Michael Brown, a longtime general partner with Battery Ventures, was just elected to the role of chairman of the National Venture Capital Association, three years after joining its board of directors. We caught up with Brown to ask about his new, year-long role with the 48-year-old trade group; we discussed some of the issues that are top of mind right now for the many American VCs he is now representing and how, if it were up to the NVCA, those issues would be addressed.
TC: VCs are always concerned about tax treatments, but these are obviously even more top of mind, given Joe Biden’s proposal last month to raise the top rate on long-term capital gains to 39.6% from 20%. What do you think of that proposal?
MB: So you’re gonna hit me right in the face with a two-by-four on taxes in the first question, I love it.
This is the NVCA’s position, this is my personal position and if you ask most venture capitalists, this position is pretty widely held: what Biden is trying to do with the Build Back Better Plan . . . we are fully supportive of that and we are actively working with both the administration and policymakers in Congress to get done a lot of what he wants to get done. A lot of what he’s talking about — whether it’s the physical infrastructure, like bridges, roads, planes; or the digital infrastructure, meaning internet broadband access more broadly and cybersecurity; or climate infrastructure, [around] how we transition the economy and the country to a greener carbon-neutral or even carbon-negative world — venture capital is required to fund the entrepreneurs to do all of those things . . . It’s really almost hand in glove. He wants this to happen, we want it to happen, and we can help facilitate that [because] it’s not going to come from corporate America, we know that.
TC: To your point, the money does have to come from somewhere. Is there a number at which you would feel more comfortable?
MB: I don’t want to speak on behalf of the NVCA around what is our target rate. I will say that people in Congress and other talking heads talk about the revenue-maximizing rate in and around 25% to 28% . . . and I think that’s kind of where people feel it is reasonable to go to. What we do believe is that long-term investment should be rewarded and not disincentivized through tax structure.
What happened under the Trump administration, where they extended the time frame to three years [from one year] before you could receive long-term capital gains treatment, we were fine with that because we’re investing for longer than three years and I think having some time component to decide what is long term and what is not worked very well.
TC: Another topic that comes up time and again is the IPO market. It sure seems healthy right now. Will you have any suggestions for the current administration relating to taking companies public?
MB: We are obviously very supportive of the capital markets. That being said, if you look at the number of public companies today versus the number of public companies 20 years ago — and this is not just true of technology companies — it’s roughly half the number. We think that’s a function of a few things. One is just how the capital markets function today — the ability to get research, etcetera, caused by [specific] legislation; regulatory issues; and just the burdens that a public company have versus a private company. You’ve also got other [rules] that have been passed over the last few years that impact the accessibility of the capital markets for private companies, and that’s why you’re seeing companies raise more money and stay private longer, which is not to the benefit of everyone.
TC: What reform here would you press for most immediately?
MB: Going back a ways now, in 2012, there was a piece of legislation called the Jobs Act that helped open up the public markets by addressing some of the risks and costs associated with going public and the regulatory burden. That needs to be updated. That’s something in particular that if we can modify it and make it current, it will help create that on ramp for smaller companies to access the public markets sooner and earlier.
TC: What do you think of SPACs, these special purpose acquisition companies that are being raised to take companies public, including, oftentimes by those companies’ own earlier investors?
MB: It’s good to have more alternatives and more ways for companies to access capital markets. That being said, those vehicles need to be appropriately regulated, and SPACs is one area where regulation has not kept up with kind of the realities on the ground. I think Chairman Gensler and even before him in the previous administration, [the agency] also felt like there needs to be better controls on the stock market.
One of the benefits of a SPAC is the ability to offer forward guidance. You can’t have that in an IPO or even a direct listing and I would not be surprised if the SEC comes out with either revised guidance and or a complete restriction on the ability to provide forward guidance. There’s probably something that should be done there, but we’ll see.
As for conflicts of interest related to the economics centered on investors buying companies within their own portfolio, I don’t know if there’ll be regulatory remedies for the conflicts. The SEC has the ability to review any of these [deals] if they want, but in the meantime, we’re seeing the market actually changing the economic terms. You’re seeing reduced promotes by the SPAC sponsors. You’re seeing reduced warrant coverage or even the elimination of warrant coverage. You have some SPACs that look like venture funds, where there’s really no promote but instead a success fee if the SPAC completes the merger and does well. You’re also seeing the vesting of the sponsor interest over a period of time, so they’re locked in over a longer-term horizon. The market is figuring out a lot on its own.
TC: The NVCA has long been pro-immigration. What are some of your proposals on this front? What would you like to see change or instituted?
MB: We took a very aggressive stance in the previous administration around the International Entrepreneur Rule and even [successfully] sued the Trump administration to have them enforce or at least roll out the rule, which enables the entrepreneur to come to the U.S. as long as they have a minimum number of dollars in financing to build their business here.
Look, we’re in a competitive market. If you look at venture capital 15 or 20 years ago, 85% of the dollars that were invested went to companies in the United States, and a lot of those went to companies founded by immigrant entrepreneurs. Today, that number stands at just over 50% [including because] founders who are coming here and getting educated and going back home and founding a company.
We want founders to start their companies here and grow their companies here to create jobs and spread the wealth. The International Entrepreneur Rule was a stopgap to ultimately what is called the Startup Visa, an official visa status that would enable entrepreneurs to come in and give them certainty that they can stay in the United States and start a company and build it. This is something that’s been in the works for a long time, and we’re hoping that Congresswoman Zoe Lofgren out of the 19th District of California will reintroduce this visa bill soon, so that we can put this as part of the Build Back Better Plan, because we need immigrant entrepreneurs to come here and start companies and employ the broader U.S. population.
If you think about the technologies that we used to get through COVID it was Zoom, it was Moderna, it was even Pfizer, dating back 100 years. All three were founded by immigrant entrepreneurs who came to the United States to start their business.
TC: Is this a role you volunteered to do? Is there a game of hot potato that happens amid the NVCA’s board of directors every year?
MB: [Laughs.] It is not just a hot potato that got passed. [NVCA president and CEO] Bobby Franklin and the outgoing chair discuss who they think would be good based on participation in board meetings and how engaged someone is with the things the NVCA is doing in Washington and who can be a good advocate for the industry and for the entrepreneurial ecosystem.
I think it’s a pretty cool time to have this job; intellectually, this is going to be super interesting, and it’s super important to the industry [because] these are big policy initiatives and we’re a very important part of the solution here, and that needs to be well-known and well-understood by the administration and Congress. That’s our mission.