doesn't acknowledge this and doesn't set
aside funding for community-based organizations that could
partner with technology companies in these kinds of
deployments.fund
Senator Tester. Anybody else want to comment? If not, I
will move on to the next one. The next one is something we deal
with in this Commerce committee all the time, and it is
broadband infrastructure, 5G service, public transportation.
For those areas that don't have those amenities, is that a deal
killer for venture capital? Jan, go ahead. You are nodding your
head. Go ahead.
Ms. Garfinkle. Yes, I mean, these startup companies need to
be able to have all of the infrastructure readily available to
be successful. If they are--it is difficult enough to do a
startup. And if they don't have basic, you know, strong
Internet, if they don't have a bus system or some way to get
their workers to work, these things will kill the company,
quite honestly. There is just no way to overcome such a major
sort of things that should be available in order for their
company to be successful.
It absolutely has to be there. As I mentioned, we invest in
health care and the high speed Internet to be able to deliver
patient information instantaneously to the physicians that are
working with our technologies, if that is not available, then
it would be very, very difficult for our companies to succeed.
Senator Tester. Cool, cool. I would--Ray Hespen, the
description you gave of your company, I would imagine, good
Internet service is pretty foundational. Would that be correct?
Mr. Hespen. Senator, absolutely. And I think one of the
things that is really important, we are fortunate to be part of
an incubator that helps subsidize some of the broadband
connectivity we had initially, because I can tell you when we
kind of--when we went off on our own, there is a pretty
massive, at least for us, a pretty large sticker shock. It is
not the Internet service that you share at home and somebody
gives you a gig Internet, and it is 60 bucks a month. It is
very expensive.
And so thinking about other entrepreneurs who are starting,
maybe don't have an incubator, don't have access to that, but
it is required, that could be a huge cost burden that could be
pretty detrimental to the early startup.
Senator Tester. Yes, it is interesting. And Mr. Chairman,
that is something we should probably visit about some more. I
mean we put billions and billions of dollars into the broadband
service, but yet the rates that are charged are through the
roof and I don't get it myself. But the same thing can be said
about prescription drugs and a lot of other things. Anyway,
thank you, Mr. Chairman. I appreciate the recognition. And I
want to thank all of you for testifying today and appreciate
the work you do.
Senator Thune. Yes, sir. Thank you, Senator Tester. And
yes, I agree. We have invested heavily in some of those areas,
those technology areas that you would think would drive down
some of the cost in parts of the country where some of these
services aren't even available, and if they are, enormously at
a high cost. But that is, as you said, a subject for another
day. Let me just say again, I think we are waiting for Senator
Young to connect, but let me just ask this of all of our
panelists and maybe we can start, Mr. Hall, with you and Mr.
Hespen.
But earlier this year, Mark Zuckerberg stated that he would
not pick the Bay Area to build another startup, indicating that
perhaps the next wave of innovation will occur outside of
traditional hubs. The question is, do you agree? And if so,
will the innovation be coming out of places like Michigan or
Georgia or Hawaii or my home state of South Dakota. Will it
look different than the innovative technologies of the past few
decades?
Mr. Hall. Thank you, Senator, for that incredible question,
because we hear a lot about it and it has been foretold for
years about this great Texodus of people leaving the Bay Area
and sort of starting--you know, it is too early for us to have
definitive conclusions around that. But I think that the
innovation that we are seeing and I think that the opportunity
that a lot of entrepreneurs are building companies in places
like Kansas City--for example, one of our portfolio companies
recently exited. They were building a company called Backlog
Cars. They were building an auto--an online, used auto trading
platform. And you can imagine, you know, in-person auto trading
platforms are great until the pandemic hit and then nobody is
going to trade a car at auction in person at all.
And so this company was phenomenally successful. They have
been successful for a while. They grew from the inside out.
They took the lived experience known growing up in the industry
and said this is what is going to work in all of America, as
opposed to sometimes you see our colleagues, you know, backing
companies in the coast saying, well, this is going to work
really, really well in San Francisco. Well, turns out there are
a lot of other communities that have very little in common with
San Francisco.
And so this inside out sort of phenomenon is one of the
things that I think we will see more and more develop as the
democratization of access to a lot of venture capital continues
to grow. And, you know, Backlog Cars recently exited for a
really good amount of money, and part of their return was that
this is going to be good for Kansas City. And it is such a
refreshing thing to hear founders say that, you know, I really
am excited about sort of doubling down on my community,
doubling down on the people that helped make me and helped make
this company.
