MSGI Congressional Hearing Recap - House Small Business Committee Hearing "Innovation as a Catalyst for New Jobs: SBA’s Innovation Initiatives"

 MSGI Congressional Recap

Hearing Title: Innovation as a Catalyst for New Jobs: SBA’s Innovation Initiatives

Committee: House Small Business Committee, Subcommittee on Economic Growth, Tax, and Capital Access

Chair: Rep. Sharice Davids (D-KS)

Ranking Member: Rep. Dan Meuser (R-PA)

Date: July 14, 2021

Witnesses

Mr. E. LaVerne Epp
Executive Chair
KU Innovation Park
Testimony

Mr. Benjamin Robert Johnson
Chairman
Innovation Advocacy Council
Testimony

Dr. Gabriel R. Burks
Vice President and Head of Research and Development
FrostDefense Envirotech Inc.
Testimony 

Mr. Jeffrey Maguire
Managing Partner and Co-Founder
Clearly Clean Products, LLC
Testimony

Main Points of Discussion

Growth Accelerator Fund Challenge and Regional Innovation Clusters

• Chair Davids (D-KS) Questions:
• Dr. Burks, what was your experience participating in a growth accelerator? How did it impact your business long-term? 
• Response: It has been a tremendous experience, lots of professionals and resources available. They host events that are in line with early-stage development. We can interact with other companies to build relationships. 
• Mr. Johnson, from your perspective, you spend a decent amount of time talking about a robust regional ecosystem, is there anything else you would like to add?
• Response: Each region is unique, programs like regional innovation clusters allow regions to define what their strength is, it is not one size fits all. We can bring this to rural communities and better engage women and minorities that are left behind. 

Access to Capital

• Chair Davids (D-KS) Question:
• Mr. Epps, venture capital funding is centralized. What approach have you taken to address this challenge?
• Response: We try to cluster investors, like small cluster groups. However, a shortage of capital is a problem for us. An incentive for venture fund capital investment would be very helpful. 
• Rep. Newman (D-IL) Question: 
• Dr. Burks and Mr. Johnson, getting the right people in the right jobs is critical, what if we extended the Community Navigator Pilot Program? Where incubators and business groups could get funding to give companies expertise in specific areas. 
• Response from Dr. Burks: I think that kind of supplement would be tremendous.  
• Response from Mr. Johnson: I think that model is promising for people to connect with SBA resources. For us, the Regional Innovation Cluster was that hub. Bringing additional resources to the Regional Innovation Cluster program is a unique opportunity. 
• Rep. Chu (D-CA) Question:
• I have reintroduced the Investing in Main Street Act, H.R. 4256, that will allow a bank or federal savings association to invest up to 15% of their capital and surplus in SBICs. Mr. Epp, SBICs are backed by SBA and last year they made 1/4 of their investments to underserved businesses. What is the importance of private investment in startups and how can SBIC's help them grow and succeed?
• Response: Small company investors are always looking for match funding, they often don’t want to be the first in. This type of funding “opens the floodgates.” 
• Mr. Johnson, I have also introduced the PROGRESS Act, H.R. 2680, that will create two new tax incentives to address the disparity of women obtaining capital to start a business. Could you talk about how incentivizing third party investment into the smallest of businesses can improve their outcomes? 
• Response: We see the hurdles of hiring the first employee as the main challenge. Anything that can help bring on a hire is important. 
• Rep. Evans (D-PA) Question:
• Dr. Burks, access to capital is a persistent issue for entrepreneurs, particularly for black businesses and women. What types of funding have you used?
• Response: We have used the University of Illinois, the National Science Foundation (NSF) SBIR Program, the Illinois Incubator, and we have gotten investment from private vineyards. This has funded a multitude of things. 
• How does this work? 
• Response: The incubator recognized our idea as having potential. From there, you continue to grow and apply for other funding. If you get the NSF SBIR, you can use that funding to further develop your efforts. The incubator is supposed to give you the support you need so eventually you can leave and become a self-sustaining business.

Taxes and the Current Economy

• Ranking Member Meuser (R-PA) Questions:
• Mr. McGuire, The Tax Cuts and Jobs Act created a more competitive environment for small businesses, what would happen if it was repealed?
• Response: It will impact the amount of money we can reinvest into our expansion. If the tax rates increase, the amount of capital we will have will decrease because the money will go to taxes. 
• The bonus depreciation (which allows for full and immediate expensing of capital investments) is a particular concern to you. How was this advantageous to your company
• Response: We added 5 production lines to our facility, we were able to depreciate the costs against income taxes which allowed us to invest millions of dollars back into our lines and continue to grow our company. The only way to innovate is to have the resources to innovate. Without the tax cuts we would have stopped growing forward. 
• What are your thoughts on patents?
• Response: Patents for small business are very important for growth. 
• Dr. Burks, what is the biggest need for startup companies?
• Response: Biggest challenge is putting an initial team together, assistance early on is important. Also, having flexibility is important. 
• Rep. Young Kim (R-CA) Questions: 
• Mr. Johnson, what would a higher capital tax rate do to early-stage funding? 
• Response: We don’t often hear about tax issues from our entrepreneurs, we hear that they need support - connecting with capital and developing products. The policy environment needs to be two sided, a decrease in regulation as well as developing the entrepreneurial ecosystem.
• Mr. McGuire, would you agree that a higher capital tax rate would put our small businesses at a disadvantage?
• Response: The capital tax rate will affect investment in companies, but it won’t stop it. When you mess with capital gains you will impact small businesses negatively. 
• Mr. McGuire, how will increase in prices or inflation affect you?
• Response: We have seen 15 – 30% increase in raw material costs. 
• Rep. Van Duyne (R-TX) Questions:
• Mr. McGuire, do you think your company’s rapid growth would have been possible today? Is the economic environment today compared to before the pandemic less friendly to business innovation?
• Response: It was easier to hire before the pandemic - we are trying to deal with having the appropriate people. I don’t see the current situation getting better in the next 6 months.
• When you think about the tax proposals coming from this Administration, how would it affect small business capital at large?
• Response: It will be difficult, most small businesses are self-funded. You cannot build a business in an environment with tax increases. 
• Mr. Epp, without sacrificing waste, fraud, or abuse protections, how can we eliminate some of the paperwork for small businesses participating in the innovation programs?
• Response: The accelerator program lacks restrictions and paperwork, and it works very well, we need more of that.