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America's Looming Tech Crunch: Blame Venture Capital, Immigration Law

Otellini cash

The U.S. likes to think of itself as a cradle for the world's newest and cleverest tech. But Intel's CEO Paul Otellini is foretelling a looming high-tech crunch, and the nation's venture capital association is equally worried now that 10-year VC returns have turned negative for the first time in a decade.

Intel's Paul Otellini has a voice that's definitely worth listening to: As the successful CEO of one of the world's most successful companies, he is a man with his finger on the pulse of the tech industry (admittedly, concentrating on the chip markets) in a way that few others have. And speaking this week at the Technology Policy Institute's Aspen Forum, Otellini had dire things to say about the state of things:

"Our research centers were without peer. No country was more attractive for start-up capital...We seemed a generation ahead of the rest of the world in information technology. That simply is no longer the case."

The reason for this is pretty simple—the legal, tax, and financial hoops that the U.S. enforces on all industry, with a particular emphasis on startups, is to blame. Successive administrations have been blind to this problem, or have ignored it, and the situation is now so dire that from his own experience Otellini notes "it costs $1 billion more per factory for me to build, equip, and operate a semiconductor manufacturing facility in the United States." Other nations have tax breaks for new companies, sometimes with a special emphasis on high-tech, and the U.S. is particularly hostile to foreign nationals who want to study and then work here. Some of the recent fiascos and political tussles over the H1B visas is a classic example of this, and demonstrates that there's little intention to change the status quo.

Otellinis warning is stark: "The United States a less attractive place to invest—and create jobs—than places in Europe and Asia that are "clamoring" for Intel's business." And Intel is just the start.

On the other side of the equation, the money men who supply the raw dollars for many startups—the venture capitalists—are poised to see their industry take a serious tumble. The National Venture Capital Association's latest report reveals that 10-year returns on investment slipped into the negative at the end of last year, and the situation only worsened in the first three months of 2010. Simply put, this indicates the VC business—which was once a fairly sure-fire way to rapidly launch a business—has become a significantly less attractive way to earn money.

The industry hasn't crossed the Rubicon, for sure, because as in investor there are still plenty of ways to make money. But with the long-term game looking so very unappealing, the end result is that investors are going to find alternative uses to put their cash to—ones that will earn more of a return. And this means the sources of VC funding for startups may soon start to dry up, forcing increased competition among potential candidate startups.

To keep up with this news, follow me, Kit Eaton, on Twitter.

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