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How VCs can help the next generation of immigrant founders—and why they should

The tech industry in the US has historically drawn some of the world’s brightest minds, but political gridlock and convoluted policies are making it harder to keep them.

In a landmark policy decision more than five decades ago, then-US President Lyndon B. Johnson signed the Immigration and Nationality Act of 1965—a federal law that abolished a quota system based on national origin and focused on reuniting immigrant families and attracting skilled professionals.

The law, along with several other factors like a robust academic system, has allured some of the brightest minds from around the world to consider the US as the premier destination to start their businesses.

That might be one reason why attracting and retaining international talent hasn’t been a pressing issue for the broader venture capital ecosystem in the US. According to a report last year from the National Foundation for American Policy, more than 50% of private US-based unicorns, as of October 1, 2018, had at least one immigrant founder. That group includes SpaceX, Stripe and Instacart and also featured some of the highest-profile exits of the past year in Uber, Slack and CrowdStrike.

However, convoluted immigration policies and political gridlock under the current administration have sparked conversation around talent retention and how it might impact venture firms in the near future—especially as immigrant founders consider the US as one of many options to fulfill their entrepreneurial pursuits.

One of those founders is Kenya-born Felix Orwa.

In 2009, 18-year-old Orwa flew from Nairobi to Oklahoma with a dream of becoming a pilot, and for the next 10 years, he studied aeronautical engineering, juggled multiple jobs and pursued a second degree in aviation management. Orwa has since moved to Silicon Valley and is currently building Sote, a provider of logistics services across Africa. Launched in 2017, the Palo Alto-based company has raised funding from several investors and recently added a pool of US-based engineers to help grow the business.

That journey shows the American dream can still be alive and well, but Orwa says the tortuous experience of getting his passport stamped with numerous visas over the years has made him doubt his future plans several times. From applying for an off-campus employment visa due to severe financial hardship to enrolling in a marketing certificate program that allowed him to extend his stay in the US for another year, it has been a meandering path to this point.

“My intent was never to necessarily live in the US. It was to build something,” he said. “If things didn’t work out here, I always thought of going to Canada or back to Africa.”

An early-stage VC firm that invests in immigrant-founded startups has helped Orwa pursue his goals. Unshackled Ventures sponsored Orwa’s nonimmigrant business visa, which allows him to actively work alongside his American co-founders and travel back and forth to Kenya without restriction. The Palo Alto-based firm, co-founded by Manan Mehta and Nitin Pachisia, helps immigrant founders navigate the bureaucratic maze by sponsoring an array of visa types and providing other forms of support.

Mehta said that it took time for the VC ecosystem to recognize how distracting the immigration process can be, and that it’s a complication that doesn’t allow founders to fully focus on what’s most important: “Their business was worth the same amount before we help, right? We know that immigration is just slowing people down from real value creation.”

Unshackled, which closed its sophomore fund on $20.0 million in May, usually uses its own balance sheet to sponsor a visa. The firm also provides support in the way of network connections in addition to typical equity investments, with a preference of leading pre-seed rounds under $500,000. The strategy appears to be paying off; VC heavyweights including NEA and Y Combinator have often collaborated with Unshackled and co-invested in its portfolio companies.

“The reason why many VC firms are coming to us now is because once we invest, they no longer have to worry about immigration [issues],” Mehta said.

Unshackled has often teamed with another VC firm focused on investing in immigrant-founded startups: Boston-based One Way Ventures provides seed and early-stage funding to tech companies founded or cofounded by immigrants in the US or Canada. Partner Lex Zhao, who has led several investments for One Way, noted that a volatile political climate has led to a lot of uncertainty for immigrants going into 2020.

“It’s important to retain talent in the US that allows everyone to build companies, create jobs and keep the American economy competitive,” he said. “We need to realize that talent can go somewhere else. It’s in our country’s interest to retain them.”

Clearly, venture capitalists cannot be responsible for every aspect of an ecosystem that ensures the US won’t lose out on talent—that’s vague and unrealistic. However, VCs should strongly consider creating a culture of open dialogue around immigration support, if they haven’t already.

After all, the core aim of investors is to deploy capital and deliver adequate returns, and the loss of foreign-born founders and highly skilled workers is bound to affect that in due time. For reference, the collective value of the 50 immigrant-founded unicorns highlighted in the aforementioned NFAP report was $248.0 billion.

Wharton Management professor Zeke Hernandez co-wrote a research paper earlier this year that offers a forward-looking insight into how immigration will play a significant role in the allocation of capital across countries. His work found that the more a VC firm invests in startups that have immigrant founders, the more that firm will later invest in startups located in the country where those immigrant founders are from.

According to Hernandez, a first-generation immigrant typically brings firsthand knowledge and connections to the equation—usually business and personal experiences in their home country before coming to the US. Immigrants often need time to unite their past experiences with their new surroundings before coming up with an entrepreneurial idea, so it makes sense to give them time to identify a problem and attempt to solve it.

“The current system is primarily focused on family reunification, rather than talent or skills, and we need an entrepreneurial visa without very large capital requirements,” Hernandez said.

William Kerr is the co-director of Harvard’s Managing the Future of Work initiative, which focuses on researching forces that are redefining how businesses and policy leaders attract, retain and improve human productivity. He isn’t surprised that two VC firms such as Unshackled and One Way are working with each other, as well as other investors.

“Any time you have a system that has gaps and poor mechanics, such as our current immigrant process, companies and individuals are going to try to figure out the best way to approach that,” Kerr said. “And if there are gains that can come from scaling operations and balancing out some of the vagaries around immigration paperwork that are outside of their control, I can see the motivation and incentive for doing it.”

Kerr, who wrote extensively about how migration shapes businesses, economy and society in his recent book, explained that it doesn’t make sense for entrepreneurs and venture capitalists to approach the problem by offering politically impossible ideas, such as open immigration structures and unlimited work visas. But there is a need to come up with a system that would structure policies in a way that would prioritize entrepreneurial talent.

“I hope venture capitalists continue to come together and make a set of policy proposals that are hard to turn down,” he said. “Approach the issue with pros and cons. ... Here’s what we really need and here’s an approach that we think would be getting us there. It would benefit the country as a whole.”

Venture capitalists in the US should understand the risk of losing out on tomorrow’s talent and stay ahead of competing venture hubs like China and India. There’s a need for VCs to help craft internal policies in a way that invites the next generation of entrepreneurs from around the world.

And help simplify the process enough to make immigration worth their effort.

Featured illustration by Kelilah King/PitchBook

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    Written by Priyamvada Mathur
    Priyamvada Mathur writes about venture capital at PitchBook.

    She is an Indian chartered accountant and has studied economics and journalism.
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