July 28, 2022

To Keep Up, We Must Startup

By Alexandra Seymour

Supporting U.S. innovation has become a key national security priority, as demonstrated by year-over-year increases in technology research and development (R&D) spending and the Senate's passage yesterday of the CHIPS and Science Act of 2022.

Yet for all the hype around technology acceleration and protection, the U.S. faces a paradox: The funding source that matters most is drying up.

Venture capital (VC) funding is the backbone of many companies, particularly those in early stages. Over the course of a decade, investors poured $1.3 trillion into promising startups, enabling many companies to achieve billion-dollar valuations. In 2021 alone, VCs supported over 14,400 companies across the United States in 414 Congressional Districts. This also makes them a major source of employment, as evidenced by the 8x larger growth rate in jobs for VC-backed companies compared to non-VC-backed companies between 1990 and 2020.

As the U.S. focuses on strengthening its innovation base — including through the U.S. government’s increased cooperation with the private sector and acquisition of commercial technologies — it must pay attention to VC risk-taking trends.

But many VCs are rethinking their approach to risk-taking, which is reflected in crashing tech stocks that are exacerbated by rising inflation and interest rates. Instead of funding company growth initiatives, such as building proof-of-concepts and hiring, VCs are scrutinizing return-on-investment (ROI) earlier in the investment cycle, such that job losses have reached a two-year high and companies like Coinbase have rescinded offers. This has even affected the cybersecurity sector, which could have been viewed as an area of resilience for tech investments, given nationwide attention on the increased frequency and sophistication of ransomware attacks.

Today’s economic conditions make it easy to understand an investor’s position; a crashing stock market isn’t ripe for risk-taking. This mindset extends to employees, who will likely start seeking employment at Big Tech companies due to the job stability bigger companies offer.

However, as the U.S. focuses on strengthening its innovation base — including through the U.S. government’s increased cooperation with the private sector and acquisition of commercial technologies — it must pay attention to VC risk-taking trends, which are essential to producing the technologies at the speed and scale required to outcompete China.

Read the full article from RealClearPolicy.

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