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The 2022 midterm elections didn’t go in the direction many people predicted, and VCs are wondering what the results mean for the startup ecosystem. We talk with an industry leader about the new political landscape and NVCA gives its perspective on what lies ahead for venture policy in Washington.
Welcome to the Venture Capitol podcast, the place where politicians can impact the startup industry nationwide. Join NVCA President & CEO Bobby Franklin for a unique podcast that looks at public policy through the eyes of America’s venture capitalists — the people who are investing in the high-growth companies of tomorrow. This show brings together VCs, policymakers, and policy influencers to discuss and debate issues that affect our nation’s economic future.
Bobby Franklin (00:06):
Hello everyone, I'm Bobby Franklin. Thank you for joining me for another episode of NVCA's Venture Capital. In this episode, we'll talk about how the outcome of the midterm elections will affect the startup ecosystem. You'll hear from Justin Field NVCA, Senior Vice President of Government Affairs, and Emily Melton, Managing Partner at Threshold Ventures and also NVCA's Board Chair. So she's my boss.
(00:33):
Before we get started, we want to know what you'd like us to discuss in future episodes of Venture Capital. Email us at podcast@nvca.org with your ideas and suggestions, or simply reach out to us on Twitter or LinkedIn and help us spread the word about venture capital by writing a review on Apple Podcasts and telling your friends about the show. Now let's get the show started.
(00:58):
I want to welcome back to the show NVCA Senior VP of Government Affairs, Justin Field, to talk about the midterm elections. Justin, welcome back to the show.
Justin Field (01:08):
Thanks for having me, Bobby, and good to see you.
Bobby Franklin (01:10):
So Justin, obviously the midterm elections didn't go as prognosticators were saying it was going to go. At the end of the day, it sort of showed the strength of maybe the middle and the outcome being the middle and not the extremes on either side. So first question, how does the outcome of the midterm election affect our, NVCA's, political champions here in Washington?
Justin Field (01:39):
I think that if you take a step back and you look at sort of where the surprises were in the races, you'll see that more often than not, it was in places where one candidate was defined as more extreme than the other, underperforming the expectations of that party. And that relates to us in a positive way because writ large, venture does better with candidates that are in the middle. And so most of our champions are members of the Problem Solvers Caucus or the New Dems, these organizations of more moderate members that actually want to come together and do policy as opposed to fight the culture wars or go out and try to gain notoriety on Twitter.
(02:19):
So for venture overall, I would say this is probably a net positive election cycle for us because A, it empowered a number of our champions to be more assertive in the next Congress and to push forward on things and B, few of our folks who we were worried about that they may lose prevailed.
Bobby Franklin (02:38):
Yeah, that's a great point. In many cases, what we're trying to do is work with both Republicans and Democrats and folks that have been champions for us are on both sides. And when there is a tight majority, you empower many of the folks that we would like to be empowered to be able to stand up for the issues that are important to us. That's really a great point.
Justin Field (03:04):
The issues that we deal with are oftentimes very complex, long term economic issue. They're not short term, they're not soundbite issues. And so you really need people that are thinking about the long term game and long term policy in order for us to be effective here.
Bobby Franklin (03:19):
What about the issues that we care about for the entrepreneurial ecosystem? What should we expect from the next Congress?
Justin Field (03:28):
So I think a couple macro factors to be looking at. Number one, and I hate to say it because we just got rid of an election, but it's very true, we're rolling into a presidential election cycle. So that's going to paint how the parties work together, what comes up and things like that.
(03:43):
We do think there's a real opportunity for a number of different targeted policies. Things around blockchain, for instance, that I tend to think that this election was positive for a potential blockchain regulatory regime to come out of Congress because you have an active champion, a guy named Patrick McHenry, that's going to run the Financial Services Committee who also has a good track record of working with and speaking with Democrats to try to find solutions. I think he's going to have blockchain there.
(04:10):
I think you're going to see stuff around national security and that coalition continue in no small part because of what we've seen go on in Ukraine and obviously our broader geopolitical competition with China. That coalition's going to stay together, the folks that brought you Science and CHIPS will be back for more issues along those lines.
