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Welcome back to Max Q, our weekly look at what’s happening in space and space startup news. This week was a bit more quiet than usual coming off of the amazingly over-packed International Astronautical Congress, but there were still some big moves that promise a lot more action to come before they year’s over – particularly in the race to fly American astronauts to space on a rocket launched from American soil once again.
There’s also startup news, including how an entirely different kind of race – one to make stuff in space – could be a foundational moment that opens up entirely new areas of opportunity for entrepreneurs big and small.
SpaceX needs to nail one key ingredient before its Crew Dragon missions can proceed apace with people on board. Actually, it has to nail quite a few, but parachutes are a crucial one, and it has been developing the parachutes that will help Crew Dragon float back safely to Earth for years not.
The third iteration is looking like the one that will be used for the first Crew Dragon missions with astronauts, and luckily, that version three system has now completed 13 successful tests in a row. That’s approaching the kind of reliability it needs to show to be used for the real thing, so this is good news for the current goal of putting astronauts on board early next year.
SpaceX has another key test for Crew Dragon coming up as early as this week – a static fire of its capsule abort engines. This is a key test because the last one didn’t go so well. Also, Boeing will be doing their pad abort test as early as this week as well, which sets things up nicely for a busy time next year in crewed spaceflight.
Launching stuff to space is expensive and really limits what you can do in terms of designing spacecraft and components. There’s been efforts made to reduce the costs, including SpaceX and Blue Origin pursuing reusable rocketry, but just building stuff up there instead of launching it could unlock much deeper cost savings – and new technical possibilities. (ExtraCrunch subscription required)
Satellite propulsion has, until very recently, been almost entirely a bespoke affair, which translates to expensive and generally not accessible to startup companies who actually have to worry about stuff like burn rates. But Morpheus Space has a new “Lego-like” system for offering affordable, compact and scalable propulsion that can serve pretty much any satellite needs.
Small satellite business is booming, and Kepler wants to make sure that developers are able to figure out what they can do with smallsats, so it’s offering a developer kit for its toaster-sized IoT communications satellites. Cooler than the Apple TV dev boxes that were on offer once upon a time.
The ISS is getting a shipment of supplies and scientific material courtesy of a resupply cargo capsule launched by Northrop Grumman on Saturday. One thing on board is twelve containers of read wine, courtesy of startup Space Cargo Unlimited. I’ll have more info about that on Monday, so stay tuned.
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“I don’t control Libra” was the central theme of Facebook CEO Mark Zuckerberg’s testimony today in Congress. The House of Representatives unleashed critiques of his approach to cryptocurrency, privacy, encryption and running a giant corporation during six hours of hearings. Zuckerberg tried to assuage their fears while stoking concerns that if Facebook doesn’t build Libra, the world will end up using China’s version. Yet Facebook won’t stop shaking up society, with Zuckerberg saying its News tab feature will be announced this week.
During the hearing before the House Financial Services Committee that you can watch here, Zuckerberg recommitted to only releasing Libra with full U.S. regulatory approval. But given the tone of the questioning and Zuckerberg’s lack of fresh answers since Facebook’s David Marcus testified about Libra in July, Libra now looks even less likely to launch in 2020.
The hearing started tensely, with Rep. Maxine Waters (D-CA) declaring that “Perhaps you believe that you’re above the law, and it appears that you are aggressively increasing the size of your company, and are willing to step over anyone, including your competitors, women, people of color, you own users, and even our democracy to get what you want . . . In fact, you have opened up a serious discussion about whether Facebook should be broken up.“
However, some members of Congress used their time to advocate for American dominance instead of heavy regulation. Rep. Patrick McHenry (R-NC) said “the question is, are we going to spend our time trying to devise ways for government planners to centralize and control as to who, when and how innovators can innovate.” Many Republicans complimented Zuckerberg on his business acumen, though none showed outright support for Libra.

With few highlights or positive moments coming from the hearing, here are the major takeaways followed by a chronicle of the top exchanges between Zuckerberg and Congress:
Zuckerberg tried to leverage nationalist sentiment to deflect scrutiny. “As soon as we put forward the white paper around the Libra project, China immediately announced a public private partnership, working with companies . . . to extend the work that they’ve already done with AliPay into a digital Renminbi as part of the Belt and Road Initiative that they have, and they’re planning on launching that in the next few months.” He later said that for Libra, “Chinese companies would be the primary competitors.”
Facebook’s executives have repeatedly leaned on this “let us, or China will” argument we chronicle here.
What if the Libra Association chooses to add the Chinese currency to the basket used to back Libra and reduces the U.S. dollar’s fraction of the basket? “I think it would be completely reasonable for our regulators to try to [implement] a restriction that says that it has to be primarily U.S. dollars,” Zuckerberg responded in one of his most substantial answers of the day. Zuckerberg was receptive to feedback that the Libra Association should keep its white paper updated.
As for why Libra isn’t just backed 100% with the U.S. dollar, Zuckerberg explained that “I think from a U.S. regulatory perspective, it would probably be significantly simpler. But because we’re trying to build something that can also be a global payment system that works in other places, it may be less welcome in other places if it’s only 100% based on the dollar.” Still, Zuckerberg said he would leave his children their inheritance in Libra because it’s backed one-to-one by the Libra reserve.
Zuckerberg wouldn’t commit to blocking anonymous Libra wallets that could facilitate money laundering, only saying Facebook’s own Calibra wallet would have strong identity checks. He did say Libra was exploring whether it could encode “know your customer” protections at the network level instead of relying on developers to build this into their wallets.
On whether Facebook will increasingly seek to verify users’ identities through government ID, Zuckerberg was enthusiastic. “This is an area where I think we are going to do a lot more in the years to come. We started with political ads . . . over the coming years for anything that people are doing that is sensitive, we’re likely going to increasingly require verification either by government ID or other things so we can have a clear sense of people’s authentic identity.”
Rep. Dean Phillips (D-MN) mentioned this could be a competitive advantage, implying Facebook’s size and resources might allow it to embark on a verification initiative other companies couldn’t.

