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Venture Capital: A Catalyst for Innovation and Growth

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How does Venture Capital serve as a catalyst for technological innovation and economic growth, while aligning the interests of entrepreneurs and investors in high-risk ventures?

Image courtesy of interviewee. November 19, 2024

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This video discusses the history and evolution of venture capital in the United States, starting with General George Dorot's establishment of American Research and Development in the late 1950s, often regarded as the first venture capital firm. His successful investment in Digital Equipment Corporation (DEC) demonstrated the potential for significant returns, influencing subsequent investors.

In 1961, lawyers Davis and Rock introduced a new partnership model for venture capital, where investors received shares at the time of investment, encouraging alignment of incentives. This video model, contrasting with Dorot.’s approach of paying salaries, led to more successful investments and allowed both entrepreneurs and venture capitalists to benefit financially only upon the success of the venture.

This video also highlights the importance of regulatory changes, such as the Glass-Steagall Act and the Employment Retirement Income Security Act, which historically limited bank investments and encouraged venture capital investments by pension funds. The discussion includes the roles of general and limited partners in venture capital firms and how the expertise of venture capitalists aids startups.

Additionally, the text examines the impact of tax policies on venture capital investments, noting a correlation between a country’s tax rates and venture capital investment levels. It raises questions about public policy related to startup subsidies and higher tax rates, suggesting that they might hinder innovation and employment growth in high-tech startup sectors. It concludes that startups in the VC-backed domain outpace others in growth and patent generation, emphasizing the unique nature and challenges of venture capital compared to traditional banking investments.

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Here are five key points from the video regarding the history and dynamics of venture capital:

1. **Origins of Venture Capital**: The video discusses the beginnings of venture capital in the late 1950s with General George Dero, who founded American Research and Development and made significant early investments in companies like Digital Equipment Corporation. His methods shaped subsequent venture capital practices, including the business model of sharing equity based on initial investments rather than salaries.

2. **Venture Capital Structure**: The differentiation between various venture capital structuring methods is highlighted through General Dero's approach versus the partnership model established by lawyers Davis and Rock. The partnership model allowed for initial investment shares to be essentially worthless to evade taxation until the company was sold or floated, aligning incentives for all parties involved.

3. **Economic Theories and Contracting**: The video mentions Dynamic Contracting, a branch of economics that examines the incentive structures in entrepreneurial ventures. It suggests that venture capitalists and entrepreneurs should share potential profits significantly to align their interests and encourage maximum effort towards the company's success.

4. **Regulatory Influence on Investment**: The impact of regulatory changes, particularly the Glass-Steagall Act and the Employment Retirement Income Security Act, on the involvement of banks in high-risk investments is discussed. These regulations led banks to avoid venture capital investments, leaving a significant role for venture capital firms in financing startups.

5. **Performance of VC-Backed Firms**: The contrasting growth trajectories of VC-backed high-tech firms versus non-VC backed firms is presented, highlighting that VC-backed firms grow significantly larger and contribute disproportionately to patents in the economy. The video also raises concerns regarding tax implications for startups, suggesting that higher corporate and capital gains tax rates could hinder the growth of high-tech startups and overall employment.

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Here are some key quotes extracted from the video:

1. **Historical Convideo of Venture Capital:**
- "The start of it was in the late 1950s, there was a person called General George Duro, and he started a company called American Research and Development, and that was probably the first venture capital company."

2. **Investment Success:**
- "They invested $70,000 in 1956, and he got a 70% share of Digital Equipment Corporation. And in 1966, that was worth 38 million."

3. **Venture Capital Evolution:**
- "Two lawyers, Davis and Rock started a venture capital company and they structured it differently than General George Duro."

4. **Incentives and Contracts:**
- "They align the incentives because if the entrepreneur didn't work, no one would get anything. And if the venture capitalist didn't work, no one would get anything."

5. **Dynamic Contracting Theory:**
- "The theory of Dynamic contracting... say that you should pay people at the end."

6. **Regulatory Influence:**
- "The Glass Steagall Act... prohibited banks from undertaking risky investments."