(04:27):
I think you're also, tax is obviously an annual issue. We always call carried interest an annual issue, so as much as we like to say it may not be on the menu, we always have to act like it's going to be because it really can be. There's other issues in the tax space where they're going to be working on together too.
Bobby Franklin (04:42):
I would say on carried interest, since you mentioned it, it felt like this last Congress that at the end of the day carried interest was sometimes the least of our worry. There were so many other issues about changing capital gains to ordinary income mark to market, having an annual tax on AUM. I mean, there have been a lot of crazy ideas out there. And of course the fear in Washington is when a crazy idea is set out on the table, but it comes back again and again until it gets more support, you have to deal with these things.
Justin Field (05:14):
Yeah, Bobby, that's really important for folks to understand that those ideas of going after capital gains and either taxing on realized gains, wealth taxes, things along those lines, those aren't going away anytime soon. And what underpins them are several things. One is from the left, the perspective of large wealth inequality as well as significant and increasing deficits that show no signs of abating over the next decade. And so whatever happens in the next Congress or this Congress, those issues and our work around those issues is going to have to continue because those are significant meta challenges that the times are putting forward and putting pressure on. I even said on the Republican side, if you want to understand how much pressure capital gains policies under, look at the 2017 Tax Cuts and Jobs Act, which didn't move the capital gains rate one point.
Bobby Franklin (06:02):
Great point. So it sounds like what you're describing is a focus on some targeted opportunities, which some of them like blockchain rules of the road would be very important for the success of our blockchain working group and our members who are invested in some of the newer technologies and what promise can hold as long as they have rules of the road in Washington. So those are certainly possibilities, but what I don't hear you saying is, well, we did the bipartisan infrastructure package and we did the CHIPS and Science Bill and we did the Infrastructure and we did the American Renewal. I mean, it doesn't sound like we're going to have big bills that have lots of spending going into a presidential election cycle. Is that fair?
Justin Field (06:53):
If any bill that feels like it's going to give President Biden a major win going in, it's probably going to be off the table. In addition, even if Democrats had fully held Congress, you've got so much money that's going to be coming through the pipeline in these agencies, Treasury, Commerce, Department of Energy, National Science Foundation, there's really a point by which it's how are you going to spend it effectively as opposed to how many more resources do you need?
(07:19):
And I think that's where a lot of folks heads are is okay, you've got dozens and dozens, particularly for us technology programs that got to get stood up, that got to get implemented effectively that that got to get processed. How do you do that well? And so that's where I think a lot of the headspace is going to be around there.
(07:36):
I do agree. I do think Congress is going to have a chance to spend time on some of these more targeted things. I would say digital health would be another interesting one. What are the learnings we've taken from the pandemic and how do we update our regulatory structure to take into account some of the possibilities that we've seen in that space as well?
Bobby Franklin (07:54):
What about Jobs Bill 4.0 or oversight of the Securities Exchange Commission?
Justin Field (08:01):
Capital markets and regulatory, I think in general are going to be a pretty interesting space. And I juxtapose that with what we saw happen with the original Jobs Act in 2012. Again, it was a presidential election cycle. Republicans held the House and they came up with the original Jobs Act as a way to say, we can work together, we can do some things together here. And I see that happening again. That dynamic has a real potential. I'm not saying it's going to get across the finish line, but I think there's going to be a lot of energy around that, particularly once Democrats realize that a lot of things the Republicans going to want in the capital markets agenda are also going to be good for their agenda. Climate companies do have to go public eventually and making those public markets more attractive is going to help not just all the other tech companies but also climate companies. So I think there is some real possibility in that space.
(08:46):
Specific to SEC oversight, that that's a really interesting place because it's our understanding that there is a significant number of Democrats that are rather concerned with what Chair Gensler's been up to as well. And with more Republican influence in the area, you could certainly see a broader coalition start putting some real pressure on the SEC and asking some more significant questions than they have been.
Bobby Franklin (09:09):
So this Congress has been one of the most consequential congresses in a long time with generational investments in CHIPS and Science and a lot of programs, advanced energy innovation and things of that nature. So talk a little bit about what will be happening over the next couple of years at some of the agencies that now have to implement the big bills that just passed.