Facebook has assured regulators that Calibra’s data would be kept separate from the social network. But Facebook said the same when it acquired WhatsApp, then reneged and integrated its data. This time around, Congresswoman Nydia Velázquez declared that “we’re going to need to make sure that . . . you learned that you should not lie.”
When pushed on why Libra Association members like Visa, Stripe and eBay left the organization, Zuckerberg admitted, “I think because it’s a risky project and there’s been a lot of scrutiny.” Zuckerberg struck back at finance incumbents, saying “I think that the U.S. financial industry . . . is just frankly behind where it needs to be to innovate and continue American financial leadership going forward.”
In an awkward moment, Zuckerberg could not answer which Libra members were run by women, minorities or LGBTQ+ people. “Is it true that the overwhelming majority of persons associated with this endeavor are white men?,” Rep. Al Green (D-TX) asked. “Congressman, I don’t know off the top of my head,” Zuckerberg responded.
Zuckerberg was criticized for trying to profit and potentially helping money laundering while claiming Libra is designed to help the unbanked. Zuckerberg said the Libra Association “hadn’t nailed down policies” about whether anonymous payments are allowed.
Rep. Brad Sherman (D-CA) said “for the richest man in the world to come here and hide behind the poorest people in the world, and say that’s who you’re really trying to help. You’re trying to help those for whom the dollar is not a good currency — drug dealers, terrorists.” Some members of Congress like Sherman chose to use their entire time monologuing instead of actually asking questions.
Zuckerberg got a chance to clear up a major snafu from Marcus’ testimony, where he said the Libra Association was in contact with the Swiss data regulator, which CNBC reported hadn’t heard from Libra. Zuckerberg explained today that the Libra Association had been in contact with the primary Swiss Financial Market Supervisory Authority instead. He says Facebook plans to earn money from Libra on ads from small businesses if cheap transactions lead to more e-commerce.
In one revealing exchange, Rep. Lance Gooden (R-TX) asked if the Libra Association still planned to offer profit incentives by offering dividends based on interest earned on currency in the Libra reserve after expenses are paid. Zuckerberg said the idea had either been “modified or abandoned.”
The highlighted section detailing how Libra Association members earn dividends on Libra reserve interest has been removed from the Libra whitepaper
Throughout the testimony, Zuckerberg tried to distance himself and Facebook from the Libra Association’s decision making process. “We might be required to pull out if the Association independently decides to move forward on something that we’re not comfortable with,” Zuckerberg said. That means if Facebook can’t launch Libra, it could still theoretically launch without the social network, though it does most of the engineering heavy-lifting.
The strategy was crystallized by Zuckerberg’s response to whether he could commit to moving Libra’s headquarters from Switzerland to the U.S. “At this point, we do not control the independent Libra Association so I don’t think we can make that decision.” Rep. Ayanna Pressley (D-MA) refuted this position, stating, “Mr. Zuckerberg, Libra is Facebook, and Facebook is you.”
The Facebook CEO, Mark Zuckerberg, testified before the House Financial Services Committee on Wednesday October 23, 2019 Washington, D.C. (Photo by Aurora Samperio/NurPhoto via Getty Images)
The “we don’t control Libra” argument provides Facebook and Libra an escape hatch from criticism, because any member and even the newly appointed chairperson and board can’t unilaterally control or make promises about its actions.
Many Congress members remain fixated on Facebook’s recently solidified policy of refusing to submit political ads for fact-checking. Rep Sean Casten (D-IL) asked if in Zuckerberg’s recent meeting with President Trump, “Did anyone discuss the policy change along the exemption of political figures and parties from misinformation prohibition on Facebook?” Zuckerberg responded, “Congressman, that did not come up,” quieting theories that Trump pushed for the policy that would exempt false claims in his ads.
Zuckerberg defended the policy to Rep. Alexandria Ocasio-Cortez (D-NY), saying “I think lying is bad, and I think if you were to run an ad that had a lie, that would be bad,” but that outside of calls for violence or voter suppression, Facebook thinks it’s best to leave lies in ads from politicians so they can be scrutinized by the press and public. Yet that too heavily leans on the media to scrutinize thousands of ad variants being run as part of multi-hundred-million-dollar political ad campaigns.
Rep. Ann Wagner (R-MO) chided Zuckerberg, saying “you’re not working hard enough” to stop the spread of child exploitation imagery online despite Facebook submitting millions of reports. She brought up worries that Facebook moving entirely to encrypted messaging could hide child abusers, and Zuckerberg merely said “I think we work harder than any other company.” He failed to explain how Facebook would continue improving detection through encryption.

Oddly, Zuckerberg was directly confronted about his views on vaccines since Facebook works to hide vaccine hoaxes and avoid recommending groups spreading unverified information about them. “I don’t think it would be possible for anyone to be 100% confident, but my understanding of the scientific consensus is that it is important that people get their vaccines,” Zuckerberg said, defending Facebook’s decision to hide some of this content.
In another strange moment, Rep. Madeleine Dean (D-PA) demanded if Facebook had bought blocks of hotel rooms at Trump properties but never used them just to curry favor with the president. Zuckerberg said he’d never heard of that and would be surprised if it was true.
On deepfakes, Zuckerberg confirmed that “I think deepfakes are clearly one of the emerging threats that we need to get in front of and develop policy around to address. We’re currently working on what the policy should be to differentiate between media that has manipulated and been manipulated by AI tools like deepfakes, with the intent to mislead people.” Zuckerberg later said the doctored Nancy Pelosi video should have been flagged sooner, and highlighted Facebook needs a separate deepfakes policy. Yet Facebook’s policy allows politicians’ ads to mislead people, weakening faith that it will properly address this new problem.
Questions about Facebook’s fair practices led Zuckerberg to reiterate his call for regulation, saying “I think we need federal privacy legislation. I think we need data portability legislation. I think clear rules on elections-related content would be helpful too because it’s not clear to me that we want private companies making so many decisions on these important areas by themselves.”
Regarding housing discrimination via Facebook ads, Zuckerberg committed to working with regulators to provide information under subpoena, noted Facebook has banned discriminatory housing ads, and said “Nobody wants to redline and I’m sure that was accidental.”
Zuckerberg received his heaviest criticism of the day from Rep. Joyce Beatty (D-OH), who grilled him about not knowing if diverse bankers manage Facebook’s cash or if diverse law firms handle its court cases. She chastised Facebook for a lack of diverse leadership, saying “this is appalling and disgusting to me.” Of COO Sheryl Sandberg, who leads Facebook’s civil rights task force, Beatty said “we know she’s not really civil rights.”
WASHINGTON, DC – OCTOBER 23: Facebook co-founder and CEO Mark Zuckerberg arrives to testify before the House Financial Services Committee in the Rayburn House Office Building on Capitol Hill October 23, 2019 in Washington, DC. Zuckerberg testified about Facebook’s proposed cryptocurrency Libra, how his company will handle false and misleading information by political leaders during the 2020 campaign and how it handles its users’ data and privacy. (Photo by Chip Somodevilla/Getty Images)
Some of the day’s most astute questioning came from Congresswoman Katherine Porter (D-CA). She hammered Zuckerberg about Facebook lawyers fighting to avoid liability over data breaches. Then she trapped Zuckerberg on the issue of the mental health harms of being a Facebook content moderator that reviews horrific and graphic violence.
“Would you be willing to commit to spending one hour a day for the next year, watching these videos and acting as a content monitor and only accessing the same benefits available to your workers?,” she asked. “I’m not sure that would serve our community for me to spend my time,” Zuckerberg said. “What you’re saying is you’re not willing to do it,” she replied.
Rep. Katie Porter challenges Mark Zuckerberg to work as a content moderator and view the same violent, disturbing videos Facebook contractors do https://t.co/iVB9nAcvHO pic.twitter.com/TfPuXkiJp8
— Bloomberg Technology (@technology) October 23, 2019
There’ll be more major launches from Facebook that could raise questions about its impact on society, Zuckerberg revealed. “Later this week we actually have a big announcement coming up on launching a big initiative around news and journalism, where we’re partnering with a lot of folks to build a new product that’s supporting high-quality journalism.” Facebook plans to launch a News section featuring headlines from top outlets, though only some will be paid.