7. **Investment Opportunities:**
- "Banks really don't have that expertise... they wouldn't have someone that would be a PhD, MD in medicine on their staff."

8. **Comparison of Employment Growth:**
- "A VC backed firm, if it's less than three years old, would have eight employees... after 11 plus years, it would've grown on average to 3000 employees."

9. **Impact of Tax Rates on Startups:**
- "Kamala Harris... wanted to increase the corporate income tax rate to 28%... this would lead to a 9% reduction in employment on high tech startups."

10. **Public Policy Questions:**
- "These are the types of public policy questions that arise... does Italy not have venture capital? Because the return on it isn't the same as it is in the US."

These quotes encapsulate key ideas around the history of venture capital, investment structures, regulatory impacts, employment growth in VC-backed firms, tax implications, and broader economic questions affecting the venture capital landscape.

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I think the, the start of it was in, in the late,

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1950s, there was a person called General George Duro,

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and he started a company called American Research

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and Development, and that was

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probably the first venture capital company.

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And they invested in, digital equipment corporations.

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They invested, $70,000 in 1956,

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and he got a 70% share of,

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digital equipment corporation.

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And in 1966, that was worth 38 million.

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So people had saw this enormous return on this investment

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in, you know, an early computer company,

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and they made many computers.

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And so if you're at a university in the seventies

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and the eighties, when I was starting, for instance,

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there were these, mini computers that universities had

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that you could run your programs through.

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And, so people saw the success of him

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and they were interested in duplicating it.

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But really the takeoff, I think, started in 1961.

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'cause two lawyers, Davis

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and Rock started a venture capital company

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and they structured it differently than,

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general George Dero.

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They set it up as a partnership general, do George Dero,

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he ran it more like a business, say like a bank.

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And he hired the experts, said you would need to go around

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and evaluate companies such

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as Digital Equipment Corporation,

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which I guess is called Deck and, Davison Rock.

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Um, their model was different.

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So, what they did, they set it up

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with a, as a partnership.

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So the venture capitalists, in this case, Davison Rock,

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they would invest in the company

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and everyone will get shares at the time of investment.

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But the shares were, you know, essentially worthless so

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that, you didn't get taxed on them by the IRS.

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And no one really got paid anything until the company,

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was floated or sold to another company.

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And normally that would take somewhere

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between seven and 12 years.

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That's how long, their contracts, were.

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Now General George Dero, he paid the experts salaries.

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And the problem was, is that

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if you're a sharp person, ID someone suited to,

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do business in venture capital,

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you could make well in today's dollars, billions, as opposed

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to making millions in a corporation, you know,

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as an employee of a corporation, say a vice president

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or some kind of manager.

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So the Davison Rock model is the one that,

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succeeded often economics,

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that's called second mover advantage.

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They align the incentives

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because if the entrepreneur didn't

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work, no one would get anything.

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And if the venture capitalist didn't

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work, no one would get anything.

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'cause you couldn't float the company

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or sell it to someone else.

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Um, so it was very, I think a very smart move.

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So in economics, we have theories of contracting

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and there's a branch called Dynamic Contracting,

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and that's called back loading, but economics

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and the theory of Dynamic contract,

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and they develop mathematical models.

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And it's really interesting is

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that these mathematical models say

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that you should pay people at the end.

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So the typical model in economics might be, you know,

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you hire someone maybe,

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like they're an entrepreneur,

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but you're worried about that they're not gonna put any

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effort in, and you can't observe how much effort you put in.

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So they might be telling you everything's, you know,

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moving along just smoothly,

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but perhaps they're not doing anything

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or, you know, perhaps,

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they're siphoning off the money you, invested in them,

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you know, into other things like holding, big parties,

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which often startups do, you know, are, you know,

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flying private jets around the world.

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There's lots of stories of that.

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And so contracting theory would say to avoid

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that you wouldn't really be paying, you know,

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people maybe just, how would I say, a salary

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so they could live, you know?