Justin Field (09:35):
We are living in a new normal in Washington. And there's this carrot and stick approach that's clearly come to the fore where we see these geopolitical challenges from an American policy maker perspective. We're worried about our supply chain vulnerability with China, the impacts of decoupling are now being felt throughout the system, and how do we react to that?
(09:54):
One of the reactions that has been some significant programs trying to harness technology and build a better domestic supply chain, build more jobs and more companies here in America, most importantly perhaps lead in the next generation of frontier technologies, be that quantum computing, next generation bio, as you put it, advanced energy, which we are counseled at [inaudible 00:10:15] to call it, semiconductors and on and so forth.
(10:19):
And so these resources are now making their way into the agencies and the likes of which we've never seen in our career. You may have to go back to Sputnik to see a policy making experiment of this size and how that plays out. What companies do they develop relationships with? These are all open questions. I joke that when someone asks me well are these things going to work? The first thing I say is, anybody who tells you yes or no is lying to you, because nobody knows. Nobody's been through something like this. The question isn't whether or not they're going to work. How do we, from the NVCA perspective, make them as effective as possible and can give our members' portfolio companies the greatest chance to participate where there is a real possibility to participate.
Bobby Franklin (11:00):
It really, I think, excites me to go to bat for the entrepreneurial ecosystem over the next couple years and make sure that the innovators and the entrepreneurs and their investors are the ones that are at the table and able to take advantage. Because at the end of the day, that's what Congress intended. The folks that are champions who worked on these bills, that's what they wanted to see happen. And we have to stay vigilant and make sure it does.
Justin Field (11:29):
Yeah, but I mean ultimately, if you look at where frontier technologies come from in the postwar economy, whether it be semiconductors and intel, obviously everything we've been talking about recently with mRNA and Moderna, the real disruptive technology's been coming from the equity investment model. And so if Congress really does want to see their programs be effective, they're going to have to get equity-backed companies into these programs. And I think that's something that we've been working hard on.
(11:52):
And to your point, which I think is a really, really important one, historically a lot of these things have been off limits because the beltway bans have made their way in. One thing I think we've learned from our time here in recent years, especially with our work around Paycheck Protection Program, was I think that was a real eye opening event when there were those affiliation rules that members were saying, well, wait a second, we're going to cut out an entire generation of advanced energy and semiconductor companies from this small business bolstering program. Why on earth would we want to do something like that? And they started thinking about it more. And I think that's a little bit of what's led to these better rules that came through in the statute. Again, we can't tell you that they're not going to be implemented well, but what we can tell you is the statute as written really does give the opportunity for venture-backed companies to participate.
Bobby Franklin (12:36):
Great point. Justin Field, Senior Vice President, Government Affairs at NVCA, thank you so much for joining us on Venture Capital.
Justin Field (12:45):
Well, thanks for having me.
Bobby Franklin (12:50):
To get the VC perspective on the current political landscape. I wanted our listeners to hear from an industry leader who has worked closely with me and the NVCA team on advocating for venture and the entrepreneurial ecosystem here in Washington. That person happens to be my boss, NVCA Board Chair Emily Melton, who's also the managing partner and co-founder of Threshold Ventures. Welcome to the show, Emily.
Emily Melton (13:15):
I think we use the term boss loosely Bobby as I am chairperson of an organization. But it is a true honor to have got to work with you and the NVCA and I'm excited to be here today.
Bobby Franklin (13:26):
Well thanks for joining us. Now, you've been on the board for more than four years now. What are some of the most interesting public policy issues you've witnessed in your time on the board?
Emily Melton (13:38):
It's not just the policy issues, but just understanding how policy is made. And this quote kept coming to mind, but there are decades when nothing happens and there are weeks when decades happen. And I feel like that kind of encapsulates my role with the NVCA, which is in those first three years there were lots of discussions around policies and initiatives, but most things kind of felt incremental. And then in the past 18 months, in the past 12 months in particular, culminating this summer with both the CHIPS Act as well as the Inflation Reduction Act, everything seemed to come to a head all at once.