“I think that there’s an opportunity within Facebook in our services to build a dedicated surface, a tab within the apps for example, where people who really want to see high quality curated news, not just social content . . . I’m looking forward to discussing that in more length in the coming days.” That service is sure to trigger debates about whether Facebook is trustworthy enough to be a formal conduit for news.
Overall, the questioning today was much more intelligent than the vague and easily-Googleable queries launched at Zuckerberg by Congress in April 2018. We had no “Senator, we run ads” moments. Instead, it was Zuckerberg who repeatedly used the separation between Facebook and the Libra Association plus the fact that Libra’s policies are still being defined to avoid giving many substantial answers. Combined with the short five-minute Q&A period per member of Congress, Zuckerberg was often able to just repeat existing talking points.
WASHINGTON, DC – OCTOBER 23: Facebook co-founder and CEO Mark Zuckerberg testifies before the House Financial Services Committee in the Rayburn House Office Building on Capitol Hill October 23, 2019 in Washington, DC. Zuckerberg testified about Facebook’s proposed cryptocurrency Libra, how his company will handle false and misleading information by political leaders during the 2020 campaign and how it handles its users’ data and privacy. (Photo by Chip Somodevilla/Getty Images)
In one of the few lighthearted moments of the day, Rep. Juan Vargas recognized the tough position Zuckerberg has gotten himself into. “It’s good to have someone that’s sturdy and resilient. You’re probably the right person at the right time to take this beating.” Yet Rep. McHenry depressingly concluded that, after six hours, “I’m not sure we’ve learned anything new here.”
The question is what array of Libra and Facebook executives would Congress need to have testify together to get real answers to critical questions about how to keep the two from harming the global economy.
The hearing is ongoing and we’ll continue to update this article with major take-aways.
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The head of Facebook’s blockchain subsidiary Calibra David Marcus has released his prepared testimony before Congress for tomorrow and Wednesday, explaining that the Libra Association will be regulated by the Swiss government because that’s where it’s headquartered. Meanwhile, he says the Libra Association and Facebook’s Calibra wallet intend to comply will all U.S. tax, anti-money laundering and anti-fraud laws.
“The Libra Association expects that it will be licensed, regulated, and subject to supervisory oversight. Because the Association is headquartered in Geneva, it will be supervised by the Swiss Financial Markets Supervisory Authority (FINMA),” Marcus writes. “We have had preliminary discussions with FINMA and expect to engage with them on an appropriate regulatory framework for the Libra Association. The Association also intends to register with FinCEN [The U.S. Treasury Department’s Financial Crimes Enforcement Network] as a money services business.”
Marcus will be defending Libra before the Senate Banking Committee on July 16th and the House Financial Services Committees on July 17th. The House subcomittee’s Rep. Maxine Waters has already issued a letter to Facebook and the Libra Association requesting that it halt development and plans to launch Libra in early 2020 “until regulators and Congress have an opportunity to examine these issues and take action.”
The big question is whether Congress is savvy enough to understand Libra to the extent that it can coherently regulate it. Facebook CEO Mark Zuckerberg’s testimonies before Congress last year were rife with lawmakers dispensing clueless or off-topic questions.
Sen. Orin Hatch infamously demanded to know “how do you sustain a business model in which users don’t pay for your service?,” to which Zuckerberg smirked, “Senator, we run ads.” If that concept trips up Congress, it’s hard to imagine it grasping a semi-decentralized stablecoin cryptocurrency that took us 4,000 words to properly explain, and a six-minute video just to summarize.
Attempting to assuage a core concern that Libra is trying to replace the dollar or meddle in financial policy, Marcus writes that “The Libra Association, which will manage the Reserve, has no intention of competing with any sovereign currencies or entering the monetary policy arena. It will work with the Federal Reserve and other central banks to make sure Libra does not compete with sovereign currencies or interfere with monetary policy. Monetary policy is properly the province of central banks.”
Marcus’ testimony comes days after President Donald Trump tweeted Friday to condemn Libra, claiming that “Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity. Similarly, Facebook Libra’s ‘virtual currency’ will have little standing or dependability. If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks, both National and International.”
TechCrunch asked Facebook for a response Friday, which it declined to provide. However, a Facebook spokesperson noted that the Libra Association won’t interact with consumers or operate as a bank, and that Libra is meant to be a complement to the existing financial system.
Regarding how Libra will comply with U.S. anti-money laundering (AML) and know-your-customer (KYC) laws, Marcus explains that “The Libra Association is similarly committed to supporting efforts by regulators, central banks, and lawmakers to ensure that Libra contributes to the fight against money laundering, terrorism financing, and more,” Marcus explains. “The Libra Association will also maintain policies and procedures with respect to AML and the Bank Secrecy Act, combating the financing of terrorism, and other national security-related laws, with which its members will be required to comply if they choose to provide financial services on the Libra network.”
He argues that “Libra should improve detection and enforcement, not set them back,” because cash transactions are frequently used by criminals to avoid law enforcement. “A network that helps move more paper cash transactions—where many illicit activities happen—to a digital network that features regulated on- and off-ramps with proper know-your-customer (KYC) practices, combined with the ability for law enforcement and regulators to conduct their own analysis of on-chain activity, will present an opportunity to increase the efficacy of financial crimes monitoring and enforcement.”
As for Facebook itself, Marcus writes that “The Calibra wallet will comply with FinCEN’s rules for its AML/CFT program and the rules set by the Office of Foreign Assets Control (OFAC) . . . Similarly, Calibra will comply with the Bank Secrecy Act and will incorporate KYC and AML/CFT methodologies used around the world.”

