Wednesday, May 28, 2014

Talent > Capital: How regulators can *actually* promote entrepreneurship in Washington State

I'm a firm believer in Brad Feld's ecosystem model of innovation, and -- in addition to my day job as an investor at Founders' Co-op -- also serve as a volunteer board member for the Washington Technology Industry Association and Chair of the City of Seattle's Economic Development Commission.

In both roles, I'm often asked what government can really do to help entrepreneurs.

The first idea that most people outside the entrepreneur community start with is tax policy, on the assumption that entrepreneurs are economic actors and will respond to economic incentives. My response always surprises them:

Startup founders don't give a shit about taxes.

Of course this isn't strictly true. Nobody likes paying taxes, and given a choice we'd always rather pay less than more. But what I mean is that tax policy -- at least at the city and state level -- is such a trivial consideration in the face of the many existential risks an early-stage company faces that it just doesn't rate as an important variable for most entrepreneurs.

So if entrepreneurs don't care about taxes, what do they care about?

The world is currently awash in capital seeking return; to a first approximation, money is not a constraint in the innovation business. What *is* in short supply is the pool of talent with both the elite-level technical skill required to prosecute innovation, and the entrepreneurial + creative capacity to pursue innovation outside the confines of traditional employment.

If talent is the scarce resource, what can government do to increase the supply of talent?

In the (very) long term, the clear answer is to support transformative change at all levels of our education system, from K-12 through college. But that solution -- as critical as it is to our nation's future -- is so long-dated that it simply doesn't factor into the strategic thinking of anyone building a company today (apart from those courageous entrepreneurs that are actually trying to fix education from the outside).

But there is one regulatory change that that has been shown to have a significant positive impact on the availability of high-performing technical talent to the innovation market: invalidating the enforceability of non-compete agreements for departing employees.

California, the highest performing innovation ecosystem on the planet, outlawed noncompete agreements back in 1872. Massachusetts is in the middle of a public debate on the topic, with strong support from Governor Deval Patrick in favor of making a similar change. And recent academic research has provided an increasingly airtight case for the economic benefits of this policy change. Here's an excerpt from the most influential paper on the topic, from Alan Hyde at Rutgers:
"States that do not enforce noncompetes have more startups, venture capital, growth, investment in human capital, and patenting... Enforcing noncompetes also creates social waste of employee talents, as most affected employees are unable to work in their areas of expertise ... The time has come for law to join those states refusing to enforce restrictive covenants, and to restrict employer claims that departing employees will disclose trade secrets."
Washington State -- like California, Massachusetts, New York and Texas -- is one of the few U.S. states with the demonstrated capacity to play a leadership role in the global innovation economy. Unfortunately, Washington State law currently supports the enforceability of non-compete agreements. And our two largest and most important technology leaders -- Amazon and Microsoft -- have demonstrated their willingness to sue departing employees to enforce them.

So the next time someone asks you what the public sector can do to foster innovation, don't let them walk away thinking tax policy is what matters -- remind them that talent, not capital, is the key ingredient in innovation, and ask them to help strike down the enforceability of non-compete agreements in Washington State.