Post on 14-Feb-2017
VentureImpact
EDITION 6.0
The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
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Content: National Venture Capital Association Design: Frost Miller GroupCopy: Michael Kooi
ISBN: 0-9785015-9-4
Copyright 2011 by the National Venture Capital Association.
All rights reserved. No part of this work covered by the copyrights hereon may be reproduced or copied in any form or by any means (graphic, electronic, or mechanical, including photocopying, recording, taping, or information storage and retrieval systems) without the written permission from the National Venture Capital Association.
Every reasonable effort has been made to assure the accuracy of the information in this publication. However, the contents of this publication are subject to changes, updates, omissions, and errors. The National Venture Capital Association does not accept any liability for inaccuracies that may occur.
Mark HeesenPresidentNational Venture Capital Association
Mark HeesenPresident, National Venture Capital Association
1Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
For a decade now, NVCA has used data collected by IHS
Global Insight to tell the story of venture capital’s outsized
impact on U.S. job creation and economic growth. I am
pleased to report that this sixth edition of Venture Impact
only reinforces the narrative. The percentage of total U.S.
private sector employment generated by venture capital-
backed companies (past and present) grew from 2008, as did
their percentage of overall U.S. revenue.
That this increase occurred amid one of the toughest
recessions in U.S. history speaks volumes about venture
capital’s importance to our economy — both today and for
the future. Even so, the numbers within this report tell only
one part of the story.
Venture capital’s role in driving U.S. innovation tells us
more. No other investors assume more risk, employ more
patience or partner more closely with entrepreneurs to bring
breakthrough ideas and technologies to the marketplace.
Over the last four decades, these products have changed the
way we live and work in profound and countless ways.
Moreover, such innovations drive the U.S. economy’s
evolution by spawning new high-growth companies and, in
many cases, entire new industries. Here, venture capitalists
play a lead role by persistently identifying and funding only
those ideas with this transformative potential — in good
economic times and bad. Venture has proven itself to be the
most effective mechanism for rapidly deploying capital to
the most promising emerging technologies and industries
— moving nimbly to where the future opportunities lie. The
result has been millions of jobs, trillions of dollars in revenue,
and immeasurable economic value that otherwise might
never have come into being had these bright ideas not been
initially funded and nurtured to sustainability.
That’s why we must continue to recognize this aspect of
venture capital’s impact when we tackle critical economic
and public policy issues. If we do, I believe the U.S. venture
capital community will continue to drive our economy
toward a more prosperous tomorrow.
Introduction
2 Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
Venture Impact At-A-Glance
Venture-Backed Companies Outperformed Total U.S. Economy 2008 – 2010
Employment Growth
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
- 2.0% VC-Backed Companies
- 3.1% U.S. Private Employment
Revenue Growth
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
1.6% VC-Backed Revenue
- 1.5% U.S. Sales
For every dollar of venture capital invested from 1970 to 2010, $6.27 of revenue was generated in 2010.
$1 < 0.2%INVESTED INVESTED
REVENUE
$6.27 21%of U.S. GDP
Annual venture investment equals less than 0.2 percent of U.S. GDP. Annually, VC-backed companies have generated revenue equal to 21 percent of U.S. GDP.
3Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
$3.1 trillion in venture-backed revenue = 10% of Total U.S. Sales
$30 trillion U.S. Total Sales
10%
107.3 million U.S. Private Sector Jobs
11.9 million venture-backed jobs = 11% of U.S. Private Sector Employment11%
Venture-Backed Jobs – 2010
Venture-Backed Revenue – 2010
4 Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
The venture capital community’s positive impact on the U.S. economy far outweighs its relative size.
While investment in venture-backed companies only equates to between 0.1 percent and 0.2 percent of U.S. gross domestic product each year, these companies employed 11 percent of the total U.S. private sector workforce and generated revenue equal to 21 percent of U.S. GDP.
While total employment and revenue for venture-backed companies contracted during the 2008-2010 downturn, both did so at lower rates than in the larger U.S. economy. As a result, venture-backed companies actually increased their percentage shares of total U.S. activity in both categories.
This ability of VC-backed companies to outperform their non-venture counterparts — during good times and bad — flows from venture capital’s focus on highly innovative, emerging growth companies. The 500 largest public companies with venture roots increased their collective market capitalization by approximately $700 billion, rising from $2.1 trillion in 2008 to $2.8 trillion in 2010.
Looking forward, venture capital’s impact on the U.S. economy will likely grow even larger. That’s because many of the fastest growing venture-backed companies in the U.S. today have yet to go public. IHS Global Insight research suggests that 92 percent of job growth for young companies occurs after their initial public offerings. This fact underscores the importance of America’s IPO market and of ensuring that our most innovative young companies can access the capital they need to grow.
