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The Startup Visa: a Boost for Small Business?

Proposed legislation could make it easier for entrepreneurs from other countries to start their businesses in the U.S.
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Two years ago, Brad Feld, managing director of Boulder, Colo.-based venture capital firm The Foundry Group, was working with two companies whose teams included foreign entrepreneurs from Europe and Canada. While the businesses were promising, Feld and his team could not find any applicable visa categories that would allow the entrepreneurs to stay and start their businesses. "The last thing in the world they could do was delay [their launches] and spend a bunch of money trying to jump through a bunch of hoops just to be able to stay here and start their businesses," he says.

After the entrepreneurs left and started their ventures abroad, Feld wrote a blog post about his frustration with the experience and got a great deal of feedback from others who were also unhappy with the current system. Through these conversations, he aligned with his friend David McClure, a San Francisco Bay-area investor, and entrepreneur Eric Ries, author of the popular blog Along with a handful of other entrepreneurs and investors, they created, a group that states that its goal is "to raise awareness and change policy re: the EB-5 visa," which permits foreign nationals who invest at least $1 million into a U.S. startup or existing business and create 10 jobs, or which invest $500,000 in capital investment and create five jobs in economically disadvantaged areas, to obtain permanent resident status, commonly known as a green card.

Last December, Rep. Jared Polis (D-Colo.), introduced the Employment Benefit Act (H.R. 4259), which included reform of the EB-5. In February, Sens. John Kerry (D-Mass.) and Richard G. Lugar (R-Ind.) introduced the Startup Visa Act of 2010 (S. 3029), which focuses solely on EB-5 reform, reallocating a portion of the 10,000 visas allowed annually under the EB-5 category and creating a new EB-6 category for immigrant entrepreneurs. While some of the details of the bills are different, the meat is largely the same: It amends current immigration law, lowering the investment threshold to $250,000 in equity funding from qualified super-angel investors or venture capital firms. According to records from the U.S. Department of State, only 692 EB-5 visas were issued in 2009.

Qualified super-angel investors need to meet certain Securities and Exchange Commission criteria to be an "accredited investor". In addition, the angel investor has to be a U.S. citizen and have made at least two equity investments in the past three years of not less than $50,000 each. Qualified venture capitalists must be U.S.-based VC firms in business for at least two years, and whose partners are primarily U.S. citizens. The firm must have made at least two investments of not less than $500,000 within the past two years. At the end of two years, those immigrant entrepreneurs who employ at least five full-time employees or who have either raised $1 million in new capital or earned $1 million in revenue will be given green cards.

It could be next year by the time the bill sees any sort of real action in Congress, but it's already spurring plenty of discussion both on and off Capitol Hill. Attorney Angelo Paparelli, a partner in the immigration practice of law firm Seyfarth Shaw LLP's Los Angeles office, says the proposed changes would make it possible for entrepreneurs in a wider range of fields to start business under this provision and qualify for citizenship Traditionally, he says, the EB-5 has benefitted entrepreneurs starting retail, hospitality, and commercial construction enterprises. Sectors like technology typically run lean and "don't employ 10 or more employees in the start-up phase," he says. Paparelli also likes that the Startup Visa Act requires investors who have a track record and licensure with the SEC. This may encourage immigration officials, who may not be fully versed in business theory and may reject business proposals they don't understand, to be more lenient in their approvals.

As far as what that means for job creation, it's unclear. When asked for projections, Kerry's spokesperson, Whitney Smith responded in an e-mail: "We don't have specific jobs numbers -- no way to know exactly how successful these new firms would be in terms of jobs." Feld, however, throws down some math, estimating that somewhere between 1,000 and 5,000 companies will qualify each year under the new guidelines -- a broad range, he concedes, but it's hard to know until the bill is passed and applicants start coming in. Each company will need to create five jobs over a two-year period, resulting in a range of 5,000 to 25,000 jobs per year after the first two-year period. Plus, he adds, some of these companies may grow to employ far more people over time.

Not Everyone Loves It
While more than 160 venture capitalists have rallied behind the Kerry-Lugar bill, which Feld and his colleagues helped shape, there is also some opposition to the proposed reforms. A piece published on in March by Paris-based entrepreneur Pascal-Emmanuel Gobry entitled "The Startup Visa Act Must Be Stopped" was widely circulated, and criticized the bill as putting too much power in the hands of investors, while saddling entrepreneurs with too much risk -- not only would their livelihood be at stake should the business fail, but also their residency status. 

Another vocal opponent has been Kim Berry, president of the Programmers Guild, a Summit, N.J.-based professional society of computer programmers, who expresses concerns about stories of mismanagement and corruption in the immigration process, as well as increased competition to American entrepreneurs in a soft venture capital market.

"There's this myth that somehow we need immigrants to do our thinking and our innovation and everything for us," he says. "We have more immigrants in this country than we've every had in our history and our economy is worse than it's ever been in history."

Then there are those who think the bill is a good start, but could use some improvement. Robert Litan, vice president of research and policy at the Ewing Marion Kauffman Foundation, a Kansas City, Mo., foundation that supports entrepreneurship through research, grants and other activities, is one of those voices. Litan calls the Kerry-Lugar bill, "an important first step," but believes it can be improved. Litan calls his option a "true entrepreneur's visa" and suggests that it not be tied to money. He proposes a provisional visa for anyone who wants to start a business in the U.S. Once that business hires at least one non-family member, the entrepreneur earns an extended visa, perhaps for five years. Then, after a threshold of five or 10 employees is reached, the entrepreneur will be awarded a green card. This, he says, spurs the same employment growth without the barrier of attracting significant investment from angels or VCs.

"There are a lot of people who can start businesses without a lot of money," Litan says. He believes requiring people who are outside of the United States to find a six-figure or larger investment limits the pool of applicants to those who already have strong investment sector connections, plus a few "really good computer whizzes or maybe some biotech engineers who have VC contacts," he says.

In addition, Litan would employ a "staged visa" for the approximately 1 million Americans who are here on H-1B visas, which are issued for specialty employment. Litan estimates, based on data from Kauffman and other sources, that an average of 10 percent of those people would start their own businesses if they were able to. "Frankly, that's probably a low number because all the surveys that we have on the Kauffman website plus other surveys that have been done by academics show that immigrants form businesses at considerably higher rates than the native-born Americans," he says. He would also give permanent visas to the 125,000 foreign students who get degrees every year in American schools, expressing concern over foreign students who come to top American colleges and universities, earn degrees, then have to return to their countries of origin to start businesses.

"I know [giving visas to all foreign students] is politically probably not possible. But as a fallback, why not let them stay if they form a business? So, there's your second cohort of people that could stay here and help Americans," he says.

Feld also expresses concerns about such so-called brain drain. He says students who obtain graduate degrees from top universities can go home and find all the information they need about entrepreneurship online -- a phenomenon that didn't exist until recent years.

What's Next
Nothing much is likely to happen with either bill before the mid-term elections, by all accounts. Lugar senior advisor Mark Helmke says that immigration is one of the issues that may be discussed in November's lame-duck session, but also adds that it could be crowded out by other issues and "may become an issue for the next Congress."

But most who tout this bill emphasize the job-creation aspect rather than the political hot potato of immigration reform. Feld, who says there is "no question" that's the less controversial aspect of the bill, is optimistic that this type of reform, either on its own or as part of a broader jobs creation or immigration package, will happen in 2011.

"In 2010, people still want to be in the U.S.," Feld says. "They still want to start their companies here, and they still want to be involved in entrepreneurial communities here. They still want to build lives here. And we should make that easy."