Venture Capital Industry Urges Senate to Maintain Current Tax Policy for Carried Interest

Kate Mitchell of Scale Venture Partners Substantiates that Venture Capital

Investment Produces Long-Term Capital Gain

    WASHINGTON, July 11 /PRNewswire-USNewswire/ -- Kate Mitchell, a
 National Venture Capital Association (NVCA) board member and managing
 director of Scale Venture Partners in Foster City, California, asserted
 today to the Senate Finance Committee that carried interest paid to venture
 capitalists has always been consistent with capital gains tax philosophy
 and should continue to be recognized as such. Ms. Mitchell, who was invited
 to testify before Congress in response to potential legislation that would
 change the current carried interest tax rate for certain partnerships to an
 ordinary income rate, explained that venture capital investment is a
 long-term, high-risk endeavor that, through both financial investment and
 sweat equity, creates a tremendous amount of sustainable value. This value
 is what Congress had in mind when it enacted current capital gains tax
 policy.
     "As venture investors, our job is to identify and nurture promising
 companies," said Mitchell. "Venture capital is about creating new companies
 and helped launch Google, Microsoft, Genentech, Starbucks, and eBay. While
 these companies are household names today, they were once just ideas put
 forth by entrepreneurs who had not grown a small business before."
     Ms. Mitchell explained that venture capitalists typically receive two
 forms of compensation. The first is a guaranteed management fee which is
 used to pay for firm operations and salaries. This management fee is
 currently taxed at the ordinary income rate. The second is the carried
 interest paid to venture capitalists which typically amounts to 20 percent
 of a fund's total profit. Carried interest is only typically paid after all
 invested capital and all of the management fees have been returned to the
 limited partners. It is never guaranteed and is entirely contingent upon
 successful company exits. Given the nature of carried interest, it has been
 taxed at the capital gains rate.
     Not all venture investments are successful, explained Mitchell, and it
 is often more than a decade before a venture capitalist can realize a
 return on investment. The long-term, high-risk nature of the business
 further supports a capital gains tax treatment.
     "We invest in companies for 5 to 10 years, often longer and rarely
 less," she said. "Many VC-backed companies fail. We dig many dry wells --
 the cost of which is balanced by gains earned from our best investments.
 This balance is critical to support our entire portfolio of hopeful
 start-ups."
     Ms. Mitchell also spent time describing the value of the intangible
 sweat equity which VCs contribute to each of their portfolio companies.
     "VC's are active, providing weekly, sometimes daily, guidance to
 management on everything from prototypes to key hires, from corporate
 governance to intellectual property rights. Venture capitalists make
 intangible contributions to our companies by leveraging our business
 experience and personal networks with customers or business partners. The
 reputation and goodwill that comes with this association is a key that
 opens doors which would otherwise remain closed to a start-up and is a
 catalyst to the value that is being created," added Mitchell.
     Finally, Mitchell warned that a change to the tax code could upset the
 delicate balance that has created a unique entrepreneurial culture in the
 US and allowed our country to outperform other economies.
     "In the last several years, we have begun to see the US venture model
 exported to developing countries who have witnessed how venture capital has
 benefited the US economy. They are becoming aggressive in attracting these
 talents to their shores. The game is ours to lose," she concluded.
     NVCA president Mark Heesen believes that Congress recognizes the long
 term value of venture capital investment as well as the harmful
 implications associated with changing the tax code.
     "Carried interest distributed to venture capitalists is not a tax
 scheme or loophole. It is a true capital gain and has been appropriately
 recognized as such for years," said Heesen. "It is a critical incentive for
 our industry to continue to invest in and nurture companies over the long
 term horizon. Venture capital has created more than 10 million jobs and $2
 trillion in revenues for the US economy. We commend Congress for
 understanding this unique dynamic in the past and ask them to support this
 economic engine in the future."
     To view Kate Mitchell's full testimony, please visit:
 http://www.nvca.org/pdf/KMitchell_testimony-7-11-07.pdf
     The National Venture Capital Association (NVCA) represents
 approximately 480 venture capital and private equity firms. NVCA's mission
 is to foster greater understanding of the importance of venture capital to
 the U.S. economy, and support entrepreneurial activity and innovation.
 According to a 2007 Global Insight study, venture-backed companies
 accounted for 10.4 million jobs and $2.3 trillion in revenue in the United
 States in 2006. The NVCA represents the public policy interests of the
 venture capital community, strives to maintain high professional standards,
 provides reliable industry data, sponsors professional development, and
 facilitates interaction among its members. For more information about the
 NVCA, please visit http://www.nvca.org.
 
 

SOURCE National Venture Capital Association