High risk. High reward.
So often, these are the first words used to describe venture capital. While they neatly summarize the investment dynamic facing entrepreneurs and venture capitalists, and limited partners who invest with them, they may obscure the larger contribution that venture capital makes.By virtue of the technologies and companies that it helps to create, venture capital touches nearly every American. And, as a recently released study demonstrates, the rewards that come to our economy from an environment that nurtures venture capital investment far outweigh the risks.
In July, the NVCA released a study measuring the contributions of venture-backed companies to the U.S. economy, which was conducted by Global Insight, a leading economic analysis and forecasting firm (formerly known as DRI-WEFA). The study reported that in 2003, venture-backed companies (companies that received venture funding any time between 1970 and 2003) contributed 10.1 million jobs and $1.8 trillion in revenue to the U.S. economy.These figures represent a 6.5% increase in jobs and nearly a 12% gain in revenue since 2000, when similar data were last analyzed.
Venture-supported companies outperformed their peers in job and revenue growth in 10 different industry sectors from 2000 to 2003, one of the most challenging economic periods in anyone’s memory.These include computer hardware and services and software, where the technology bubble was the highest. Not only did venture-backed companies grow faster than their national industry peers, but the sectors with higher concentrations of venture capital financing enjoyed greater margins of employment growth. The best example is computer software, where venture-backed companies employed 88% of all workers in that sector and experienced a 31% increase in revenue, compared to 5% for the industry as a whole.
The study also demonstrates that the impact of venture capital is felt nationwide. From 1970 to 2003, VCs invested $338.5 billion in more than 21,600 U.S. companies. In states such as California, Massachusetts and Texas, where activity is the strongest and many of these companies are headquartered, the most jobs and revenue have been generated. But states like Washington (home to Microsoft and Costco), Tennessee (Federal Express) and Georgia (Home Depot) have made significant contributions to the growth of the U.S. economy as well. Perhaps most significant is the correlation found by the study between VC funding and productivity growth. Global Insight reported that the higher the level of venture capital funding per worker in a given state, the more likely that state was to register growth in output per worker. The study found that states in which companies receive the highest levels of venture funding also have the highest wages.
While much innovation already has come from venture capital investment, it is certain that there is a great deal more to come as R&D activity continues to shift to smaller companies.According to figures cited in the study from the National Science Foundation, small companies’ contributions to overall R&D spending rose from $4.4 billion in 1984 to an estimated $40.1 billion in 2003. That is a nine-fold increase.The share of R&D conducted by companies with fewer than 500 employees increased 3.5 times to 20.7% during the same period. Of the top 50 R&D contributors in the United States, 41 were either originally venture-backed (Microsoft, Intel, Cisco, et al) or were major acquirers of VC-supported companies (Johnson & Johnson, Pfizer and IBM).
Venture capital is a key driver of U.S. market growth.While venture-backed companies account for 9.4% of US jobs and revenue, they traditionally make up between one-quarter to one-half of all IPOs per year.Federal Express, Ebay, Intel, Cisco, Amgen, Home Depot, Starbucks, AOL and Google demonstrate that venture capitalists are in the business of raising thoroughbreds. Failures may occur very early on, but successes endure.
Venture capital is also a key U.S. asset in the world economy. U.S. companies received 72% of worldwide venture funding, and the United States is second only to Israel when funding is adjusted for the relative size of national economies.
If we are to remain the global economic leader, the United States needs policies supportive of venture capital investment.We must be thoughtful about how laws such as Sarbanes-Oxley impact emerging companies that will be tomorrow’s Genentech or JetBlue.We must be sure these companies can attract and retain talent by offering stock options.Our borders must remain open to talented people who want to be educated and work in the United States. And we must continue to foster innovation by supporting government-funded basic research and development that serves as a breeding ground for the breakthroughs-and thoroughbreds-of tomorrow.
Mark Heesen is President of the National Venture Capital Association. He may be reached at email@example.com.