(14:13):
And so zooming out and thinking not just about the four years, but just what we've seen happen in this recent kind of Congress, we've seen a once in a generation investment from the United States government in our nation's infrastructure and competitiveness. It's this generation's kind of equivalent to a New Deal. And I still don't think that's broadly understood, not only the country as a whole, but even within our industry. And so I think it's been very, very exciting. It's been an amazing learning pace for me. But one of the things that may be helpful if you wanted to, Bobby, is we could talk through a couple of those bills and initiatives and my learnings from those if that would be useful.
Bobby Franklin (14:53):
That's great. Let's do that.
Emily Melton (14:55):
As someone who's not in politics, you're mostly consuming your information from newspapers and others. And one of the things I really wanted to emphasize when we talk about these bills, is that this was largely bipartisan efforts, particularly when you think about the infrastructure bill and the CHIPS Bill. And so that was very encouraging for me in a world where it seems so divisive and that most of the emphasis has been on our differences, at least from our perspective of getting to work with this industry innovation and having conversations with people in Washington recognizing on both sides of the aisle there's actually a lot more common ground than I think we're often led to believe.
Bobby Franklin (15:35):
I just wanted to reiterate what you just said. I talk to family, friends, folks that don't live in Washington, folks that don't kind of work on the issues that we work on all the time. And I tell them a lot of things are happening, but you're not going to hear about them because it's not news like, oh, Republicans and Democrats got together and they worked on something important for the country. That's not going to be exciting on cable news or get social media algorithms to kind of invite stuff. So you're absolutely right. That's a wonderful point.
Emily Melton (16:04):
Yeah, we're selling outrage. We like to talk about the things that upset us. And don't get me wrong, there's a lot that upsets me and upsets others, but we don't spend as much time on the things that actually come together and how people are working together. And honestly, one of the things I would love to see is us reward those politicians that are reaching across the aisle and are getting things done because it's not just that we don't talk about it and we also make that difficult for these politicians, but it's really critical for us as a country and for innovation economy to have people who are willing to have differences of opinions, but to come together and actually work together for the better of our country.
(16:38):
And I think that's what we've seen. So oddly, I think there's a lot of things to be concerned about right now, but there was also a lot of positive movement that we've seen in the last 18 months around that alignment and the infrastructure bill being the first one last fall, it's a trillion that's with a T, bill, the largest federal investment in infrastructure in decades.
(16:58):
And I remember when Justin and the other kind of policy leaders at the NVCA were walking us through, it's like, infrastructure? I'm a venture capitalist. What do I care about? I care about bridges and roads, but that's not my purview. But when you really, that's the headline saying it's infrastructure, but when you peel back and you understand what's in this bill, it's substantially more than just roads and bridges. It really talks a lot about modernizing our infrastructure through frontier technology. And there's tons of programs that as part of this bill that are going to increase innovation across the country and reshaping the way that we think about technology and manufacturing. And so I do think it was one of those that shows not just that the Congress and federal is about fixing infrastructure, but looking towards the future and harnessing the innovation and technology of our country and our ecosystem to actually address these societal issues.
(17:50):
The other one, and Senator Mark Warner has been a wonderful friend for our industry for a long period of time, but I've been hearing about the CHIPS Bill for a substantial period of time as I've been on the NVCA board. And having that come to fruition this summer I also think was a really, really meaningful step forward to increasing the kind of competitiveness of our country that's authorized as 250 billion dollars over five years for research, education, workforce development. And it's not just CHIPS, but the science innovation bill also allows us to expand into things like climate change and broader entrepreneurship. So I was very excited to see that come to fruition this last summer.
Bobby Franklin (18:31):
Well, I'm so glad you raised those two bills and you're so right. It's a great example of how Washington can work and function like it should. And it's great for you to share with our listeners about the wonderful opportunities that are going to be available as these bills get implemented. And that's going to take a little bit of time, but there's a real opportunity here for the entrepreneurial ecosystem,
Emily Melton (18:56):
And I think that is why it's so important that we're engaging and being educated on what's happened and then engaging with policymakers and now this next level of the people who are implementing beyond policy.
(19:08):
We hosted a dinner, Bobby, you and I, along with a number of the board members of the NVCA with a number of senator colleagues, and it was really about that discussion. Which is now that we've had these bipartisan efforts, now that we've seen these bills, how do we ensure that we're working together to make sure that these dollars are spent well and that innovation does actually occur.
