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Report Says Growth of Venture-Backed Companies Outpaces Overall Economy
Companies backed by venture capital grew their revenue and employment numbers at a much higher rate than other businesses in recent years, according to a report from the National Venture Capital Association (NVCA). Between 2006 and 2008, revenue at U.S. venture-backed companies increased by 5.3 percent, while total U.S. business revenues grew by only 3.5 percent. Employment at venture-backed companies grew by 1.6 percent during that same period, compared to 0.2 percent in the overall U.S. private sector. Last year, venture-backed companies accounted for 11 percent of U.S. employment and 21 percent of U.S. gross domestic product (GDP).
The report maintains that because of the remarkable growth of venture-backed companies and the strategic nature of the industries that attract venture investment, the venture industry is important in sustaining national economic growth.
NVCA's biannual report on the impact of venture capital uses data on investment activity from the quarterly NVCA/PricewaterhouseCoopers Moneytree survey.
Though the venture capital industry (not including venture-backed companies) represents only 0.2 percent of GDP, the report argues that venture investment plays a vital role in supporting emerging sectors. Part of the reason venture-backed companies experience such high rates of growth is that venture investors gravitate toward companies and industries with high-growth potential.
By supporting high-growth sectors, venture firms help new sectors grow and thrive, the report argues. Within many high-tech and emerging sectors, venture-backed companies dominate employment and revenue figures. Venture-backed software companies employ 81 percent of the U.S. software workforce. Three-quarters of all U.S. telecommunications and semiconductor jobs are within venture-backed companies.
Although U.S. venture activity has been centered in Silicon Valley and Massachusetts's Route 128, NVCA argues that several smaller hubs have emerged to spread the advantages of a strong venture industry throughout the country. Pennsylvania, Minnesota, Florida and Washington each experienced strong employment and revenue growth at venture-backed companies between 2006 and 2008.
The report discusses the role that government can play in supporting entrepreneurship and innovation. NVCA encourages the government to implement more favorable rates for capital gains taxes and carried interest and to craft a leaner and more consistent regulatory process. The report also advocates increased government funding for basic research to ensure a steady stream of technologies. In the model depicted by NVCA, basic research is translated into applied research and commercial products by venture capitalists and the entrepreneurs they support. Notably, their recommendations do not include direct equity investments in companies, investment through private venture funds, non-financial support for entrepreneurs or incentives to local venture firms.
Increasing Access to Capital
The idea that the government role in supporting venture capital should be focused on decreasing the tax and regulatory burden of venture firms and on basic, not applied research, indicate a disconnect between the perspectives of the TBED community and the venture industry. As federal, state and local policymakers expand their efforts to grow the venture industry through funds-of-funds, early-stage investment, angel capital networks and capital matchmaking services, venture capitalists remain focused on reducing government interference beyond basic research. Reconciling these views would be a major step in improving the effectiveness of policies to increase the availability of capital.
A major theme of SSTI's upcoming 13th Annual Conference is focused on the future of public equity effort, including a much anticipated plenary session and two engaging breakout sessions:
The Future of Public Equity and Entrepreneurship Programs
Harvard professor Josh Lerner will join us to discuss his upcoming, provocatively titled book, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed-and What to Do About It. Lerner asked: when has governmental sponsorship succeeded in boosting growth, and when has it fallen terribly short? In his presentation he will provide valuable insights into why some public initiatives work while others are hobbled by pitfalls and offer suggestions for how public ventures should be implemented in the future. A discussion of the implications and opportunities presented will follow.
Addressing Capital Gaps: Lessons from the Field
Capital programs are facing challenging times given the financial meltdown of the past two years. At the same time, TBED efforts to increase the availability of risk capital for young firms have taken on a new sense of urgency. What worked yesterday won't necessarily work in the new world of finance, however. This session will look at the continual evolution of state programs, highlighting the pros and cons of two recently adopted approaches in Tennessee and Pennsylvania to build a robust local private equity market.
Where Do Equity Programs Go from Here? A Roundtable Discussion
There will be a lot to process from our first two capital-related sessions, starting right from the top with Josh Lerner's provocative plenary address. Add financial markets that are continuing to sort themselves out, and heads could begin to spin. With Rebecca Bagley, one of the TBED community's top thinkers on equity policy, as our guide, we're dedicating this session to find meaning and direction: what does it all mean for programs and policies to increase local capital access? What should they look like going forward?
SSTI's Annual Conference, Seize the Moment: Tech-based Economic Development for the Next Economy, will be held Oct 21-23 in Overland Park, KS. More information is available at: http://ssticonference.org.
NVCA's "Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy" is available at: http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=482&Itemid=93