So I think that there is going to be this--I hope the sort
of the next generation of company founders and entrepreneurs
lean into this notion that it is an ecosystem, they are part of
a community, and that we are able to support these startups in
some of these regions so that you can have more of those people
that say a win for me, is a win for my hometown, and keep that
flywheel turning.
Senator Thune. Thank you. Mr. Hespen.
Mr. Hespen. Thank you, Senator Thune, for the question. I
think it comes down to solving, at least for us, a root issue,
which is the personnel and the staffing that it is going to
take to grow these companies. I mean, so if we are the company
that keeps growing and having 100, 200 employees, there is
going to be a real logistics question. Can we continue to do
that in that area or do we have to open up a second office
somewhere else?
And so I think as we think about how this Texodus what is
that, I like that, is impacting, I think we have really got to
make sure that there is this community of these startups that
are happening that keeps cross cultivating talent, attracting
more talent. Because if that is a question that I think a
company like us has, it is going to be a question for other
people and it is going to prevent people from looking at, say,
South Dakota saying that is a hub where we can start, grow all
the way through a business until exit or public, whatever the
exits might be for those investors and founders.
Senator Thune. And what do you think is the solution to get
that talent and personnel? I mean, the workforce is an issue we
hear about all the time in South Dakota----.
Mr. Hespen. So--I am sorry, Senator.
Senator Thune. No, I was going to say it can be very
limiting in terms of, you know, opportunities for people.
Mr. Hespen. Yes, so I am very proud to say that we have
recruited people from out of state, we recruited people from
Oregon, North Carolina, we are pretty close to having somebody
from Texas, another one from Colorado just recently. The big
scary factor that a lot of them have is, if I am going to
bring--you know, if you are a young person, you don't have
families, you can take a risk, go to someplace, and if it
doesn't work out, you move. But the problem changes when you
sit there and go, I have got a family, I can't just pick up and
move.
So they need to have that belief that when they go to that
place, that if it doesn't work out with this company, which
hopefully it does, that there are more options available in
that community, and that gives a little bit of sense of ease.
Now, the interesting thing with everything happening, with
Microsoft going more remote, Facebook going remote, it kind of
creates some opportunities, at least in software where people
don't feel like they are on an island in those areas because
they can still get a job remotely with some of those companies.
But I think that is the big thing. How do we create and
lower the barrier that these people can feel comfortable moving
to these areas when the local talent doesn't exist.
Senator Thune. Great. Thank you. Ms. Garfinkle?
Ms. Garfinkle. Thank you for admitting me. I really agree
that I think COVID has made working remote acceptable, right. I
mean, here we are doing this remotely. It is not ideal. Of
course, people would rather be in a facility where you can
interact and you can do all the fun stuff alongside just the
work stuff that gets done on Zoom. It is very interesting to
me, you know, with most of our, probably three quarters of our
companies are off the coast, OK, but the other one quarter are
on the coast. One thing that we have really recognized is that
the cost structure off the coast is very beneficial to those
startup companies. And actually the local economic development
corporation here called Spark, which is in Ann Arbor, did a
study and compared the cost to develop a company from concept
to exit compared to a company in San Jose, California.
So how much does it cost in Ann Arbor compared to San Jose?
And it costs about a third less to develop it off the coast.
But even though it costs a third less to do that, you still can
sell it or have the same exact amount. It doesn't matter that
it's off the coast when it sells. So that is super important
because for the founders, for the management team, for all the
employees that have stock options, they are able to get more
money for those options because they are still selling it for
the same amount, but they own more because it didn't take as
much money going into it. So that is a super important, very
critical factor.
So a lot of entrepreneurs that we see, you know, in San
Francisco and Boston, New York, they are from geographies that
are not San Francisco, New York, and Boston. They are from
areas in Michigan or Chicago or South Dakota or Nevada. They
are from a lot of different geographies. Often as they have
children, they want to go back to the areas where they grew up
because they want to be closer to their grandparents--to the
grandparents or to their parents, so that they their children
can grow up with them also.
So there is a strong desire by folks to go back to the
areas they grew up in, create their own entrepreneurial company
there, and I think COVID has really spurred that along, and
they realize that they can be successful there and have a very
nice outcome if they develop a successful company because of
the cost structure that are in these different geographies.
Senator Thune. Thank you. Ms. Lippert.