(19:31):
And so I think in our industry, the venture industry we've benefited enormously from government spending. If you think about the first wave of technology, a lot of it was derivative from military spending, DARPA initiatives and others. That was in the eighties and nineties, we haven't really seen how this next generation of partnership can occur and how we can collaborate with the federal funding, which has the money and the need, but they don't have the ideas and they don't have the people. And so that's where that partnership comes together, is you have to bring the risk capital and you have to bring the people of access to really drive that change.
(20:07):
Last but not least, the wonderful thing that kept us away from our summer vacations this last August was the Inflation Reduction Act. And again, that was a very good lesson for me in what can happen in a short period of time. [inaudible 00:20:22] everything comes to together and there's a lot in there. But one of the things that's really interesting is thinking about, again, some of the impacts for climate change programs and healthcare that I think we are starting to better understand.
(20:33):
But specifically for venture investors that are interested in climate change, I think all of these bills, including the Inflation Reduction Act, are opportunities for us to think about how to take some of this federal initiative dollars and marry that with the innovation to really solve some of the real challenges that we face with the climate in the decades to come.
(20:53):
The last piece I'd bring up is that's all on the policy side, and that was very exciting for me to learn about. I felt like it was the evolution from the kid how a bill becomes law to getting really a little bit more involved in the sausage factory and understanding it. But the other really humbling process for me, and I think it's really important, is just how critical the regulatory bodies are for our industry and broadly. And we have a number of discussions and [inaudible 00:21:21] right now with the SEC on regulation of private funds. But as you look at just what's currently happening in the world with FDX and crypto, it's quite clear to me that our industry is going to have to be much more thoughtful about how we interact with regulatory bodies and recognizing that it is a very critical moment for venture capital founders and for regulators to find paths forward to protect consumers, but in ways that don't hurt or undermine innovation.
Bobby Franklin (21:48):
I have to say that your year as board chair has been perhaps a little more exciting than others and maybe more than you thought you were signing up for, but I appreciate your leadership greatly. I think that is fair to say there have been significant changes in how Washington views technology related products and services, and I know that a lot of the biggest tech companies are under fire from both sides of the aisle, Republicans and Democrats. How do you think your investor colleagues of think about these trends and what it means to the VC business model?
Emily Melton (22:24):
Bobby, you've heard me say this to our board a number of times is depending upon, different people have different views of it, but oftentimes they're like, I don't need to talk to Washington DC. Just leave us alone and let us do what we're doing. And that was because the venture industry was really niche and in 2000, no one really knew what we were doing and we kind of flew under the radar. It was this small little asset class that had outsized returns that a couple of people at business schools wrote case studies on, but it wasn't really viewed as a substantial kind of asset class within modern finance. That's changed. And we're still small from a dollar perspective, but not from an impact perspective.
(23:02):
I grew up in Utah and my husband is from West Virginia, and my relatives are now learning about the venture industry, unfortunately from Hulu drama series where they think there's a venture capitalist. And I keep trying to explain to them that what I do is not what they see on TV in any form, but it is becoming something, it's part of the modern vernacular.
(23:25):
And so we as venture capitalists, I think can no longer fly under the radar. We have to better define our industry. We have to be more active in these conversations, and we have to make sure that we're representing not just our industry, but as you and I talk about a lot, our returns as an industry are derivative of the founders, of the entrepreneurs. We only make money when the entrepreneurs create value. And so we're often a proxy for them in these discussions with people in Congress of how we can continue to fuel an innovation economy. How can we make sure that these entrepreneurs are set up for success? So my basic comment to most people is like, even if you don't want to be on the radar of Washington, too late, and let's make sure that we're having really productive conversations.
Bobby Franklin (24:09):
Is there anything that you're hearing from your colleagues following the midterms? I mean, at the end of the day, I think there was an anticipation going into the midterms that'd be a Republican wave. That's not necessarily what we got. We do have a divided Congress. Republicans in charge of the House, but the Senate is still in democratic hands. Anything that your colleagues have sort of commented about after this?
