New study demonstrates venture industry’s multiplier effect

“From small things, mama, big things one day come.”

Smart money says Bruce Springsteen did not have venture capital in mind when he wrote those lyrics, but if he did, Global Insight’s recently updated study, “Venture Impact 2006,” would make him as big a prophet as he was a rock ‘n’ roll legend.

The study, which measures the economic importance of venture-backed companies to the U.S. economy, represented the third iteration of data that confirmed again what most venture capitalists already know: Venture-backed companies create jobs and drive revenue at a pace that significantly outstrips their non-venture counterparts.

Venture capital’s impact relative to U.S. gross domestic product may tell the story best. While venture investment itself represents a scant 0.2% of U.S. GDP, venture-backed companies were found by the study to account for 9% of total U.S. private sector employment and 17% of total U.S. GDP. That’s some pretty big bang for a relatively small amount of bucks.

Remarkably, the Global Insight study reveals this “venture multiplier” in just about every area of its inquiry, arguing more than ever for greater public understanding of this critical component of the U.S. economy and for greater focus on policies that foster its growth.

Growth engine

According to the study, venture-backed companies have experienced robust job growth that has outpaced that of their non-venture counterparts. Companies such as Microsoft, Staples, Starbucks, Google and Cisco added more than 1.3 million jobs to the U.S. economy between 2000 and 2005, resulting in annual growth of approximately 2.9 %. In the last two years alone, venture-backed companies added 765,700 jobs to the U.S. economy, good for a 4.1% annual growth rate. This brought total venture-backed company employment to over 10 million jobs in 2005.

Furthermore, this growth has permeated the entire economy, not just the two sectors (IT and biotech) most often associated with venture capital. In fact, venture capital-financed companies in the media/entertainment/retail industry produced the largest number of jobs, employing more than 2 million workers in 2005, and comprising over half of the industry’s nearly 4 million jobs. Computers/peripherals accounted for nearly 1.9 million jobs, followed by industry and energy at 1.2 million.

Venture investment represents a scant 0.2% of U.S. GDP, but venture-backed companies were found by the study to account for 9% of total U.S. private sector employment and 17% of total U.S. GDP.”

Mark Heesen, President, NVCA

Perhaps more important than the raw numbers of jobs are the %ages they constitute within their specific industries. Those 1.9 million jobs in computers/peripherals represent a staggering 9 of every 10 for that industry. Similarly, the 860,000 venture capital-supported jobs in the software industry represented almost 90% of the industry’s 960,000 total in 2005. These industries simply would not exist without venture capital.

Just as impressive as these percentages is the pace of growth. According to the study, companies financed with venture capital added jobs at an annual rate of 4.1% between 2003 and 2005, as opposed to a 1.3% rate for the total private sector.

Differences within some sectors were even more marked. The financial services sector recorded double digit compound annual gains of 10.7%, compared with an industry average of only 1.2% between 2003 and 2005. The biotechnology sector closely followed, with 9.4% annual growth in employment from 2003 to 2005. By contrast, the annual employment gain for the total biotechnology industry was only 3.2% during this same period.

The Global Insight study also revealed that venture-backed companies delivered impact across geographic regions almost as broadly as they do across industry sectors. Of course, California still led the way with nearly 2.3 million venture-supported jobs in 2005, with Texas, Pennsylvania, Massachusetts and Georgia rounding out the top five.

Of these, Pennsylvania was perhaps the biggest surprise. Ranked third in the nation by total venture capital-backed employment, it posted an annual employment growth rate of 14.7%, the strongest in the nation. As a result, venture capital-backed companies with headquarters in Pennsylvania generated more than 167,000 jobs between 2003 and 2005, as compared to 140,000 jobs added by firms headquartered in Texas. Much of the Pennsylvania growth was driven by two companies: ARA Services and Comcast. The strength of these companies in driving these numbers suggests another lesson: It only takes one venture-backed winner to change the economic landscape of a region.

While most of these states are familiar players in the venture arena, the study also found that even less-populated states like Montana, South Dakota and Wyoming benefit from jobs generated by venture capital investments in companies headquartered in these states

Sales driver

The “venture multiplier” surfaces again in another key indicator of economic impact: sales. According to the Global Insight study, sales by venture financed companies jumped from $1.5 trillion in 2000 to $2.1 trillion in 2005, representing a 6.8% annual growth rate during those years. The computers/peripherals industry sales topped $466 billion in 2005, followed by the nearly $300 billion in sales posted by the media/entertainment/retail industry. Sales by venture capital-backed firms in the industrial and energy industry totaled nearly $270 billion, and software services sales exceeded $210 billion.

Companies financed with venture capital added jobs at an annual rate of 4.1% between 2003 and 2005, as opposed to a 1.3% rate for the total private sector.”

Mark Heesen, President, NVCA

According to these figures, venture capital-backed firms outperformed total U.S. sales growth at a compound annual rate of 11.3% for venture backed companies, compared to 8.5% for total U.S. sales between 2003 and 2005.

As with employment, venture capital-backed firms outperformed their national counterparts in every industry sector in sales. Biotechnology accounted for the greatest differential in sales growth. Sales at venture-backed biotechnology companies totaled nearly $67 billion in 2005, posting a compound annual growth rate of 16.4%, compared to a 9.7% growth rate for the entire biotechnology industry between 2003 and 2005.

The electronics and instrumentation industry recorded the second largest annual growth rate at 15.9% between 2003 and 2005, reaching $70 billion in sales. Software services revenue jumped by 14.7% on an annual basis between 2003 and 2005, compared to 13.1% for the total software industry for the same time period.

The regional breakdown of sales growth mirrors that of job creation, with a few exceptions. Again, California led the nation by sales from venture capital supported companies at $507 billion in 2005. Texas followed with approximately $270 billion, while Washington broke the top five with sales of $127 billion. Pennsylvania and Massachusetts trailed with $113 billion and $112 billion, respectively, in 2005.

While the study demonstrated that every state benefited from expanding revenues, growth was not equal across all states. In some cases, impressive growth provided cause for optimism in the face of relatively low raw numbers. For example, the District of Columbia posted venture capital-backed revenue of only $2.2 billion in 2005, but it was the fastest growing state in the nation, with a compound annual growth rate of 24.7% between 2003 and 2005. By the same measure, Montana grew the second fastest at 20.2%, followed by Connecticut at 14.5 percent.

Outsized impact

What emerges from the study’s statistics and analyses is a clear picture of a venture capital industry whose impact on the U.S. economy is not merely additive, but multiplicative. It has produced some of the true stars of our economic system and has in turn generated wealth and quality of life improvements that filter into every aspect of our society. In addition to the contributions made by venture-backed companies such as eBay, Home Depot, Starbucks and Whole Foods, and to the retail sector of our economy, venture-backed companies such as Amgen, Apple, Cisco, Genentech, Google and Intel are the primary drivers behind high paying professional jobs and waves of innovation Subtract venture capital from the equation and you’d have a national economic story worthy of a sequel to Capra’s “It’s a Wonderful Life.” None of these companies would have existed. And then where would we be?

It is that prospect that compels us to compile these numbers and measure these impacts every two years through the Global Insight study. They quantify the value of this industry that we have painstakingly built over the past 50 years, and they underscore the urgency with which we must act to foster and preserve it through the advocacy of sound public policy and promotion of public awareness and understanding. So that from this small-yet-vigorous industry, big things will continue to come.

Mark Heesen is President of the National Venture Capital Association. He may be reached at MHeesen@nvca.org.