These answers might help to calm finance legal eagles, but I expect much of the questioning from Congress will deal with the far more subjective matter of whether Facebook can be trusted after a decade of broken privacy promises, data leaks and fake news scandals like Cambridge Analytica.
That’s why I don’t expect the following statement from Marcus about how Facebook has transformed the state of communication will play well with lawmakers that are angry about how those changes impacted society. “We have done a lot to democratize free, unlimited communications for billions of people. We want to help do the same for digital currency and financial services, but with one key difference: We will relinquish control over the network and currency we have helped create.” Congress may interpret “democratize” as “screw up,” and not want to see the same happen to money.
Facebook and Calibra may have positive intentions to assist the unbanked who are indeed swindled by banks and money transfer services that levy huge fees against poorer families. But Facebook isn’t acting out of pure altruism here, as it stands to earn money from Libra in three big ways that aren’t mentioned in Marcus’ testimony:
The real-world stakes are much higher here than in photo sharing, and warrant properly regulatory scrutiny. No matter how much Facebook tries to distance itself from ownership of Libra, it started, incubated and continues to lead the project. If Congress is already convinced “big is bad,” and Libra could make Facebook bigger, that may make it difficult to separate their perceptions of Facebook and Libra in order to assess the currency on its merits and risks.
Below you can read Marcus’ full testimony:
For full details on how Libra works, read our feature story on everything you need to know:
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On January 12, 2016, Grindr announced it had sold a 60% controlling stake in the company to Beijing Kunlun Tech, a Chinese gaming firm, valuing the company at $155 million. Champagne bottles were surely popped at the small-ish firm.
Though not at a unicorn-level valuation, the 9-figure exit was still respectable and signaled a bright future for the gay hookup app. Indeed, two years later, Kunlun bought the rest of the firm at more than double the valuation and was planning a public offering for Grindr.
On March 27, 2019, it all fell apart. Kunlun was putting Grindr up for sale instead.
What went wrong? It wasn’t that Grindr’s business ground to a halt. By all accounts, its business seems to actually be growing. The problem was that Kunlun owning Grindr was viewed as a threat to national security. Consequently, CFIUS, or the Committee for Foreign Investment in the United States, stepped in to block the transaction.
So what changed? CFIUS was expanded by FIRRMA, or the Foreign Risk Review Modernization Act, in late 2018, which gave it massive new power and scale. Unlike before, FIRRMA gave CFIUS a technology focus. So now CFIUS isn’t just an American problem—it’s an American tech problem. And in the coming years, it will transform venture capital, Chinese involvement in US tech, and maybe even startups as we know it.
Here’s a closer look at how it all fits together.
Image via Getty Images / Busà Photography
CFIUS is the most important agency you’ve never heard of, and until recently it wasn’t even more than a committee. In essence, CFIUS has the ability to stop foreign entities, called “covered entities,” from acquiring companies when it could adversely affect national security—a “covered transaction.”
Once a filing is made, CFIUS investigates the transaction and both parties, which can take over a month in its first pass. From there, the company and CFIUS enter a negotiation to see if they can resolve any issues.
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The Green New Deal has burst onto the American stage, spurring more conversation about – and aspiration for – ambitious climate policy than at any point in at least a decade.
I’m glad to see it. Suddenly, climate is on the agenda, and ambitions for climate policy are higher than perhaps at any point in US history.
The Green New Deal is a resolution right now. It’s a statement of intent. It hasn’t yet progressed to the point of detailed policy proposals or legislation, which means now is the time to help craft its details.
For the last decade I’ve written about and publicly spoken about innovation in clean technology and ways to address climate change. I’ve helped to lead a climate-fighting citizen ballot initiative in my home state of Washington, invested in clean energy startups, and advised on climate and clean energy policies of other nations.
In that time, my views on what sort of climate policies have the most impact and have the greatest chances of winning over voters have changed. Policies that I thought were foolish a decade ago have revealed themselves to have been farsighted and effective. Policies I thought were powerful and elegant have, on closer inspection, revealed themselves to be far less effective than I believed. And the history of climate and energy legislation and attitudes in the US has demonstrated a path to getting new and more ambitious policies passed.
What I’ve learned over time is that good climate policy has 3 key traits:
All of that is compatible with a Green New Deal. Here’s what it could look like.
The conventional wisdom on climate policy is straightforward. Every nation uses its policies to reduce its own emissions. This conventional wisdom is wrong. Carbon dioxide doesn’t honor national boundaries. Climate change is global. And the best climate policies have a global impact as well.
The US, overwhelmingly, is the country most responsible for climate change. The carbon dioxide and other greenhouse gases we’ve emitted over the past decades are largely still in the atmosphere, still warming the planet. The world’s present and future emissions, though, are increasingly elsewhere. The US now accounts for just 15% of the world’s annual greenhouse gas emissions from fossil fuels. And because the developing world is rising in energy consumption far faster than the US, American emissions will be an ever-smaller share each year.

That means that, despite the fact that the US is the largest overall contributor to climate change thus far, the US could completely eliminate its carbon emissions and barely affect the future course of climate.
This means we need a different strategy. It’s not enough to eliminate the US’s carbon emissions alone. Our goal has to be to drive down the whole world’s emissions.
The Most Effective Climate Policy in the World
How can the US drive down the emissions of other countries? We can do it by making clean technologies irresistible to the entire world. And there we can take a lesson from the most effective climate policy of all time – Germany’s early subsidies of solar and wind.
Solar panels and electricity-producing wind farms have been around for decades. Yet, for most of that time, they’ve been a far more expensive way to produce electricity than burning coal or natural gas. Germany changed that. Starting in 2010, Germany’s Energiewende legislation heavily subsidized solar and wind. That, in turn, drove utilities and home owners and corporations to purchase solar and wind. And that, in turn, made the technology cheaper. As prices fell, other nations – first European nations, then the US, and then China – jumped into the fray, enacting more ambitious policies that further brought down the price of solar and wind (and now batteries and electric cars).
Why did subsidies bring down the price of technology? Because industry scale leads to industry learning and innovation, and that, in turn, leads to lower cost ways to manufacture, deploy, and manage new technologies. We’ve seen this for a century. Almost all technologies improve via Wright’s Law, often referred to as the learning curve or the experience curve. In the late 1930s, Theodore Paul Wright, an aeronautical engineer, observed that every doubling of production of US aircraft brought down prices by 13%. Since then, a similar effect has been found in nearly every technology area, going back to the Ford Model T.

