International Entrepreneur Rule: The good, the bad, and the unknown

The Kauffman Foundation gave feedback today on the U.S. Department of Homeland Security’s proposed International Entrepreneur Rule. The rule would allow certain immigrant entrepreneurs to remain in the United States for the purpose of operating and growing their startup.

The good: The proposed rule recognizes the importance of immigrant entrepreneurs.

Immigrants to the United States are nearly twice as likely as native-born Americans to start businesses. These businesses create needed employment opportunities. Whether the immigrant-founded firm creates one job for an American or hundreds of jobs, that immigrant entrepreneur is providing public benefits.

Unlike more than a dozen other countries, the United States has no visa for immigrant entrepreneurs. The International Entrepreneur Rule is a response to this shortcoming in U.S. law and acts as a Band-Aid.

The proposed rule is a temporary patch that will stop the American loss of some immigrant entrepreneurs until Congress passes legislation to permanently fix the problem by creating a clear, clean, and reasonable path for immigrants of all kinds to start businesses in the United States.

Also: The proposed rule makes a subtle but important distinction between young firms and small firms.

To be eligible for benefit under the International Entrepreneur Rule, an immigrant entrepreneur must have founded a company within the last three years. This focus on young firms is appropriate, since young firms spur innovation and are responsible for almost all net new job creation.

For years, policymakers have wrongly attributed the benefits of young firms to small firms. Small businesses are important, but when it comes to job creation, age—not size—matters most. The proposed rule makes this clear.

The bad: Strict eligibility thresholds will leave many potentially successful immigrant entrepreneurs out.

To benefit from the proposed rule, an immigrant entrepreneur must secure at least $345,000 from qualified U.S. investors or receive at least $100,000 in government grants or awards. Immigrant entrepreneurs that fail to meet one of these requirements will likely be out of luck.

Under the proposed rule, qualified U.S. investors are limited to venture capital firms, angel investors or startup accelerators. The challenge with this limitation is that the vast majority of new businesses do not receive investment capital from these sources.

According to the Kauffman Firm Survey, which followed 5,000 companies for eight years, only 5.8 percent of startup funding came from angel investors, while just 4.4 percent came from VCs.

Even among high-growth companies, VC and angel investment is rare. A survey of some of the fastest growing companies in America, as identified by Inc. magazine, found that only 7.7 percent of these firms received angel investment and only 6.5 percent received venture capital investment. In the same survey, government grants were an even rarer source of capital; only 3.8 percent of fast-growing companies had received a government grant.

What’s more, the proposed rule places less importance on revenue generation than investment. Many entrepreneurs use revenue as their investment capital, yet bootstrapping is not recognized in the proposed rule as a legitimate way to finance business growth.

The unknown: How much tolerance for risk will USCIS adjudicators have?

The proposed rule vests significant authority in United States Citizenship and Immigration Service (USCIS) adjudicators. These civil servants will be given the task of evaluating immigrant entrepreneurs’ applications and making determinations about who stays and who goes.

Given the unique nature of entrepreneurship, it will be important for adjudicators to proactively familiarize themselves with entrepreneurial and startup culture.

Failure is a real part of startup culture and embraced by entrepreneurs, who realize that the first, second, or even third iteration of an idea may not work. But quick learning and constant refinement of a business model may mean that the fourth iteration is a big success.

Some immigrant entrepreneurs will be running successful businesses but will fall short of some of the eligibility thresholds. It would be unfortunate to allow these entrepreneurs to learn important lessons about starting and running a business while in the United States only for adjudicators to send these “failed” entrepreneurs home to another nation when they are more seasoned and poised for greater success.

What happens next

The Department of Homeland Security will now review the more than 285 public comments received on the proposed rule and then issue a final rule before the end of President Obama’s term in January 2017.