Ms. Lippert. Thank you so much for that question. So we
have seen the same thing across our companies and we had a CEO
recently move back to Hawaii who grew up here and is raising
his company, growing his company from Hawaii. And we also have
sort of a new initiative where folks are asked to sign a pledge
to essentially be good neighbors and contribute positively to
the community when they come to Hawaii to work on tech here. So
it is a really interesting moment right now. Won't last that
long, but I think we can really capitalize on it as communities
and capitalize on that talent that work other places, as others
have said.
And I will just give a couple of examples too of why I
think there is a real advantage to developing companies off the
coasts in addition to the cost structure, and in particular
because of the work that we do around climate technology and
clean energy, that exists everywhere. So whether it is clean
water, energy, transportation, these are in every single
community, which is one reason why I think climate technology
is such an interesting place to look when you are looking at
creating entrepreneurship opportunity and new jobs and new
companies away from the coasts.
So a couple of examples since we were talking about Kansas
City, one of our portfolio companies, is called Neer. It was
started by an immigrant in Kansas City, and a really
interesting company that is developing software to help manage
water infrastructure. And their target market really starts in
Kansas City and Midwestern regions, and it is an excellent
place to start a company like that. Another example is a
company in our portfolio called Fervo, which is a geothermal
innovation company.
And so they go where the geothermal resource is, which is
in Nevada or parts of California or other places where there is
geothermal activity. So their economic development and all the
value they are creating is by definition in these rural
communities where there is really interesting geothermal
resource. Now, I think it also just comes back to sort of the
role of government in both seeding these technologies and then
helping them on the regulatory side sort of get out of the way
and clear barriers.
You know, Fervo, for example, was trying to get a permit
and would be delayed about 2 years in one of the places that
they are trying to develop their geothermal plant. So all that
economic development, all that job creation is delayed because
the Bureau of Land Management has very long permitting times
for geothermal. So these are some of the opportunities I think
if we can think about how technology can really benefit and
create jobs in these other regions, but there is an
intersection with government and a role that we can play in
helping them grow faster.
Senator Thune. Thank you. I don't think we have been able
to get Senator Young on. OK, great. So what we will do is, I
think we have got through the members who wanted to ask
questions, is we will keep the hearing record open for a couple
of weeks. And we will make sure that Senators on the panel who
have questions get them to you. And if you could get the
responses back as quickly as possible, that too will be made a
permanent part of the hearing record. So there will be some
what we call QFRs, questions for the record that you all may be
asked to respond to.
And I just again want to say how much I appreciate you all
being here. Is a great discussion. It is an important subject,
a subject that bears not only on what happens in the economy
here, but as we are trying to become more competitive globally,
see countries like China that are investing heavily and seeing
more startup businesses in that country, and if we are going to
compete with them, I think we have got to figure out too, how
to, as you all described it, to democratize or get more
geographic balance in terms of where the investment is in this
country so we have more startups who need the resources and the
assets that obviously those with the capital bring.
So good answers. Appreciate very much the discussion. And
we will look forward to continuing that discussion in the
future. But wish you all the very best. Hope you have a good
holiday season. And in the case of Mr. Hespen, hope for
continued growth in your company in South Dakota. And I am sure
we can find some people, hopefully, if we need personnel and
talent, who want to live in the beautiful Black Hills of South
Dakota. So, we will keep trying to round them up, but you just
keep hiring them. So thank you all very much. With that, this
hearing is adjourned.
[Whereupon, at 4:20 p.m., the hearing was adjourned.]
A P P E N D I X
Response to Written Questions Submitted by Hon. Kyrsten Sinema to
David Hall
University Partnership. Universities in my home state of Arizona
bring together students, faculty, and the community for cutting-edge
research and innovation. The universities create fertile ground for new
advancements and developments that can solve problems, build the
economy, and create jobs in Arizona.
Question 1. How can states and universities outside the traditional
venture capital hubs harness that groundbreaking university research in
order to expand entrepreneurship and create jobs here at home, rather
than let those advancements move out of state?
Answer. University innovation can't stop once a technology/IP isn't
owned by the university; campuses must support all types of
entrepreneurs. The same wrap-around programming that supports research-
based founders can support all kinds of entrepreneurs. Additionally,
university systems across the country have used capital from their
endowments to invest in venture capital firms that focus specifically
on a campus or multiple campuses within a university system.
