Class of 2019 | armghana@wharton.upenn.edu
In the early hours of the morning on November 9th, the nation—and much of the world—held its breath as controversial businessman, TV star, and Republican nominee for President took the stage in New York to claim victory in the 2016 presidential election. The markets, which had been dropping rapidly as the results began to pivot away from the seemingly inevitable Clinton victory, regrouped, as stability was restored by way of a concession and a tempered victory speech by President-elect Trump. There was one industry, however, that seemed to be in shock, even fear, of the results.
Stocks of tech companies have lagged behind market returns since the election, representing investor’s concerns about the direction of the industry. And these concerns are feeding through to the private market as venture capitalists remain cautious. As Charlie O’Donnell of Brooklyn Bridge Ventures wrote, “extreme uncertainty slows the VC market to a crawl”, citing his experience in 2008 pitching for his startup.
The ever-indomitable optimism of Silicon Valley seemed to have been dimmed by last Tuesday’s results—and if his prior stances are any indication, they have reason to be worried. Trump’s previous statements have included promises to force Apple to produce products in the US, initiate antitrust action against Amazon, and in the wake of the San Bernardino shooting, called for a boycott of Apple unless it agreed to unlock the shooter’s phone. Of course, the general repudiation of Trump and his policies by most of Silicon Valley—Charles Rivers Capital published a blog post in August titled “F*ck Trump” and in July, 145 CEOs, investors, and entrepreneurs signed an open letter that condemned Trump as a ‘disaster for innovation’—may also be a reason to worry, as the President-elect has shown a willingness to follow up on personal insults (winning temperament indeed).
Trump’s negative rhetoric towards immigrants and women, in particular, has much of the industry worried. Over half of billion dollar US startups have at least one immigrant founder, and diversity is one of the factors that both fuels and is most cherished by much of the Valley. If the Trump administration were to curb immigration, especially H-1B visas—visas granted to highly skilled workers, which Trump has previously raised the idea of scrapping—the tech industry would be one of the sectors most hurt by the fallout. In fact, the industry has been unsuccessfully lobbying for years to raise the cap on such visas; Todd Warren, MD at Divergent Partners is quoted as saying “the sheer number of engineers needed can’t be served without those here on H1B visas”, later lambasting Trump for his anti-trade positions.
Some have said that perhaps Trump—with his generally pro-business policies and a much more tempered campaign rhetoric in the past week—may end up being a boon for the industry. Indeed, many people in the venture capital world are optimistic regardless of the election. Shahin Farshchi, partner at Lux Capital, remarked that “Lux Capital is open for business” and “continues to look for great founders”. In fact, venture capital firms have raised money at levels not seen since the early 2000s, and will likely be able to keep distributing funding despite the direction the federal administration takes.
Another point worth mentioning—both Trump and Clinton, on the campaign trail, vowed to get rid of carried interest in order to tax both the private equity and venture capital industry. It remains to be seen whether this will actually go through, but chances are the rules will change in the near future, fundamentally changing the economics of both industries. The National Venture Capital Association is on record as arguing that Trump’s policies on carry would “severely damage the entrepreneurial ecosystem” in this country.
Figure 2: Poll on Effects of Removing Carried Interest
Personally, while I think a Trump White House will definitely be an ideological blow to much of the VC and tech industry, I do not think too much will change in practice. Trump has shown us that he willing to say whatever necessary to court voters (repeal & replace Obamacare, indict Clinton) and then backtrack afterwards (keeping major tenets of the Affordable Care Act, claiming Clinton’s emails are not a priority). In that same vein, I think Trump would not be in favor of reducing immigration of skilled workers—in fact, he was on air this week, mentioning Ivy League graduates and stating “we have to keep our talented people”.
Even in regards to Trump’s attitudes towards minorities and women—Trump is no fool. I cannot see him truly acting on many of the outlandish promises he has made. In my opinion, he has played this campaign masterfully, breaking traditional party lines and managing to capture people’s votes despite a host of scandals and racist rhetoric. Overall, I think a Trump administration will reduce regulation and generally give business a boost—the one caveat, of course, being his unpredictability. It remains to be seen who Trump picks to serve in his Cabinet and the plans his administration outlines in regards to the tech industry. Until then, we can do no more than speculate and wait.
Figure 3: Capital Raised and Funds Closed by VC’s