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'cause if you're an entrepreneur, maybe, you,

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you know, you need money to sort of live

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and maybe if, your venture capitalist,

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you would actually need some kind of salary to live too.

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But these wouldn't be exorbitant.

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And then, the main payoff would be when the two,

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you know, when there was a success,

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and then that would be divided up between the two parties,

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entrepreneur or venture capitalists, depending on

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what the contract they had signed.

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So in modern Data, venture capitalists might take 55%.

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Oh, yeah. Massive, isn't it?

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Uh, let's get to the regulatory changes then.

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Um, how,

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what regulator changes have influenced venture capital

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investments, especially with regard to pension funds?

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Well, so the question, I guess the big question here is,

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why don't banks do it?

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And the Glass Stegel Act, which is in 1993,

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it prohibited banks from undertaking risky investments.

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And even, you know, today, you know,

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bankers don't really like to do, you know, risky investments

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'cause they want keep their depositors,

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money safe in their, in the bank.

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Um, so the Black Glass Segal Act was actually repealed in

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1999, but still, banks are wor, you know, worry about,

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undertaking risk investments.

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The other thing that, limited investments was,

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the Employment Retirement Income Security Act.

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That was in 1974.

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And that was, you know, essentially the same thing saying

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that you couldn't invest, retirement funds in, you know,

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really risky ventures that was reinterpreted in 1979.

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And so, you know, for instance, my retirement fund,

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maybe yours too, you, you could definitely, you know,

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invest, say in an index fund.

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Uh, but they, you know, I, I'm not sure, I didn't check,

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but I don't think at Penn I could invest in,

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for instance, in gold.

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Uh, so

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that opened the door for venture capitalists to, you know,

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get huge amounts of money.

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And, there's general partners and limited partners.

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So the general partners would be,

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say someone like Davison Rock, they would be actively

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involved in managing the venture and, you know, have a vote.

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And then limited partners,

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these would be hands-off investors

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and they wouldn't really, have any, you know,

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active, role in running the enterprise.

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And then they would decide how much,

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each party would get according to the contract.

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There's a very kind of interesting quote from,

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bill Gates when he was starting Microsoft.

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And this quote, basically said, essentially,

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I really didn't need any money.

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I needed the advice.

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And so, you know,

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economists are very interested in the synergy effect,

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between a venture capitalist and, the entrepreneur.

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So, you know, entrepreneurs, they might not know,

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I'm gonna say relatively simple things like

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how would I incorporate my business?

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How do I file for a patent? Should I file for a patent?

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How do I, you know, advertise, you know, just,

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and these are things that, you know, venture capitalists,

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would have a lot of, you know, expertise on.

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And so they lend their expertise,

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you know, to the startup.

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'cause some of these startups, especially venture

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capitalists, you know, like to get in very early.

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So we're talking, I was gonna tell you the facts in a

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second, but we're talking about incredibly small companies,

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you know, like, to use the phrase, maybe some

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of them are garage inventors.

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So they're, you know, they know their own invention really

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well, but they're not really suited to commercializing it.

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And, and, so I,

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and I think in venture capitalist, I'm,

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it was a few years ago since I looked at these statistics,

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but, half of 'em have either a PhD or an MBA.

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Uh, so they're, you know, incredibly,

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specialized.

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And actually a large chunk

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of them come from two business schools, Harvard

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and Stanford business schools, you know, so they're,

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you know, very skilled people

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and often they're skilled in particular, industries.

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So for instance, you know, the two industries

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historically invested in would be computers

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and then, you know, medical industries

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and some of the computer venture capitalists, you know,

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tried to undertake investments in the medical sector,

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but that didn't go very well.

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'cause they didn't really have the expertise in medicine,

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you know, to evaluate what are,

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you know, good inventions

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or, you know, good innovations in medicine.

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And so some of my graduate students, one actually,

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he had a wife that was doing an MD PhD at Penn

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Penza taught medical school.

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And he was telling me she was worried

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that her advisor would never, would not be at Penn anymore,

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because when your research grants run out

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and the medical schools give you maybe five years

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to get another research grant,

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and then you would have to go to the private sector.