$1.49$1.67
$2.64$2.99 $3.08
2000
14.9% 15%
19.7% 20.8% 21%
2003 2006 2008 2010
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
25
20
15
10
5
0
Trill
ions
of R
even
ue % of U.S. G
DP
8.699.37
11.6812.36 11.87
2000
7.8%8.6%
10.2%10.8% 11.0%
2003 2006 2008 2010
14
12
10
8
6
4
2
0
12
10
8
6
4
2
0
Mill
ions
of J
obs
% of U.S. Private Em
ployment
Venture Capital Grows U.S. Jobs and Revenues
U.S. Venture-Backed Company Employment 2000 – 2010
U.S. Venture-Backed Company Revenue 2000 – 2010
% of U.S. GDPVC-Backed Company Revenue
% of U.S. Private EmploymentVC-Backed Company Jobs
5Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
120
100
80
60
40
20
0
7000
6000
5000
4000
3000
2000
1000
0
Companies Funded by Venture Capital
Venture Capital Dollars Invested ($Billions)
Dol
lars
Inve
sted
($B
illio
ns)
Com
panies FundedVenture Capital Investment in the United States 1970 – 2010
Venture Capital Investment by Region 1970 – 2010
1970 1980 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
$.1093
$.50
314$2.60
1050
$7.30
1565
$99.20
6420
$38.00
3845
$20.90
2688
$18.90
2486
$21.80
2655
$22.70
2752
$26.30
3152
$30.40
3383
$28.70
3398
$19.50
2554
$23.30
2863
New England: $59 BN
New York Metro: $40 BN
Phila. Metro: $13 BN
DC Metro: $22 BN
Southeast: $33 BN
South Central: $2 BN
Texas: $28 BN
North Central: $9 BN
Northwest: $20 BN
Silicon Valley: $165 BN
Los Angeles/OC: $32 BN
San Diego: $18 BN
Colorado: $15 BN
Southwest: $8 BN
Midwest: $25 BN
Source: The MoneyTree Report by PwC and NVCA based on data from Thomson Reuters
Health Care 4800+ Companies Funded
Venture Capital Creates New Industries
Information Technology
17,000+ Companies Funded
6 Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
Semiconductors/Electronics
Diagnostics
Computer Software
Computer Hardware
Healthcare Services/IT
Biotechnology
Hospital Management
ERP/Inventory
Groupware
Biosensors
Personalized Medicine
Electronic Medical Records
Medical Practice
Management
Prescription Management
Managed and Long- Term Care
Imaging
Lasers
Fiber Optics
Scanners
Business/Office
Cloud Computing
Encryption/Security/Firewalls
Database Management
MedicalDevices
Minimally Invasive
Prosthetics
Patient Monitoring
Drug Delivery
Surgical Devices
Neuro-stimulation
Wafers
Clinical Diagnostics
Genetic Screening
and Testing
Personal Computers
Terminals
Medical Payment Systems
Healthcare Quality
Management
Animal HealthWound
Care
Cell Therapies
Gene Therapy
Vaccines
Agricultural Products
Consumer and Industrial
Products
Regenerative Medicine
Human Therapeutics/
Biologicals
Fabless
Controllers/Sensors
Information Technology
17,000+ Companies Funded
Clean Technology900+ Companies Funded
7Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
Communications
Energy Efficiency
Natural Gas
Computer Hardware
Internet
Pollution Control
Energy Storage
Rare Earth Mineral Mining
Alternative Energy
Throughout its history, venture capital investment has built entire industry sectors by funding ground breaking innovations. From biotechnology to information technology to clean technology, thousands of startups have been brought to life, improving the way we live and work each day.
Solar
Nuclear
Social Media
GPS
Satellites
WANS/LANS
PDAs
Wind
Information Portals
Search Engines
Encryption/Security/Firewalls
Online Gaming
Wireless Devices
Water Purification
Pump Storage
Smart Grid
Lighting Systems
Advanced Building
Materials
Terminals
E-Commerce
Flywheels
Biomass
Waste to Energy
Networking
Battery Technology
Instant Messaging
Recycling
Air Filtration
Geothermal
Electric Automobiles
Wave Energy
Hydropower
8 Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
Venture Capital Drives the Hi-Tech Sector
VC-backed companies keep growing faster than
their peers — even after their venture investors exit.
Over the past half century, venture-backed innovations have consistently
spawned not only life-changing technologies but entire new industries.