Electricity from solar power, meanwhile, drops in cost by 25-30% for every doubling in scale. Battery costs drop around 20-30% per doubling of scale. Wind power costs drop by 15-20% for every doubling. Scale leads to learning, and learning leads to lower costs.
Germany began subsidizing solar and wind when they were extremely small scale industries, and their costs were quite high. Those subsidies drove German utilities, businesses, and home owners to purchase clean energy. That created a market. That, in turn, led solar and wind manufacturers to leap into the market, competing ruthlessly against one another to bring down their prices faster, offering the best product at the best price to customers.
By scaling the clean energy industries, Germany lowered the price of solar and wind for everyone, worldwide, forever.
The International Renewable Energy Agency finds that, between 2010 and 2019, the price of solar power, worldwide, has dropped by more than a factor of 5. The price of offshore wind power has dropped by a factor of three.

In just the past decade, solar power has gone from being uneconomical anywhere on earth without subsidies, to being cheaper than any fossil fuel electricity in the sunniest parts of the world. Building new solar is now cheaper than building new fossil fuel electricity plants in India, Chile, Mexico, Spain, and in sunny US states like Arizona, Nevada, Colorado, and Texas.
And because, in general, businesses, utilities, and consumers all around the world will deploy the cheapest energy they can, solar is now the fastest growing energy source around the world.
Happy? Good. Thank policy makers in Germany, and the US, and China – all of whom took action to bootstrap markets for solar and wind before they were cost-competitive.
The lesson for US climate policy is clear: The biggest impact we can have is by driving down the cost of technologies that reduce carbon emissions, to the point that clean technologies are cheapest way to provide the energy, food, and transportation that everyone around the world desires, and then spreading those technologies to the world. That means a mix of early-stage government R&D, government incentives to scale deployment in the private sector, and a very healthy dollop of private sector competition.

1 – As solar volume has grown, prices have dropped, leading to more growth.
Would the Green New Deal drive down the cost of clean technologies in a way that scales to the rest of the world? The current resolution is vague on exactly how the rapid decarbonization in the US would happen. One reason for concern is that the now-retracted Green New Deal FAQ released by Representative Alexandria Ocasio-Cortez specifically dismissed the idea that the private sector – even with government incentives – could pull off this decarbonization, and explicitly says that “Merely incentivizing the private sector doesn’t work”.
I agree in one sense – basic government R&D is a high-value investment, especially when the technologies we need to invent don’t even exist yet. The government has a vital role to play. At the same time, the incredible, unprecedented decline in cost of solar power, wind power, batteries, and electric cars has happened both because of early government R&D, and because private sector companies, incentivized by governments, have brought these technologies to market and been forced to compete with one another to provide the best technology at the lowest price. Ignoring this is to ignore what brought us the very best progress we’ve seen in cleaning up the way we produce energy.
The FAQ I reference has been retracted. The Green New Deal hasn’t yet become a detailed roadmap or legislation. As it does, I urge you, Green New Deal legislators and architects: Craft policies that create incentives to build and deploy clean technologies. Then use the market for what it’s good at: fierce competition that delivers ever-better products at ever-lower prices.
The Green New Deal resolution is really quite comprehensive. It touches on almost every source of US emissions.
Even so, there’s a tendency for climate and energy wonks – and legislators – to focus on electricity and cars when discussing climate policy.
Electricity and cars aren’t our hardest problems. They’re both big chunks of our carbon emissions, yes. And they both need more policy to drive them home. (More on that down below.) They’re also the areas where we’ve made the most progress, with incredible declines in the price of clean electricity and electric vehicles that put us at the edge of a tipping point. We aren’t over the hump yet, but the solutions are here – and if we continue to push them with policy, we can decarbonize electricity and cars.
Our hardest climate problems – the ones that are both large and lack obvious solutions – are agriculture (and deforestation – its major side effect) and industry. Together these are 45% of global carbon emissions. And solutions are scarce.
Agriculture and land use account for 24% of all human emissions. That’s nearly as much as electricity, and twice as much all the world’s passenger cars combined.
Industry – steel, cement, and manufacturing – account for 21% of human emissions – one and a half times as much as all the world’s cars, trucks, ships, trains, and planes combined.
Add industry, agriculture, and land use together and you have a very sticky, very difficult-to-improve 45% of carbon emissions.
By contrast, electricity and transportation are 39% of global emissions – nearly as big. The good news is that in electricity and transportation, we have momentum.
We do NOT have momentum in reducing the carbon emissions of industry and agriculture.
Decarbonizing Agriculture and Industry
The Green New Deal does, happily, mention these sectors. In agriculture, though, it avoids the biggest chunk of the problem: Livestock.
Livestock around the world – specifically cows, pigs, and other mammals – consume a tremendous amount of the world’s agriculture output. They drive the bulk of the deforestation around the world (which itself releases carbon into the atmosphere, and reduces forest land that could absorb carbon instead). And cows and pigs belch methane – a greenhouse gas that’s causes tremendously more warming than CO2 – about 100 times more in the first year, and 30 times more over the course of a century. Livestock in total produce about 15% of the world’s carbon emissions, as much as all transportation on land, air, and sea combined.
And the world’s appetite for meat is rapidly growing, with consumption expected to double in the next 40 or so years.

Cows should scare you more than coal.
In industry, meanwhile, steel and cement production both remain incredibly carbon intensive. We’ve learned to recycle steel using electricity, but making new steel from ore still involves the use of a tremendous amount of coal. (Theoretical ways to make steel without coal exist, but aren’t expected to be commercially viable for another 20 years.) We’re closer to technologies that could make cement without carbon emissions, but those technologies are still young, expensive, and haven’t been deployed to any significant degree. And the rest of industry – from manufacturing finished goods to making petrochemical products like plastics and lubricants – remains extremely carbon intensive.
These two sectors – agriculture and industry – are on path to be the two largest sources of carbon emissions in the world. And they’re the ones we have the fewest and least developed solutions for. The Green New Deal – or any serious climate policy – ought to focus first and foremost on R&D to develop methods for clean agriculture and clean construction and manufacturing; and then on incentives to deploy those clean methods, which will initially be extremely expensive, until they hit the scale to compete directly with dirty methods on cost alone.
What would a climate policy for agriculture and industry look like? Let’s take a page from energy, where we have a one-two punch: 1) Agencies like the Department of Energy’s Advanced Research Projects Agency for Energy, ARPA-E, that funds early stage energy science and technology R&D; and 2) A breadth of state and national subsidies and incentives that help those technologies reach higher scale and lower costs.
This one-two punch first invents technology (ARPA-E is modeled after the original ARPA, which created the foundations of the internet, originally called ARPANET), and then scales technology to the point that the new clean technology is cheaper than the alternatives.
We can use that one-two punch in agriculture and industry, by creating:
In several of these areas some options exist today, but a need for more innovation and more fundamental research – that the federal government is uniquely equipped to fund – still exists.