Arizona State University serves as a great example for colleges and
universities across the country. ASU President, Michael Crow, has made
entrepreneurship and innovation a pillar of learning. We saw it first
hand when we visited Phoenix on our fifth Rise of the Rest tour in
2015.
Tribal Communities. Across Indian Country, tribal communities are
operating nation-owned enterprises and cultivating tribal citizen-owned
businesses to prepare their people to access expanding job
opportunities and build sustainable economies. In Arizona, I work
closely with the Dineh Chamber of Commerce that provides a voice for
Navajo-owned businesses, organizations, and governments doing business
on the Navajo Nation. The work of the Dineh Chamber of Commerce creates
opportunities that enable a successful business climate on the Navajo
Nation.
Question 2. How can we expand entrepreneurial opportunities in
Indian Country, and is there a roll for Congress to play?
Answer. I am not an expert in Indian Country Affairs, but I would
believe that these ecosystems have several aspects in common with other
smaller ecosystems, including driving towards improved network density,
a belief which enables smaller ecosystems to pool resources and
relationships to better access the opportunities more commonly found in
larger markets. As these communities continue to seek access to startup
and venture resources, partnering with other proximal organizations or
institutions can substantially amplify their individual signals to be
seen by more investors and entrepreneurs.
______
Response to Written Questions Submitted by Hon. Kyrsten Sinema to
Raymond Hespen
University Partnership. Universities in my home state of Arizona
bring together students, faculty, and the community for cutting-edge
research and innovation. The universities create fertile ground for new
advancements and developments that can solve problems, build the
economy, and create jobs in Arizona.
Question 1. How can states and universities outside the traditional
venture capital hubs harness that groundbreaking university research in
order to expand entrepreneurship and create jobs here at home, rather
than let those advancements move out of state?
Answer. Thank you for the question Hon. Kyrsten Sinema. I'm not an
expert on university research and what determines if a tech reaches
commercialization, I can only speak to some examples I've seen. Usually
it takes someone who is involved with the research to a) determine if
there is a product-market fit, and b) someone to be willing to go
through the steps at making that transition to monetize research.
Fortunately, I've seen some examples of this, but what I would think
would be critical is the ability to vet the majority of R&D at the
universities for these items.
Tribal Communities. Across Indian Country, tribal communities are
operating nation-owned enterprises and cultivating tribal citizen-owned
businesses to prepare their people to access expanding job
opportunities and build sustainable economies. In Arizona, I work
closely with the Dineh Chamber of Commerce that provides a voice for
Navajo-owned businesses, organizations, and governments doing business
on the Navajo Nation. The work of the Dineh Chamber of Commerce creates
opportunities that enable a successful business climate on the Navajo
Nation.
Question 2. How can we expand entrepreneurial opportunities in
Indian Country, and is there a roll for Congress to play?
Answer. I appreciate the question but would be afraid I could lead
your team down the wrong path. Someone who has managed to help Native-
American businesses transition from idea to business would be best
suited to discuss the roadblocks and challenges specifically. As for
any business, the support network around mentoring an early-stage
business is always critical to getting investment. The infrastructure
for that specifically in the Native-American communities is something
that would need to be investigated.
______
Response to Written Questions Submitted by Hon. Kyrsten Sinema to
Jan Garfinkle
University Partnership. Universities in my home state of Arizona
bring together students, faculty, and the community for cutting-edge
research and innovation. The universities create fertile ground for new
advancements and developments that can solve problems, build the
economy, and create jobs in Arizona.
Question 1. How can states and universities outside the traditional
venture capital hubs harness that groundbreaking university research in
order to expand entrepreneurship and create jobs here at home, rather
than let those advancements move out of state?
Answer. Universities across the country generate groundbreaking
technologies, and many play a significant role in creating
entrepreneurial opportunities that lead to the formation of successful
new companies in local communities. But some play this role much more
effectively than others. To unlock this potential, universities must
develop robust and effective technology transfer practices that
prioritize long-term economic growth over short-term revenue.
Relationships with local venture capital investors, angel investors,
and entrepreneurs are key towards achieving this goal.
Based on our experience working with the University of Michigan,
which sits a few minutes from our office and is a close collaborator,
the first step in effectively harnessing university research is helping
research projects transition into viable commercial entities. The
University of Michigan launched a record 31 startups in 2020 by
leveraging programs such as Michigan Translational Research and
Commercialization (MTRAC), a committee composed of university leaders
and local venture capitalists that provides guidance and non-dilutive
funding to professors/graduate students who want to spin out and
commercialize their research projects. MTRAC and similar initiatives
help propel research projects ``over the hump'' and into the commercial
arena and have directly led to dozens of local university spinout
startups.
