Jon StojanUS tax and regulatory policy has historically affected the venture capital (VC) industry, which flourished under former President Ronald Reagan’s tax cuts and deregulation efforts and helped to create a favorable environment for entrepreneurs and investors.
During the 1990s, the Clinton administration worked with a Republican Congress to reduce the capital gains tax and overhauled stifling telecommunications laws to allow for competition in the emerging Internet space, and as a result, VC investments fueled the massive expansion of the Internet and technology sectors. Meanwhile, between 2008 and 2016, the Obama administration supported various startup initiatives and innovation through government-backed programs, which simplified the process for small businesses to raise capital.
As the 2024 US election approaches, venture capitalists and startups are bracing for policy changes that might shape the future of the VC industry. According to Aman Verjee, the Managing Partner and Co-founder of Practical Venture Capital (PVC), one of the areas that could change under a new administration is tax reform. Former President Donald Trump would like to extend his signature tax legislation, the Tax Cuts and Jobs Act, which lowered the tax rate on corporations from 35 to 21 percent, and to further reduce business taxes. His opponent, Vice President Kamala Harris, has proposed an increase to the corporate tax back to 28 percent, as well as increases in capital taxes. She initially supported President Biden’s proposal to increase the capital gains tax rate to as high as 44.6 percent and to tax “unrealized” gains at 25 percent for some investors.
Carried interest or capital gains for taxation purposes could be revised. Carried interest is the share of profits that VCs receive from successful investments. It’s currently taxed at the long-term capital gains rate, which is lower than ordinary income tax.
Verjee points out that both President Trump and Vice President Harris have, in the past, pushed to eliminate this favorable tax treatment. This would increase the tax burden on venture capitalists and potentially slow investment, stifling innovation in early-stage companies. But more recently, both sides have downplayed that position and focused more on tax relief.
Verjee’s vast background and experience as an entrepreneur, investor, and advisor to high-growth startups have also allowed him to identify regulatory policy, especially around cryptocurrencies, as another area of focus. Depending on the outcome of the election, there might be a lighter regulatory approach that would enable VCs to invest more freely in crypto-related startups. Conversely, there might be an enforcement of stricter oversight, which would limit the sector’s growth.
In addition, the Silicon Valley veteran sees artificial intelligence (AI) as one of the most exciting and complex frontiers for venture capital. “Many venture capital firms are optimistic and aggressively investing in AI,” Verjee remarks. “Many others are waiting for the AI landscape to mature before making substantial investments. This is understandable because the business models surrounding AI are unclear even today.”
The upcoming election could influence the direction of AI regulation. The new administration, if concerned about issues such as bias in AI algorithms or the impact of automation on jobs, can push for more oversight. The contrary could also happen. A more hands-off approach might be encouraged, allowing the market to dictate AI’s growth trajectory. Regardless, VCs must navigate these uncertainties while identifying the startups that have the potential to become the next Google or Amazon.
Verjee warns venture capitalists about the potential challenges that could reshape the industry. He states that raising capital will become more difficult as interest rates remain high and the economy slows. Verjee also points out that Pres. Trump’s proposed tariffs would probably be more inflationary than Vice Pres. Harris.
His advice to emerging managers is to focus on finding niche opportunities. “It can be in late-stage startups, emerging markets like Latin America, or in sectors like AI where there’s massive growth potential,” he advises. “You can’t be a generalist in this market. You have to find an edge.”
The industry expert suggests strategies. VCs must be selective in their investments. This means focusing on profitable companies with a sustainable business model. Second, they should consider secondary transactions to capitalize on the current market conditions. “There’s a lot of opportunity in the secondary market right now, especially as valuations have come down in later-stage companies,” Verjee notes. Practical Venture Capital is an ideal partner for those seeking to generate liquidity within 18 to 24 months instead of 10 to 15 years. It champions a “skip the J-curve” approach, which allows investors to receive faster and more predictable returns by bypassing the early high-risk stage.
Lastly, venture capitalists must stay informed about regulatory changes, whether changes to the accredited investor rules, new taxes on capital gains, or increased regulation of emerging technologies, and be prepared to adapt. With the upcoming US election, doing so would ensure continued success in the VC world.