Venture Capitalists Head to Washington

If Sand Hill Road is home to the venture capital industry, capitol hill has become its home away from home. With legislators tackling everything from taxes to energy policy and health-care reform, the industry believes the Obama team will be more sympathetic to their concerns than previous Administrations. "This is an Administration with individuals who understand and respect technology," says Mark Heesen, president of the National Venture Capital Assn. (NVCA), the industry's primary lobbying group. "And from Obama on down, there is a view that innovation is key to getting us out of this economic situation."

The NVCA spent $2 million lobbying in 2008, up from $500,000 in 2005, according to the Washington-based Center for Responsive Politics, a nonprofit that tracks the influence of money in politics. But that doesn't count money being spent by individual firms or the companies in which they invest. NGEN Partners, a Palo Alto (Calif.) venture capital firm specializing in clean energy, encouraged two of its portfolio companies to retain D.C. lobbyist Beth Viola of Holland & Knight six months ago, says Steve Parry, a managing director at NGEN. While Viola now lobbies directly for those startups, she also provides NGEN with inside-the-Beltway intel. And Parry says other firms have recently taken similar steps. "Understanding what is being proposed is mission critical for venture investors," says Parry.

The growing prominence of the VC crowd in Washington has drawn some sharp criticism. Vivek Wadhwa, a former entrepreneur and senior research associate at the Labor and Worklife Program at Harvard Law School, says the industry is looking for government aid now that it has been hurt by bloated, underperforming funds. "It would be a big mistake to give them anything," Wadhwa says. "Instead, the government should be giving tax breaks directly to small business people." Heesen denies the industry is asking for special treatment. "VCs are not looking for a bailout," he says. "But our portfolio companies should be treated like all other companies."

The venture industry's high profile marks a dramatic shift from a decade ago, when venture capitalists essentially wanted to be left alone by the federal government. But the push into life sciences and energy changed that. "There is a growing realization that the areas we want to invest in over the next 20 years are heavily skewed toward government regulation," says Heesen.

Much of the industry's influence comes from the perception that its role in backing innovative companies makes it crucial to future economic growth, and a 2009 industry-sponsored study showed that VC-backed companies account for 12.1 million U.S. jobs. But Paul Kedrosky, a senior fellow at the Kansas City (Mo.)-based Ewing Marion Kauffman Foundation, a nonprofit that promotes entrepreneurship, says VCs' role is overblown. "Can you say that all the jobs ever created by a company that took venture capital are the result of the initial money put in?" Kedrosky asks, claiming that many venture-backed companies would have found financing elsewhere.

The Washington blitz has had some success. The NVCA has been pushing to allow more venture-backed companies to participate in the Small Business Innovation Research program, which directs federal research and development dollars to small companies with promising technologies that could be commercialized. A House bill reauthorizing SBIR would allow greater involvement by venture-backed companies, and SBA chief Karen Mills, herself a former venture capitalist, doesn't object. (The Senate version is more restrictive.) Earlier this year, the NVCA helped get increased incentives for solar installations into the stimulus package.

But tougher challenges lie ahead. The Administration has proposed taxing the money venture capitalists make on their appreciated investments as ordinary income rather than capital gains. Jay Ritter, a finance professor at the University of Florida, says that would have a minor impact on small companies but would deliver a big tax hit to partners in venture capital firms. The NVCA is also pushing hard to be heard in the health-care debate, worried that venture-backed companies will lack pricing power on new drugs or medical devices they've developed. Yet another reason the NVCA needs to keep its lobbying machine in high gear.

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