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So I was asking him, well, how long you know,

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would you have, he's telling me

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like probably four or five years.

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But he was telling me, you know, venture

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capital firms in, the medical sector,

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they're already very interested in hiring her right away.

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'cause, you know, they know how this works.

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Like, fortunately for my student's wife,

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she did get a big research grant

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and, she still, you know, employed at Penn.

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But, you know, these, they are, they hire very,

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you know, specialized people.

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Um, and so banks really don't have that expertise.

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Like, you know, a bank wouldn't have someone

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that would be a PhD, MD in medicine on their staff,

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you know, so banks are more suited to,

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you know, if I told you them I wanna take a loan for a car,

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they would know how many people in my income class

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default on a loan for a car given my credit rating.

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Uh, you know,

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or same if I was setting up a restaurant, they would

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understand exactly, you know, the restaurant business.

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'cause they probably lent to millions

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of restaurants if you take.

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And, and, but what they're not so good at, at evaluating,

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if it's something they've never really seen

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before, businesses that are financed

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by venture capitalists do better than businesses

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that finance by angel investors, which in turn tend

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to do better than, you know, businesses that,

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you know, are, you know, are financed by banks.

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And they're probably like, the problem

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for economists is they're not exactly the

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same type of businesses.

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So I was going to say, so if you look at a,

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so VC businesses, they're four times more likely

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to invest in high tech firms, say than a bank.

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And so these would be using census data, ai,

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additive manufacturing, that's 3D printing,

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distributed ledgers, RFID,

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that's radio frequency identification.

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Like when you go in a parking lot and the gate opens

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'cause it sees your card right away, robotics

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and then cloud, computing.

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So what do we know? So a VC backed firm, if it's less than

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three years old, would have eight employees.

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'cause they go in really early. But

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after 11 plus years, it would've grown on average

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to 3000 employees.

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Now, the of, now this is only

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probably 0.07% of firms in the economy would be

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VC backed high tech firms.

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Um, and such firms would have, VC-backed firms.

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They would probably have 27% of patents, which,

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you know, given their tiny fraction,

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the economy is like an astounding success.

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Now, the non VC-backed non-high tech firms,

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they would grow from six employees.

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So at the start, they'd have roughly the same number

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of employees, and they grow to only 21 employees.

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And these firms make up 45% of the economy.

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So the modal firm in the American economy

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is never gonna grow.

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And in fact, there's a famous paper by two economists, Hurst

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and Pugley, where they looked at survey questions

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and you know, the average entrepreneur says he doesn't even

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want his firm to grow.

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Maybe he's a landscaper or a restaurant, worker,

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or a plumber or an electrician.

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So it's not even, you know, in their goals.

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Um, so there's a bunch

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of public policy questions I think that,

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come out of this.

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So venture capitalists, they, set their firms up

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as C corporations

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and when they're floated, they're taxed at the,

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corporate income tax rate.

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And the venture capitalists, under the Davis

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and Rock model, when they float the company, then they get,

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you know, the profits from the sale

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and that's taxed at the capital gains tax rate.

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So in the US the corporate income tax rate is 21%,

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and the capital gains tax rate is 20%.

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I gotta just, check my notes here for a sec.

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So that's effectively a 37% tax

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rate on a startup.

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Okay? So I'm gonna give you an example here.

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So Kamala Harris, she wanted

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to increase the corporate income tax rate to 28%

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and the capital gains tax rate to 28%.

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This is according to the National Tax Foundation, which is a

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supposedly nonpartisan, you know, I can't swear to that.

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So that LE has a 52% leads

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to a 52% tax rate on startups.

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So when we run it through the computers at Penn,

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this would lead to a 9% reduction in employment on

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high tech startups.

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So the question is kind of,

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are you killing the goose at laying the golden egg?

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Uh,

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and you know, you could ask the same,

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a similar question was like, one of your proposals was,

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I'm gonna subsidize all startups,

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but should you, you know, most of them never grow, right?

