Like everyone who has looked at the issue of immigration, I came to the conclusion long ago that it is a broken and outdated system. Just consider that every H1-B visa is snapped up within 12 hours of becoming available and you see how not only demand outstrips supply but an industry has grown up around a flawed system for the sole intention of gaming it for profit.
Pascal-Emmanuel Gobry wrote a piece in Business Insider today that highlights a move by some influential VCs (who also have political clout) to enact a Startup Visa Act that would provide foreign entrepreneurs who receive a minimum amount of funding and hire a minimum number of employees a visa that would convert to a “green card” in two years.
Before I get to Pascal-Emmanuel’s article, let’s cover the basics.
The visa that this act would empower isn’t new either, it is the EB-5 visa for foreign investors who commit at least $500k of capital and create 10 jobs according to a complex matrix of “allowed activities” dependent on whatever regional center the investment is located in. Presumably the Startup Visa Act would create a new EB-6 visa that mimics the EB-5 (even takes the allocation) and reduces the required initial investment to $250k and number of full time jobs to 5. Over a 2 year period beginning with the date of visa issuance the entrepreneur has to create 5 full time jobs, raise an additional $1m in investment capital or generate $1m in revenue.
Reading the text of the bill it is clear that this bill:
- takes existing visa and allocates them for the startup visa program
- defines “super angels” as an accredited investors (yes this is a defined category of investor, look it up on the SEC site, who makes at least 2 minimum $50k investments every 3 years and is a U.S. citizen. Venture capital operating companies are also defined according to existing standards but in order to qualify the fund must be based in the U.S. and be comprised of a majority of partners who are U.S. citizens, have capital commitments of $10m and have been operating for 2 years with actual investments in that period.
- After 3 years if the conditions of the program are not met the visa, called “conditional permanent resident status”, will be revoked. BTW, it seems like a contradiction in terms to have a conditional permanent resident status… why not just call it what it is, a visa. It’s supposed to be a 2 year time period but the text of the bill explicitly says after 3 year the visa will be revoked if the requirements are not met.
- It is not clear if the 5 required full time jobs also includes the founding entrepreneur(s).
The bill is a welcome 7 pages long but the brevity, while making for easy reading, also opens it up for potential abuses and Gobry actually has some very good points here. I will also take a moment to submit that the whole exercise of legislative sausage making is incremental and there’s no way this bill would proceed through committee, get voted on and signed into law with 7 pages of text… so let’s assume that I’m not breaking any new ground or discovery here.
Gobry’s primary criticism is that the bill makes entrepreneurs a servant of the investor and on that point I agree. I can’t imagine a situation primed for more potential abuse than one where the entrepreneur is dependent not only for funding from a VC but also residency in this country, a dream of many foreign entrepreneurs despite the state of our economy. While $1.25 dollars is a modest amount of capital, for a seed stage company it is a good sized amount of capital and likely to be allocated not at once but over time as the entrepreneur progresses in planning and execution.
Under this legislation, as the entrepreneur burns his timeline not only is he/she dealing with the pressures of business survival but the threat of deportation that depends solely on whether or not their investors will release more capital when needed. Can you imagine how those discussions would transpire?
Another potential problem with this is what happens if the venture firm ceases to exist (it happens all the time to $10m’ish sized funds) over that 3 year period and in the process of disappearing fails to meet the funding requirements of the business? What happens is deportation.
The only “out” for foreign entrepreneurs to get out from under the thumb of investors when operating with conditional permanent resident status is to race to $1m in revenue over the 3 year period (the bill does NOT say annual revenue), in which case they have satisfied the requirements of the program assuming they have also employed 5 people who are not relatives.
The single minded focus on revenue rather than sustainability is another area ripe for abuse and fraud, only in this case it’s not just the integrity of the visa program at stake but also investors. While it is arguable that the incentives are overwhelming for investors to keep things honest, the fact remains that what qualifies as disclosure in private companies is subject to a lot of interpretation.
Lastly, as Goby points out, there is nothing in this bill that requires the entrepreneurs and investors to be focused on technology sectors… as opposed to real estate or automotive painting or whatever. I could foresee a scenario where this program is used by U.S. investors to establish companies onshore with cheap offshore entrepreneurs in exchange for green cards… again it empowers investors to turn foreign nationals into indentured servants.
So where do I stand on this? Well from my reading the initial bill is pretty weak and has few guarantees that the aspirations of professional and reputable investors like Fred WIlson, Paul Graham, and Brad Feld will be met. The weakness is not only in the provisions of the act but in the fact that is will draw on a limited allocation of visas which all but ensures that a legal specialty industry will attach itself to it like a parasite for the sole purpose of selling off access to the visa program. Basically we’ll end up right back where we started.
All of the weakness that I, and others, have identified are not reasons to kill the bill; what they should do is go back and address these weaknesses with draft language that passes muster and puts reasonable checks and balances in place that ensures the intentions of lawmakers and investors are being met.
Why do I call this a “well intentioned bad idea”? I know the investors who are pushing this and I know their intentions are honest, they want to fix a problem that impacts foreign entrepreneurs who would otherwise be welcome in the U.S. and available for U.S. venture capital. It’s a bad idea because it doubles down on the existing visa system that is plagued with so many problems… and because it operates under the constraints of a limited supply visa allocation it is going to be gamed by lawyers and that will increase the costs and lock out smaller funds who would otherwise be ideal participants in such a program. As it is written now, the big VC funds would have all of these visas locked up within hours of the allocations being made.
(Cross-posted @ Venture Chronicles)
You are right, this is just or more abusable than the H1B!
Employers can legally discriminate against qualified Americans by firing them without cause and recruiting only H-1B guest-workers to replace them. The U.S. Department of Labor (DOL) has said: “H-1B workers may be hired even when a qualified U.S. worker wants the job, and a U.S. worker can be displaced from the job in favor of a foreign worker.” Some companies that discriminate against American workers are so brazen that their job advertisements say “H-1B visa holders only.” And some companies in the United States have workforces that consist almost entirely of H-1B guest-workers.
“I know the investors who are pushing this and I know their intentions are honest…”
These investors have repeatedly called this a “grassroots” movement. Grassroots Venture Capitalists? Give me a break!
So their intentions are honest, but their actions are deceit and misrepresentation?
The lobbying and donations that put them in the top 100 contributors of various politicians leave their honesty in question.
Get the American investors out of the picture and this Bill would have some merit. Churning around US dollars through this scheme will not add wealth to the US Economy. Foreign investment, on the other hand, would have immediate impact. And don’t give away the store with tax breaks as the US VCs are anticipating. These Visas and starting up in the US has value. Exploit that fact and not exploit the “immigrant entrepreneurs”. US VCs have plenty of opportunities to invest in American entrepreneurs and our startups. Maybe not with the same excessive ROI as they could get by playing the immigrants.
This is the right thing to do.