Once university spinout startups have been established, states need
to step up to ensure the spinouts and corresponding jobs stay local. A
key action taken by the State of Michigan was providing support to the
regional venture capital community. In our case, the early support
Arboretum received from the State of Michigan (such as a $250,000 grant
from the Michigan Economic Development Corporation to cover the costs
of raising a first fund) was instrumental in helping us get off the
ground and kick off our track record of investing in local startups.
The state also created a $95 million ``Venture Michigan'' fund to
invest in VC firms that open offices in the state, which persuaded
several regional funds to open Michigan offices and invest capital in
Michigan startups, and in turn enabled Michigan startups to flourish at
home. It also funded 10-15 new venture funds with headquarters in
Michigan.
Congress can support this critical economic development activity by
increasing Federal basic research investment, encouraging greater angel
investment, and supporting the formation of more venture capital funds
in regions across the country. Pro-innovation policies such as the
bipartisan, bicameral Endless Frontier Act would reprioritize a
commitment to Federal basic research investment and technology
commercialization efforts in emerging and critical technologies. The
legislation supports innovation advancement in communities throughout
the U.S. and leverages partnerships between universities and business
leaders to develop and commercialize technology that will create and
encourage greater economic activity.
As outlined above, the participation of venture capital and angel
investors are critical participants in these partnerships to ensure
success in creating new companies and providing opportunities outside
traditional tech hubs. For instance, the Developing and Empowering our
Aspiring Leaders Act (DEAL Act) would help small VC funds across the
country by allowing larger and later-stage VC funds to provide early-
stage liquidity to these funds without triggering regulatory
challenges, helping improve their returns and raise new funds to invest
in a new generation of companies. These changes are especially
important today as industry data demonstrates a significant decline in
first-time and seed financings during the ongoing global pandemic.\1\
---------------------------------------------------------------------------
\1\ NVCA Venture Monitor Q2 2020, available at https://
pitchbook.com/news/reports/q2-2020-pitchbook-nvca-venture-monitor.
---------------------------------------------------------------------------
Tax policy can be particularly powerful for these funds as well,
and I encourage you to review the proposals I highlight in my written
testimony that would support the creation and growth of regional VC
funds.
I would also encourage Arizona universities to apply for Venture
Capital University, a program run by the National Venture Capital
Association on venture finance, held in partnership with universities
across the country. The program shines a spotlight on emerging
ecosystems and expands the focus on VC beyond traditional venture hubs.
VC University LIVE served more than 120 participants across its first
two programs at the University of Michigan and Tulane University in
2019. In November 2020, VC University LIVE was held virtually with
Southern Methodist University (Dallas), with more than 60 participants.
Tribal Communities. Across Indian Country, tribal communities are
operating nation-owned enterprises and cultivating tribal citizen-owned
businesses to prepare their people to access expanding job
opportunities and build sustainable economies. In Arizona, I work
closely with the Dineh Chamber of Commerce that provides a voice for
Navajo-owned businesses, organizations, and governments doing business
on the Navajo Nation. The work of the Dineh Chamber of Commerce creates
opportunities that enable a successful business climate on the Navajo
Nation.
Question 2. How can we expand entrepreneurial opportunities in
Indian Country, and is there a roll for Congress to play?
Answer. There is much more Congress can do to encourage
entrepreneurship and venture capital investment in Native American
communities. Startups need high quality, reliable infrastructure to
build cutting edge technology, attract the best talent, and quickly
scale up. Investment in high-speed broadband, public transportation,
and other critical infrastructure needs form the foundation of vibrant
entrepreneurial ecosystems. In particular, broadband access in many
underventured regions tends to be prohibitively slow, expensive, or
both--barring talented entrepreneurs from launching innovative startups
in these areas.
Many students in Native American communities lack access to high
quality science, technology, engineering and math education. Strong
STEM education programs that connect students with innovators and
provide hands-on engagement are a key feature of robust entrepreneurial
ecosystems outside of traditional tech hubs. Policymakers should invest
in STEM education with a particular focus on these communities to
ensure that all students have the opportunity to pursue
entrepreneurship in high-tech fields.
Many of the points I make in my written testimony about university
partnerships are also broadly applicable to increasing startup activity
in and around tribal communities, as they are designed to jumpstart
startup activity in emerging regions, which would include these
communities.