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They say, there's the, the, the modal firm only grows

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to 21 employees.

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Uh, should you like subsidize high tech startups?

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Like, I don't have the answer to this question,

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but these are the types of public policy questions

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that arise and people that looked at the international data,

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they see a strong correlation between a country's tax rates

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and, I,

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and the level of,

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VC investment relative to GDP.

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So I don't know the number for the UK unfortunately,

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but there's no VC investment to speak of in,

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Italy and accountants claim

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that their tax rate on the startup would be 70%.

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Uh, so, you know, the question is,

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is does Italy not have venture capital?

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Because the return on it isn't the same

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as it is in the us.

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You know, the three biggest countries,

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the absolute size would be the US and actually China.

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But, you know, in proportionate size,

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Israel's pretty successful too,

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but, you know, Israel's a small country,

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so I can't have the volume.

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I think when people think about capital gains taxation,

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I think maybe they're thinking about

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traders on Wall Street making money for nothing,

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but they really forget that, startups,

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are taxed according to the capital gains

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and corporate income tax rate.

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And so it might kill innovation

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or have a, a dissuading, you know,

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effect on innovation.

Origins of Venture Capital: The Impact of General George Duro

00:00:00 - I think the, the start of it was in, in the late, 1950s, there was a person called General George Duro, and he started a company called American Research and Development, and that was probably the first venture capital company. And they invested in, digital equipment corporations. They invested, $70,000 in 1956, and he got a 70% share of, digital equipment corporation. And in 1966, that was worth 38 million.

00:00:38 - in, you know, an early computer company, and they made many computers. And so if you're at a university in the seventies and the eighties, when I was starting, for instance, there were these, mini computers that universities had that you could run your programs through. And, so people saw the success of him and they were interested in duplicating it.

00:01:07 - 'cause two lawyers, Davis and Rock started a venture capital company and they structured it differently than, general George Dero. They set it up as a partnership general, do George Dero, he ran it more like a business, say like a bank. And he hired the experts, said you would need to go around and evaluate companies such as Digital Equipment Corporation, which I guess is called Deck and, Davison Rock.

Venture Capital Partnerships and Dynamic Contracting

00:01:36 - So, what they did, they set it up with a, as a partnership. So the venture capitalists, in this case, Davison Rock, they would invest in the company and everyone will get shares at the time of investment. But the shares were, you know, essentially worthless so that, you didn't get taxed on them by the IRS. And no one really got paid anything until the company, was floated or sold to another company. And normally that would take somewhere

00:02:06 - That's how long, their contracts, were. Now General George Dero, he paid the experts salaries. And the problem was, is that if you're a sharp person, ID someone suited to, do business in venture capital, you could make well in today's dollars, billions, as opposed to making millions in a corporation, you know, as an employee of a corporation, say a vice president or some kind of manager.

00:02:42 - succeeded often economics, that's called second mover advantage. They align the incentives because if the entrepreneur didn't work, no one would get anything. And if the venture capitalist didn't work, no one would get anything. 'cause you couldn't float the company or sell it to someone else. so it was very, I think a very smart move. So in economics, we have theories of contracting and there's a branch called Dynamic Contracting,

Dynamic Contracting and Performance Incentives in Venture Capital

00:03:12 - and the theory of Dynamic contract, and they develop mathematical models. And it's really interesting is that these mathematical models say that you should pay people at the end. So the typical model in economics might be, you know, you hire someone maybe, like they're an entrepreneur, but you're worried about that they're not gonna put any effort in, and you can't observe how much effort you put in. So they might be telling you everything's, you know, moving along just smoothly,

00:03:43 - or, you know, perhaps, they're siphoning off the money you, invested in them, you know, into other things like holding, big parties, which often startups do, you know, are, you know, flying private jets around the world. There's lots of stories of that. And so contracting theory would say to avoid that you wouldn't really be paying, you know, people maybe just, how would I say, a salary

00:04:13 - 'cause if you're an entrepreneur, maybe, you, you know, you need money to sort of live and maybe if, your venture capitalist, you would actually need some kind of salary to live too. But these wouldn't be exorbitant. And then, the main payoff would be when the two, you know, when there was a success, and then that would be divided up between the two parties, entrepreneur or venture capitalists, depending on what the contract they had signed. So in modern Data, venture capitalists might take 55%.

