Most people would probably agree that in uncertain economic times, our government should do all it can to avoid causing harm through excessive regulation.
Yet, scores of agencies and thousands of bureaucrats seem undaunted in their quest to overregulate economic activity, even while facing an unprecedented onslaught of lawsuits waged by business and labor advocates.
In this context, the American Edge Project recently released a report on the risks of rising regulatory overreach on venture capital and, in turn, American innovation. The report laments the abandonment of a U.S. regulatory framework that historically fostered growth and encouraged risk-taking and the adoption of stringent regulatory models that discourage investment and innovation.
The report’s bottom line: Stifling venture capital investment through regulatory overreach steals opportunities from Americans and puts the United States at a global disadvantage. Typically coming from private investors, venture capital is a form of financing for small businesses and startups with long-term growth potential. Thousands of business owners and investors rely on venture capital to fuel company growth, promote innovation and maintain financial success.
A Stanford University study showed that 43 percent of the public U.S. companies founded between 1979 and 2013 were venture-capital backed. Venture capital also accounted for 82 percent of the research and development of new public companies.
The regulations noted in the American Edge Project report are associated primarily with American tech policy. In 2023, 65 tech policy changes were enacted nationwide, such as limiting online data and AI legislation. Minnesota passed bills limiting generative AI and imposing audits of “surveillance and data analysis technologies.”
While these policies sound innocuous or beneficial at first blush, research has revealed that they dissuade technology-related venture capital investment.
Overregulation is common in Europe and has discouraged competition and restricted economic growth. Europe enjoys fewer startup and small-business successes. Still, the United States should not be satisfied with having a less oppressive regulatory venture capital environment than Europe.
China’s venture capital ecosystem has grown to the point where its private equity and venture capital market is the second largest in the world. China’s economic growth rates have been much higher than those of the United States and private consumption is expected to double by 2030.
If U.S. policymakers were to overregulate venture capital, China could continue to grow and easily surpass the United States as the world’s economic and technological leader — particularly if China saw the wisdom of reducing its regulatory burdens.
Overregulating tech and other common venture capital-intensive industries would yield dangerous results for small businesses and startups — the backbone of many communities and among the most significant contributors to the U.S. economy. Existing jobs would be threatened, not to mention those that would never materialize under an overregulated venture capital regime.
With fewer regulations, Pennsylvania, Florida and North Carolina are experiencing unprecedented success, underscoring the benefits of a minimally regulated venture capital market. Meanwhile, venture capital volume is down in heavily regulated states, including Minnesota.
A venture capital industry with minimal regulation is critical; policymakers must realize this. By prioritizing a minimally regulated venture capital environment, the United States can continue outperforming its global competitors and strengthening its domestic opportunities.