______
Response to Written Questions Submitted by Hon. Kyrsten Sinema to
Dawn Lippert
University Partnership. Universities in my home state of Arizona
bring together students, faculty, and the community for cutting-edge
research and innovation. The universities create fertile ground for new
advancements and developments that can solve problems, build the
economy, and create jobs in Arizona.
Question 1. How can states and universities outside the traditional
venture capital hubs harness that groundbreaking university research in
order to expand entrepreneurship and create jobs here at home, rather
than let those advancements move out of state?
Answer. Thank you for this question, Hon. Kyrsten Sinema. This is a
powerful insight; universities play a vital role in driving innovation
and entrepreneurship on a local and regional scale. We have identified
three ways that universities can accelerate their effectiveness and
help keep talent and resources in state.
1. Provide extracurricular innovation and entrepreneurship programs:
Programs and activities like entrepreneurship clubs and
competitions are excellent ways to expand the skill set of
students in order to prepare them for the workplace. The
Department of Energy Cleantech University Prize (DOE's
Cleantech UP) is a great example of this. It aims to inspire
and equip the next generation of clean energy entrepreneurs by
providing them with competitive funding for business
development, commercialization training and other educational
opportunities.
2. Create partnerships between industry and university: Internships,
job placements and networking opportunities through
partnerships with local universities are great for students to
practice and develop their entrepreneurial skills. They also
help build relationships in the community outside of their
university. For example, the Engineering department at
University of Hawaii at Manoa, partnered with the State
Department of Transportation to create a Hawaii Autonomous
Vehicle Institute and Traffic Control lab to develop the skill
set needed for local startup entrepreneurs and workforce. In
addition, a collaboration between the University's Office of
Innovation and Commercialization and the Navy co-created Hawaii
Tech Bridge, connecting local government and the university to
assist in solving problems for the Navy.
3. Ensure that technology transfer is set up for success: Many
university systems are still set up only to provide incentives
for research and publication. University technology transfer
offices can be restructured to incentivize the
commercialization of technology and intellectual property
developed within the university. Faculty and students need the
ability (and incentives) to license new technology or spin out
a startup. University support systems such as proof-of-concept
funds and on-campus incubators can also help provide the soft
support needed to help faculty and students make the leap into
entrepreneurship.
Tribal Communities. Across Indian Country, tribal communities are
operating nation-owned enterprises and cultivating tribal citizen-owned
businesses to prepare their people to access expanding job
opportunities and build sustainable economies. In Arizona, I work
closely with the Dineh Chamber of Commerce that provides a voice for
Navajo-owned businesses, organizations, and governments doing business
on the Navajo Nation. The work of the Dineh Chamber of Commerce creates
opportunities that enable a successful business climate on the Navajo
Nation.
Question 2. How can we expand entrepreneurial opportunities in
Indian Country, and is there a roll for Congress to play?
Answer. Thank you so much for the question, Hon. Kyrsten Sinema.
At Elemental Excelerator, we advance solutions to climate change
and work with communities who need them the most. Low median income
communities are typically last to see the benefits of climate
innovations and are even less likely to be asked to be part of the
conversation in implementing solutions.
One of our projects working with indigenous communities was with
SOURCE (formerly Zero Mass Water) where we worked with an indigenous
majority-owned and -managed business called Waddi Springs to prove a
new community scale water purchase agreement in drought-ridden
Queensland, Australia. With our funding, SOURCE was able to deploy 600
hydropanels in the span of 4 months where a conventional water
treatment plant would've taken at least a decade. This project has the
capacity to produce 119,000 gallons of drinking water and displace
approximately 748,000 plastic water bottles per year and also created
new workforce opportunities for native Aboriginals in the area.
Regardless of where the project or community is located, we've
found that the best way to engage and expand opportunities is to
partner deeply with community leaders. We look to the leadership of
collaborative organizations who work with local communities to
establish sustainable practices for the stewardship of the land and
ecosystems while growing economic opportunities. We admire
organizations like Nia Tero, a global collaborative designed to
directly advance indigenous peoples' and local communities' stewardship
of vital ecosystems around the world, and Sealaska, a for-profit Alaska
Native Regional Corporation with shareholders of primarily indigenous
descent. We encourage Congress to find ways to support such
organizations and give Native-owned businesses a voice, as the Dineh
Chamber of Commerce has done in Arizona.
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