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A great article on the proposed Start-Up Act.

The below article (copied) was published in Entrepreneur magazine authored by Professor Scott Shane.  As a proponent of the Start-Up Act, I wholly agree with Professor Shane’s arguments for editing the bill as it stands. 

Expand the Startup Visa Act (Opinion)

Guest op-ed contributor Scott Shane is a professor of entrepreneurial studies at Case Western Reserve University. He writes about entrepreneurship and innovation management, among other things.

The Startup Visa Act, introduced in the U.S. Senate earlier this year by Sen. John Kerry (D., Mass.) and Richard Lugar (R., Indiana), would “allow an immigrant entrepreneur to receive a two-year visa if he or she can show that a qualified U.S. investor is willing to invest in the immigrant’s startup venture.” Some oppose the legislation, now winding its way through committee, arguing that it gives investors too much power or could be open to abuse. Those problems are readily fixed. The real problem with the legislation is that it won’t significantly spur job creation or increase GDP.

The Startup Visa Act has a basic, solid premise: If entrepreneurs can establish their businesses in Seattle and Boston instead of Shanghai and Bangalore, they will generate U.S. jobs and U.S. economic growth. Unfortunately, the Act is too narrowly written to accomplish much.

Because its sponsors were more worried about getting political agreement than about having economic impact, they limited visa eligibility to a small group of people. To qualify for the new startup EB-6 visa, would-be entrepreneurs residing outside the U.S. must get a $100,000 investment from an accredited super angel (defined as an American citizen who made two $50,000 or larger equity investments in young companies in each of the prior three years), venture capitalist or government entity.

Prospective entrepreneurs with an H-1B visa or U.S. graduate degree in a science, technology or engineering field also would be eligible; they must earn at least $30,000, have assets of at least $60,000, and obtain $20,000 from one of those three types of investors. Finally, existing entrepreneurs abroad would be eligible if their business generates U.S. sales of at least $100,000 a year

These narrow qualifications mean that very few visas would be given out. The Act also limits the number of the EB-6 visas by not authorizing new ones, but instead reallocating a portion of the EB-5 visas that foreigners can receive if they invest at least $1 million in the U.S. and create at least 10 jobs. In 2009, 5,799 of the 9,940 authorized EB-5 visas were never used, suggesting that the Act would provide startup visas to about 5,800 entrepreneurs. That’s a drop in the bucket in a country with over a million new permanent residents every year.

I strongly doubt that even 5,800 visas would be claimed. Very few new entrepreneurs could secure the required investment from venture capitalists, super angels or government entities. The National Venture Capital Association reports that 1,001 companies received venture capital funding for the first time in 2010. Because super angels are savvy investors, virtually all of them co-invest with venture capitalists. That fact suggests that only slightly more than 1,000 companies receive the kind of funding each year that would be needed for a startup visa.

What’s more, most of those companies are not founded by immigrants. Vivek Wadhwa estimates that one quarter of technology and engineering companies started in the U.S. between 1995 and 2005 had an immigrant founder. Therefore, of the roughly 1,000 businesses with venture capital every year, it’s likely that as few as 250 are founded by immigrants. Some of those immigrants would not even need the new EB-6 visa because they already have a green card.

It’s true that entrepreneurs who already have companies elsewhere but want to relocate to the U.S. wouldn’t need to raise money to get a visa. But that provision will do little to help foreign scientists and engineers trained in the U.S. start their companies here. If we make the entrepreneurs go home and create $100,000 in U.S. sales before we give them a visa, then we will lose most of them. Once people start a business in one country, it is very hard to get them to relocate it.

If Senators Kerry and Lugar really want to pass legislation that helps keep immigrant entrepreneurs in the U.S., they should amend the Act in two ways. First, they should allow entrepreneurs to obtain funding from anyone, not just venture capitalists, super angels and government entities. Second, they shouldn’t limit the number of visas to a portion of the existing EB-5 visa allotment, but instead, should create a new—and larger—pool of EB-6 visas.

Senators, the marketplace doesn’t work like your world. Taking a little from each side to get buy-in works well in politics; in economics, it merely washes out the effect you are hoping for and leaves you with little or nothing.