2-ARPA-I would fund research to decarbonize industry, starting with the largest industrial sources – steel, cement, and petrochemicals.
As with solar and wind in Germany, scaling use of these methods in industry would bring their prices down, with a target of beating the price of existing, carbon-heavy methods.
All of the above is compatible with Green New Deal language. It’s just a matter of emphasis. We need to double down on these two areas – agriculture and industry – that are soon to be the largest sources of global carbon emissions, and the ones we have the least progress in solving.
Perhaps the most important question about the Green New Deal is this – what can we actually pass?
The Green New Deal has already moved the Overton window, by elevating the conversation about climate. At the state level, in progressive states like California and New York, Democrats have solid majorities and could pass large parts of the Green New Deal that are applicable at a state level. As I argued just after Donald Trump’s election, the States are where we can most effectively push for climate action.
What about at the Federal level? Maybe the Green New Deal, by motivating the base, will lead to more electoral victories for Democrats in 2020. Or maybe it will hurt in red states like Alabama, where Democrats are defending a Senate seat. It’s far too early to say.
Democrats don’t have any chance of reaching 60 Senate seats in 2020. They do have the option, if they win a majority and the Presidency, of eliminating the legislative filibuster (using the so-called “nuclear option”), in which case a simple majority of the House and Senate could pass as much of the Green New Deal as Democrats could achieve consensus on, without the need for any Republican legislators.
What if none of the above occurs? What if Democrats don’t get a Senate majority at all? Or do get a majority, but are unwilling to eliminate the legislative filibuster? Could any parts of the Green New Deal pass with some Republican support?
Bipartisan Climate Policy is Possible. In Fact, It’s Here Now
Yes. Recent history shows that, while climate is a highly divisive issue in the US, clean energy and innovation have massive support on both sides of the aisle.
Consider the following:
Wait. Don’t Republicans hate clean energy?
Nope. Not at all. Americans on both sides of the aisle love solar and wind. Solar is the most popular energy source in the US, with 76% of Americans saying that their utility should get more energy from solar. Wind is a close second, at 71%. The third choice, natural gas, is 24 points behind solar, at 52%. And a meager 30% of Americans want more coal.

It helps that clean energy is literally everywhere in America. Solar and wind have been built out in every state. Wind power, especially, is booming in rural districts in red states. Representatives from these districts, and Republican Senators from red states like Iowa and Texas that have deployed a tremendous amount of solar and wind, have every reason to support policies that benefit clean energy.

What’s more, Americans – on both sides of the aisle – wildly support research into new technologies that can improve their lives. A whopping 85% of Americans support funding more research into renewable energy sources. Ready for the real shocker? Solid majorities in virtually every county and every congressional district in the US support more funding of research into clean energy.
Nearly as many Americans – 82% – support tax breaks for Americans who purchase energy-efficient vehicles or solar panels. And again, the support isn’t limited to blue states or blue districts. It’s overwhelmingly national.

So Americans don’t just love innovation and R&D spending. They also support incentives to deploy clean technology faster. And, in fact, those two policy levers – more research funding, and incentives to deploy clean technology – get both the most support in poll after poll, the most bipartisan support, and the most geographically consistent support. If you want a policy proposal that that will work in red or purple states, or that can win over some Republican Senators and Representatives, clean technology research and clean technology deployment incentives are the two most likely to garner support.
What Bipartisan Policy Would Look Like
If Democrats do get both the White House a filibuster-proof congressional majority – one way or another – and get enough internal consensus, they can drive forward whatever GND policy they wish. Right now, that seems unlikely to me.
In the event that we have a Congress without that filibuster-proof majority, or with enough moderate democrats who balk at the entirety of the Green New Deal, there are still extremely effective climate policies that Congress can put in place.
First, in industry and agriculture, the four policies we mentioned already:
Those policies in agriculture and industry have an excellent chance of getting bipartisan support. They follow a pattern of Americans being willing to invest in new science and technology R&D. And, because they benefit industrial and agricultural states and districts, by giving carrots for deploying clean industry and clean agriculture, they’re a benefit to politicians from those – often red – states that have the greatest concentration of farms and factories. That’s the exact opposite of a policy that penalized farmers or factories for their carbon emissions. You’d have a hard time getting much bipartisan support for that. Make the policy an incentive that helps farms and industry thrive, and helps them get an edge over their global competitors, and the politics completely change.
In electricity, transportation, and buildings, there are also policies – some of them counter-intuitive – that would accelerate us towards a clean future :

3- A nation-sized grid increases the amount of energy we can use from solar and wind, and reduces the overall cost. Source – Nature Climate Change
Long-range transmission is also remarkably efficient and low cost. High-voltage DC transmission lines can send power 2,000 miles with only 10% losses and a small additional cost. That means solar power plants in Texas could be powering New York City…an hour after the sun has gone down in New York. China understands this, and is building the world’s largest high voltage power grid, moving power from the sunniest and windiest areas in the west to the coastal population centers 3,000 km (1,860 miles) east. In the US, meanwhile, it’s nearly impossible to build new long-range transmission – largely because of NIMBY. Congress should make it easier to get the necessary permissions to build transmission, paving the way for a grid with more and cheaper clean energy.
4- China’s Ultra High Voltage Grid moves clean energy 2,000 miles from the sunny and windy interior to the population centers on the eastern coast. The US has nothing similar.