Emily Melton (24:35):
There hasn't been as much discussion around the midterms. I think a lot of those were social policies that were driving a lot of that, and I think there was the midterm elections, but the backdrop here is that we're also in a very volatile economic period in terms of understanding what interest rates are going to do, in terms of understanding geopolitical risks and how that can impact our economy. And so most of my peers right now, if I'm being really honest, are less focused on kind of short-term politics or a couple House seats and are more trying to understand what is the political landscape going to be for the next decade and how do we make sure that that political backdrop or landscape is helping to address some of the economic challenges that we're facing.
(25:24):
I like to say that venture capital is the business of being long term right. Not short term right, but long term right. So we need to zoom out and really think about long term trends and opportunities versus short term optimization. Venture at its best is not about investing in incremental change, but disruptive technologies that will have profound impacts over longer periods of time.
(25:49):
The best way to be able to think about a long term return is to know that there's some level of stability and alignment of incentives along that period of time. And so most of my peers right now, whether it's Democrat, Republican or midterms, it's really, and you know this because we work with that bipartisan coalition that was critical for a lot of those initiatives that we discussed earlier. I think we're trying to focus much more as an industry on who are the problem solvers, who are the people that are coming together to address these long term concerns and making sure that we're thinking about it from that perspective versus the short term optimization or politics. So I think that's where our focus lies as a body at the NVCA and I think that's where most of the members are focused as well.
Bobby Franklin (26:34):
And speaking of that sort of long term nature, perhaps decades, are there any kind of long term policy issues that you're concerned about?
Emily Melton (26:44):
We talk about a lot at the NVCA is kind of the Jekyll and the Hyde, right? On one side, we've seen this amazing federal endorsement of the need for an innovation economy and wanting more than any time in my professional career, am I seeing government support domestic innovation, right? 'Cause the other thing we've seen is a lot of the benefits for the venture industry have been around globalization and a lot of these bills and these initiatives are really focused on bringing that back to the US and making sure that we are benefiting from that innovation and aligning those incentives. And so on one side we're seeing that and it feels like it's the most robust support I've ever seen for an innovation economy. But on the other side, there's a lot of, as we talked about, regulatory challenges or some bad actors that could end up really hindering or challenging this innovation economy.
(27:43):
We have a competitive edge as a country. Our innovation economy is the envy of the world. And we say this and people are trying to copy it. And so sometimes a lot of the conversations that we have, particularly with regulatory bodies is please don't break what doesn't need to be broken. Right? It is working and really starting to think through about long term consequences for any of these changes, anything that could potentially hinder that innovation economy. We benefited immensely from entrepreneurship and not just economically.
(28:16):
If you look at the last couple of years, I mean the Moderna Covid-19 vaccine. Zoom or other technologies enabling people to communicate during the pandemic and companies to continue to operate. These innovative solutions have been there in our times of need and can react so quickly and so nimbly.
(28:36):
And you look at our situation versus other countries that are in lockdowns or unable to manufacture those vaccines at scale. It is our superpower. And I want to make sure the conversations I have is trying to make sure that people understand the uniqueness of that superpower and that we don't unnecessarily hinder it or take away that competitive edge. It's honestly the reason that I'm spending so much time with you and the NVCA. It's not just because of my day job. I have this job because I deeply believe that venture capital and innovation is the cornerstone of sustained competitiveness and viability. I want to have that innovation economy for my children and for generations to come.
Bobby Franklin (29:18):
Emily Melton, Managing Partner, Co-founder of Threshold Ventures, NVCA Board Chair, thank you so much for joining us, but mostly, thank you for all the time and effort you put in as chair of the board of the NVCA, all the work you put in on behalf of the industry.
Emily Melton (29:36):
Thank you for having me and it's been an honor working with you and your team. You guys make me look good. You brought a novice up to speed very quickly, so I really appreciate it.
Bobby Franklin (29:48):
Now before we leave you, here is another fun fact. The next time you are at Union Station, look up at the ceiling. All that glimmers isn't necessarily paint. It's solid 23 carat gold gilding. The train station was originally the intended site for the Lincoln Memorial.
(30:06):
Thank you for listening to Venture Capital, a podcast from the National Venture Capital Association. Don't forget to rate and review the show on Apple Podcasts, share your thoughts and ideas with us on Twitter and LinkedIn, and tell your friends about this show. I'm your host, Bobby Franklin, wishing you good days ahead. Bye for now.