Regulatory Influences on Venture Capital and Banking Risks

00:04:47 - let's get to the regulatory changes then. how, what regulator changes have influenced venture capital investments, especially with regard to pension funds? Well, so the question, I guess the big question here is, why don't banks do it? And the Glass Stegel Act, which is in 1993, it prohibited banks from undertaking risky investments. And even, you know, today, you know, bankers don't really like to do, you know, risky investments

00:05:19 - money safe in their, in the bank. so the Black Glass Segal Act was actually repealed in 1999, but still, banks are wor, you know, worry about, undertaking risk investments. The other thing that, limited investments was, the Employment Retirement Income Security Act. That was in 1974. And that was, you know, essentially the same thing saying that you couldn't invest, retirement funds in, you know,

00:05:52 - And so, you know, for instance, my retirement fund, maybe yours too, you, you could definitely, you know, invest, say in an index fund. but they, you know, I, I'm not sure, I didn't check, but I don't think at Penn I could invest in, for instance, in gold. so that opened the door for venture capitalists to, you know,

Roles of General and Limited Partners in Venture Capital

00:06:22 - And, there's general partners and limited partners. So the general partners would be, say someone like Davison Rock, they would be actively involved in managing the venture and, you know, have a vote. And then limited partners, these would be hands-off investors and they wouldn't really, have any, you know, active, role in running the enterprise. And then they would decide how much, each party would get according to the contract.

00:06:55 - bill Gates when he was starting Microsoft. And this quote, basically said, essentially, I really didn't need any money. I needed the advice. And so, you know, economists are very interested in the synergy effect, between a venture capitalist and, the entrepreneur. So, you know, entrepreneurs, they might not know, I'm gonna say relatively simple things like

00:07:25 - How do I file for a patent? Should I file for a patent? How do I, you know, advertise, you know, just, and these are things that, you know, venture capitalists, would have a lot of, you know, expertise on. And so they lend their expertise, you know, to the startup. 'cause some of these startups, especially venture capitalists, you know, like to get in very early. So we're talking, I was gonna tell you the facts in a second, but we're talking about incredibly small companies,

Venture Capitalists: Expertise and Challenges in Innovation

00:07:58 - of them are garage inventors. So they're, you know, they know their own invention really well, but they're not really suited to commercializing it. And, and, so I, and I think in venture capitalist, I'm, it was a few years ago since I looked at these statistics, but, half of 'em have either a PhD or an MBA. so they're, you know, incredibly,

00:08:27 - And actually a large chunk of them come from two business schools, Harvard and Stanford business schools, you know, so they're, you know, very skilled people and often they're skilled in particular, industries. So for instance, you know, the two industries historically invested in would be computers and then, you know, medical industries and some of the computer venture capitalists, you know,

00:09:01 - but that didn't go very well. 'cause they didn't really have the expertise in medicine, you know, to evaluate what are, you know, good inventions or, you know, good innovations in medicine. And so some of my graduate students, one actually, he had a wife that was doing an MD PhD at Penn Penza taught medical school. And he was telling me she was worried that her advisor would never, would not be at Penn anymore,

Venture Capital in the Medical Sector: Opportunities and Expertise

00:09:33 - and the medical schools give you maybe five years to get another research grant, and then you would have to go to the private sector. So I was asking him, well, how long you know, would you have, he's telling me like probably four or five years. But he was telling me, you know, venture capital firms in, the medical sector, they're already very interested in hiring her right away.