5-29 US States have Renewable Portfolio Standards
The solution is for Congress to mandate a Renewable Portfolio Standard nationally, dragging the laggard states up to the standard of the rest. How high should that mandate be? The Green New Deal goal of 100% carbon free electricity by 2030 is incredibly ambitious. And it pushes us into the unknown. Beyond 70 or 80 or 90% of electricity from renewables, integration becomes increasingly difficult as periods of bad weather nation-wide cause serious problems. The technical challenges there can be overcome – perhaps through nuclear, or next-generation carbon-capturing natural-gas plants, or long-term energy storage technologies (which are being funded by ARPA-E).
Those challenges are still real enough that even a clean energy optimist like me gets nervous. A goal of 50% of electricity from carbon free sources in every state by 2030, then 80% by 2040, and 100% by 2050 would be in-line with what scientific models say we need to achieve in order to stay below 1.5 degrees Celsius of warming. And by scaling both clean energy and the technology to integrate it to high percentages of the total grid, it would drive those technologies down in price for the rest of the world, and pave the way for cleaner grids everywhere.
First, for individually owned vehicles, Congress should improve the federal electric vehicle tax credit. Today’s $7,500 federal tax credit is capped at 200,000 electric vehicles per manufacturer. That’s an absurdly low number in a country that has 260 million cars on the road. General Motors CEO Mary Barra recently called for the cap to be removed. Congress ought to put electric vehicles on the same footing as solar, wind, and batteries: A 30% tax credit – like the solar ITC – with no limit on the number of vehicles its applied to would be simple, clear, and consistent. For individuals buying their own vehicles, that tax credit ought to be structured so it can be taken off the purchase price of the vehicle directly, rather than waiting for tax season.
Second, the same tax credit ought to apply to fleet operators who buy or build electric vehicles to offer rides to consumers. While the pace at which consumers buy new cars is slow, the pace at which they switch miles of transport can be far faster, as they switch some of their travel to fleets like Uber, Lyft, and whatever comes after. Those fleets, today, are mostly gasoline engine vehicles of hybrids. As electric vehicles increasingly become the cheapest per mile, those app-based transport fleets will go electric. And a typical taxi drives 70,000 miles a year, or roughly 4 times the 13,500 miles per year of a typical individually-owned car. That means each electric vehicle deployed as a taxi can have the impact of four individually owned vehicles.
Finally, Congress ought to accelerate the deployment of autonomous cars on the nation’s roads. Why? Because an autonomous vehicle, by taking out the cost of the driver, can cut the cost per mile by half. Some calculations show that an autonomous electric taxi, by 2025, could cost 35 cents per mile. That’s 1/10th of what a taxi costs, 1/5th of what a Lyft or UberX costs today, and half the cost of owning and operating your own car. That lower cost would cause even more rapid switching to electric transport fleets, as currently-owned gasoline vehicles increasingly sat unused, or saved for long-distance trips or other scenarios. Some studies find that, even at twice that price, as much as 40% of miles driven would switch to these electric fleets.

6 – Autonomous Electric Taxis could be half the cost per mile of owning and operating a gasoline car – if autonomous vehicles arrive.
Getting to those costs absolutely depends on autonomy. Today, however, autonomous driving is regulated by a hodge-podge of different laws at the State level. Congress should step in and act to standardize safety testing, unify laws between states, and accelerate the deployment of safe, cheap, efficient, electric autonomous taxi services. Congress almost did so in 2018. It’s time to try again.
These three actions would both accelerate the deployment of electric vehicles in the US, and drive innovation in a sector where US companies are currently in the lead, and where they could be global leaders in trillion-dollar industries for decades to come.

7 – Electric vehicles with smart chargers could charge when solar and wind are most abundant on the grid, increasing the amount of renewable energy we can use.
Wait, but what about?
So I didn’t list your favorite technology, policy, or issue? Here:

8 – The cheapest ways to capture carbon are on the bottom of this chart – in soils and forests.
What About Climate Justice?
The Green New Deal advances a plan to fight climate change and to ensure that we do so through a just transition. Here, I think a few principles clearly apply.
All of that is fully in alignment with the Green New Deal resolution. The GND goes further, though, making the case for universal healthcare, universal higher education, universal housing, a job guarantee for all people in the United States, strengthening unions, reducing discrimination in the workplace, respect for Native American rights and sovereignty, and stopping the transfer of jobs overseas.
Many of those policies are ones I support, or at least where I support the motivations behind them. Yet I am not at all certain those policies should be coupled with climate action. Coupling a long list of liberal priorities with climate action would seem to make it harder to get the bipartisan support we’ll probably need to enact these climate policies. That said, the Green New Deal resolution is a high level map, not a specific bill. The original New Deal wasn’t one piece of legislation – it was made up of more than 30 separate bills. Democrats should approach the Green New Deal the same way. They ought to embrace the idea that the overall effort may take multiple years and multiple Congresses to enact, and that it’s perfectly acceptable to support some parts of the Green New Deal and not others. They ought to embrace alliances and assistance – including bipartisan alliances – to pass parts of the Green New Deal where they can.
(Photo by Ira L. Black/Corbis via Getty Images)
Climate Action is the Ultimate Climate Justice
Even more importantly, though, acting on climate change itself creates a more just world. Climate change is a slow, insidious, and massive threat to human well-being. It’s also profoundly unjust. Americans may only emit 15% of carbon emissions today, but all the CO2 we’ve emitted in the past will linger in the atmosphere for roughly a century from when it was released. Add up all the carbon the US has emitted over time, and the US remains the largest cumulative emitter of greenhouse gases on the planet. We Americans are more responsible for climate change than any other nation, even those with many times our population.
Meanwhile, two billion people live in countries that have emitted the least carbon dioxide over history – the poorest countries on planet earth – which are also the countries where people are likely to suffer the most from climate change. Climate change itself is a deep inequity. The most just thing we can do is to address climate change as rapidly as possible, and to produce and spread the tools that also boost climate resilience around the developing world. Indeed, most of the benefits of fighting climate change don’t go to Americans at all. Americans do benefit. But the largest benefits of fighting climate change go to the billions around the world who have the fewest resources and who live in the nations with the greatest vulnerability.
Lower income Americans also stand to suffer more from climate change than do wealthier Americans. A lower-income American in Detroit isn’t as vulnerable as a subsistence farmer in Botswana – not by a long shot. At the same time, it’s hard to deny that Katrina, for example, hit the poor of New Orleans harder than it did the rich. Wealthier Americans can relocate more easily, can pay energy bills more easily, can rebuild from climate disasters more easily. And here again, the most just thing we can do is to act on climate, as rapidly as possible.
Should we find ways to use the fight against climate change to also address the long history of inequality and injustice, and the differences in wealth and income that exist in the US? If so, should we stop there? Climate change is global. Carbon emissions and the harm they cause know no national borders. The harm of American (and European, and more recently Chinese) carbon emissions will fall most heavily on the poor of the developing world. Should climate policy aim to decarbonize the world as rapidly as possible? Or should it aim to decarbonize and address other global ills?
For me, the answer is clear. Climate change itself is so unjust, so lopsided in who has benefited from burning fossil fuels and who will suffer the most from that combustion, that addressing climate change is, itself, to help undo an injustice – one that threatens billions of people around the world.
Let’s tackle all the world’s other problems too. As we do so, let’s keep in mind that addressing climate change, even if we don’t succeed at everything else, is a major, vital, and necessary step towards a more just world.
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When considering the structural impact of technology companies on our economy and society, we tend to focus on questions of scale and monopoly.
It’s true that the FAANG companies and more recent winners (Airbnb, Uber) have surfed a combination of network effects, preferential access to capital and classic efficiencies of scale to generate tremendous value for their shareholders — to the detriment of new entrants who attempt to unseat them.
At their high water mark in mid-2018, FAANG alone made up 11 percent of the total market cap of the S&P 500 and 38 percent of the index’s year-to-date gain, representing a doubling in their influence in only five years. The question of regulating technology companies — to the point of instituting anti-trust actions — has even become a rare point of relative concord between Democrats and Republicans in Congress.
But is the narrative of tech companies in the 2010s only a story of economic consolidation and growing inequality? Many of the most successful B2B startups of the last decade are aligned by a theme that paints a different picture. By transforming the nature of the costs required to start a business, these startups are reducing the influence of capital and leveling the playing field for new entrants to share in the surplus generated by the secular shift to a tech-mediated economy.
Source: Getty Images/MIKIEKWOODS
What do AWS, WeWork, Stord, Gusto
But they are alike in the economic purpose they serve for their customers. Each of these services takes a fixed cost — a bank of servers, a lease, a legal retainer — and transforms it into a variable cost. As a refresher, a fixed cost stays constant regardless of output, and variable costs scale with the output of a business.
When my father started his software consulting business in the early 1990s, I remember the giant boxes of AIX servers that arrived at our apartment, and tagging along to office tours in central New Jersey before he decided to run the company out of our spare bedroom. Back then, starting almost any kind of business was hard because of high fixed costs. Without AWS or WeWork, you shelled out upfront for hardware and a lease.
Access to capital, whether in the form of a bank loan, savings or friends and family was a prerequisite for entrepreneurship.
Today, startups make it possible to start and scale almost any kind of business while incurring few fixed costs. Want to found an e-commerce store? Start with a free Shopify account and dropship your inventory. Want to become a freelance designer? Put a shingle up on Fiverr and meet clients at a Breather you rent by the hour.
Whether software or hardware or labor, building a business is way easier when overhead is transformed into a string of flexible microservices that you only pay for as you grow.
Image courtesy of Getty Images
Taken together, startups that turn fixed costs into variable costs make it less capital-intensive to start a business. This decreases the influence of gatekeepers and aggregators of capital — an impact evident in the way entrepreneurs think about starting businesses today.
It’s no coincidence that the rise of B2B startups fitting this theme has coincided with the bootstrap movement, in which tech entrepreneurs with major ambitions demur from raising venture funding because — well, they don’t need the money anymore.
It has also coincided with a renaissance in freelance entrepreneurship: 56.7 million Americans freelanced in 2018. Beyond the economic benefits of working for yourself — the fastest growing segment of freelancers earns more than $75,000 a year — freelancers can access the lifestyle and health benefits of owning their destiny, which aren’t directly captured but play a role in the economic picture. Indeed, 51 percent of freelancers said no amount of money would lure them into a traditional job, and 64 percent reported feeling healthier and happier.
When capital plays a reduced role in new business formation, access to capital plays a smaller role in determining who will succeed. More companies are founded, and the economy becomes more likely to birth new Davids that will unseat the Goliaths. Economics 101: lower barriers to entry create markets that converge on perfect competition instead of oligarchic concentration.
Source: Getty Images/ERHUI1979
Variable costs have their downsides. A startup with a relatively higher proportion of fixed costs — the profile of the classic high-tech software business — can achieve higher profit margins as it scales. Compare Microsoft or Google, which pay high fixed costs in the form of salaries and servers but few costs in delivering their services and achieve operating margins of 25-30 percent, to Costco, which takes in more than $100 billion of annual revenue but earns an operating margin in the single digits.
That’s OK. Neither type of cost is “better” or “worse,” but having the option to decide how to structure costs through a company’s life cycle can meaningfully impact an entrepreneur’s ability to execute a business idea.
Founders investigating startup ideas — and politicians debating the impact of technology — would do well to pay attention to how B2B companies have democratized access to entrepreneurship.
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Late last week, Congress moved one step closer to passing the American Innovation Act of 2018, a bill that would make accounting and tax changes that would likely increase the valuation of startups in an acquisition.
The House Ways and Means committee approved a bill containing text that would improve the treatment of Net Operating Losses (NOLs) for startups. While many startup founders would probably rather watch paint dry (or build their companies) than dive into complex tax code changes, the provisions in the bill could greatly improve the ability of startups to invest in growth activity, and could drive meaningfully positive impacts to valuations, acquisition prices, capital markets participation and venture returns.
First, though, what are NOLs? Each year, if a company loses money, it can claim the losses as a deduction off of its future taxes. Traditionally, the U.S. tax code has allowed companies to cumulatively track and carry forward NOLs to offset taxable income in future years, reducing the amount of cash required to pay taxes. These NOLs are essentially a cash-like asset, and they can be exchanged in the event that a company is acquired.
However, a long-standing IRS provision, Section 382, which was originally implemented to prevent companies with large tax appetites from acquiring those with large operating losses exclusively to reduce taxes, limits the use of NOL carry-forwards in instances of ownership change.
Currently, in cases of an ownership change, specified as a more than 50 percent change in the ownership of shareholders who own at least 5 percent of a company’s stock, the amount of taxable income for the “post-change” company that can be offset by existing NOLs cannot exceed the value of the “pre-change” company, multiplied by the long-term tax exempt rate set by the IRS.
(Yes, this is why you hire a tax attorney.)
The net-net is that this provision has been particularly challenging for startups, which often trigger this limiting condition, given they frequently operate in the red through growth stages and often see frequent, sizable changes in their ownership structure due to fundraising, public offerings and acquisitions.
The House bill would alleviate this complication by protecting these tax offsets and creating an exception to the section 382 provision for startups, allowing the application of NOLs and R&D tax credits realized in the first three years of operations regardless of ownership change limitations.
These changes have a number of benefits for startups. It would provide increased flexibility around early-stage financing activities and remove potential issues that could arise with capital markets activity. Additionally, with startups more easily maintaining tax offsets to reduce their cash taxes, startups would have larger cash balances to invest in growth efforts.
The protection of the NOL from ownership change limitations could also have serious impacts to company valuations and the attractiveness of startups as acquisition candidates. With acquirers better able to utilize existing tax offsets, startups should benefit from higher purchase prices from the inclusion of NOL balances in valuations, helping founder and VC returns.
The bill passed through committee through a voice vote with no objections and is now expected to be voted on by the rest of the House later this month before advancing to the Senate. The bill has 23 co-sponsors, all Republican.
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Over the past few weeks, Twilio has had the opportunity to meet with members of Congress and their staff who have taken on the difficult task of balancing security and privacy. We were struck by the sincere desire to understand how actions proposed by those in Washington impact smaller technology businesses. It’s been clear to us for some time that in order to get the full picture,… Read More
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On Friday, December 18, Congress passed the PATH Act (Protecting Americans from Tax Hikes), a sweeping $1 trillion bill which, as part of an 887-page omnibus, would prove challenging for even the most astute of human beings to absorb, let alone many of those in Washington. Nevertheless, page 813, Section 126, makes reference to a feature that’s now become a permanent part of the tax… Read More
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