00:10:02 - Like, fortunately for my student's wife, she did get a big research grant and, she still, you know, employed at Penn. But, you know, these, they are, they hire very, you know, specialized people. and so banks really don't have that expertise. Like, you know, a bank wouldn't have someone that would be a PhD, MD in medicine on their staff, you know, so banks are more suited to,

00:10:34 - they would know how many people in my income class default on a loan for a car given my credit rating. you know, or same if I was setting up a restaurant, they would understand exactly, you know, the restaurant business. 'cause they probably lent to millions of restaurants if you take. And, and, but what they're not so good at, at evaluating, if it's something they've never really seen before, businesses that are financed

Venture Capital's Impact on High-Tech Firms

00:11:06 - that finance by angel investors, which in turn tend to do better than, you know, businesses that, you know, are, you know, are financed by banks. And they're probably like, the problem for economists is they're not exactly the same type of businesses. So I was going to say, so if you look at a, so VC businesses, they're four times more likely to invest in high tech firms, say than a bank.

00:11:39 - additive manufacturing, that's 3D printing, distributed ledgers, RFID, that's radio frequency identification. Like when you go in a parking lot and the gate opens 'cause it sees your card right away, robotics and then cloud, computing. So what do we know? So a VC backed firm, if it's less than three years old, would have eight employees.

00:12:09 - after 11 plus years, it would've grown on average to 3000 employees. Now, the of, now this is only probably 0.07% of firms in the economy would be VC backed high tech firms. and such firms would have, VC-backed firms. They would probably have 27% of patents, which,

Venture Capital's Impact on Firm Growth and Economic Policy

00:12:39 - the economy is like an astounding success. Now, the non VC-backed non-high tech firms, they would grow from six employees. So at the start, they'd have roughly the same number of employees, and they grow to only 21 employees. And these firms make up 45% of the economy. So the modal firm in the American economy is never gonna grow. And in fact, there's a famous paper by two economists, Hurst and Pugley, where they looked at survey questions

00:13:13 - want his firm to grow. Maybe he's a landscaper or a restaurant, worker, or a plumber or an electrician. So it's not even, you know, in their goals. so there's a bunch of public policy questions I think that, come out of this. So venture capitalists, they, set their firms up as C corporations

00:13:45 - corporate income tax rate. And the venture capitalists, under the Davis and Rock model, when they float the company, then they get, you know, the profits from the sale and that's taxed at the capital gains tax rate. So in the US the corporate income tax rate is 21%, and the capital gains tax rate is 20%. I gotta just, check my notes here for a sec. So that's effectively a 37% tax

Impact of Tax Rates on Startups and VC Investment

00:14:14 - Okay? So I'm gonna give you an example here. So Kamala Harris, she wanted to increase the corporate income tax rate to 28% and the capital gains tax rate to 28%. This is according to the National Tax Foundation, which is a supposedly nonpartisan, you know, I can't swear to that. So that LE has a 52% leads to a 52% tax rate on startups.

00:14:47 - this would lead to a 9% reduction in employment on high tech startups. So the question is kind of, are you killing the goose at laying the golden egg? and you know, you could ask the same, a similar question was like, one of your proposals was, I'm gonna subsidize all startups, but should you, you know, most of them never grow, right? They say, there's the, the, the modal firm only grows

00:15:16 - should you like subsidize high tech startups? Like, I don't have the answer to this question, but these are the types of public policy questions that arise and people that looked at the international data, they see a strong correlation between a country's tax rates and, I, and the level of, VC investment relative to GDP. So I don't know the number for the UK unfortunately, but there's no VC investment to speak of in,

Impact of Taxation on Venture Capital and Innovation

00:15:50 - that their tax rate on the startup would be 70%. so, you know, the question is, is does Italy not have venture capital? Because the return on it isn't the same as it is in the us. You know, the three biggest countries, the absolute size would be the US and actually China. But, you know, in proportionate size, Israel's pretty successful too, but, you know, Israel's a small country,

00:16:47 - I think when people think about capital gains taxation, I think maybe they're thinking about traders on Wall Street making money for nothing, but they really forget that, startups, are taxed according to the capital gains and corporate income tax rate. And so it might kill innovation or have a, a dissuading, you know, effect on innovation.

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