These include semiconductors, the Internet, biotechnology, medical
devices and clean technology, which in turn have spawned exciting
subsectors of their own (pp.6-7). Such evolutions create virtuous circles
of innovation, job creation and revenue growth that benefit all Americans.
Venture-backed companies typically go on to fuel these new industries
in terms of employment and revenue share. With their focus on
innovation, high-growth potential and entrepreneurial spirit, these
companies set themselves on a unique, positive trajectory that
prevails long after the venture capitalist exits the investment.
The recession of 2008 saw employment losses nationally, but less
so with venture-backed companies. From 2008 to 2010, as U.S.
private sector employment fell 2.6 percent, venture-backed company
employment fell by only 2.0 percent — 23 percent less than the
overall decline. In terms of revenue compound annual growth rate,
while total U.S. sales fell 1.4 percent, venture-backed company
revenue grew at 1.5 percent and VC-backed companies outperformed
their overall industries in 12 of 16 sectors from 2008 to 2010.
9Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
Percent of VC-Backed Jobs In Major Industry Sectors
Percent of VC-Backed Revenue In Major Industry Sectors
48% Telecom
445,596 VC-BACKED JOBS
72% Semiconductors/Electronics
620,773 VC-BACKED JOBS
74% Biotechnology
427,353 VC-BACKED JOBS
54% Computers
1,179,287 VC-BACKED JOBS
90% Software
734,064 VC-BACKED JOBS
$234.4 MILLION VC-BACKED REVENUE
Semiconductors/Electronics88%
$161.6 MILLION VC-BACKED REVENUE
Biotechnology80%
$402.3 MILLION VC-BACKED REVENUE
Computers46%
$226.5 MILLION VC-BACKED REVENUE
Software40%
$22.5 MILLION VC-BACKED REVENUE
IT Services39%
10 Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
Venture Capital 101
The venture capital industry drives U.S. job creation and economic growth by helping entrepreneurs turn innovative ideas and scientific advances into products and services that change the way we live and work.
Companies Founded With Venture Capital:
Silver Spring Networks, Inc.Facebook
Cis
co
eBay
Microsoft
Skyp
e
Zyn
gaG
enen
tech
Amgen
Med
tron
ic KyphonGenzyme
MedImmune
Boston Scienti�c
Intuitive Surgical
Amyris BiotechnologiesFirst Solar
Solazyme
Bri
ghtS
ourc
e En
ergy
Opower
Tesla
ZipcarStarbucks
Home Depot
Staples
FedEx
Co
stco
Zappos
Out
back
Ste
akH
ouse
Amazon
Cephalon
Ce
ph
alo
n
Apple
Intel
GoogleEn
erN
OC,
Inc.
11Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
Venture capitalists do this by providing the funding and guidance — and by assuming the risks — necessary for building high-growth companies capable of bringing these innovations to the marketplace.
Many venture capitalists come to the industry
after successful careers as scientists, engineers,
doctors or entrepreneurs. Working through tight-
knit firms, they raise money from pension funds,
endowments, foundations and high-net-worth
individuals to form a venture fund. This fund
is then invested in the most promising startup
companies (which become part of the VC’s
“portfolio”), typically over the course of 10 years.
VCs focus exclusively on companies developing
significant innovations — be it a new piece of
software, a life-saving cancer drug, or a new
model for consumer sales. Unless the company
is poised for significant growth, a VC won’t
invest. Making investments at the earliest
stages of a company’s development — often
before a product or service is more than just
an idea — involves significant entrepreneurial
risk, which severely limits capital sources for
such companies. Yet, venture capitalists assume
this risk alongside the company founders by
providing capital in exchange for an equity stake
in the company.
During this investment stage, a venture
capitalist provides more than just money to
the company. Typically, the VC takes a seat on
the board of directors and participates actively
in company operations. This commitment
often includes providing strategic counsel
regarding development and production, making
connections to aid sales and marketing efforts,
and assisting in hiring key management. As
part of this process, the venture capitalist also
guides the company through multiple rounds
of financing. At each point, the company must
meet certain milestones to receive fresh funds
for continued growth. If the company fails to
meet these goals, the VC’s responsibility to his
investors may require him to walk away.
The VC’s goal is to grow the company to a
point where it can go public or be acquired
by a larger corporation (called an “exit”) at a
price that far exceeds the amount of capital
invested. Approximately one-third of portfolio
companies fail, so those that do succeed must
do so in a big way. Typically, when a venture-
backed company exits the portfolio, the VC
distributes the profits to the fund’s investors
and eventually leaves the portfolio company’s
board of directors. Once all the investments
of a particular fund have been exited and the
proceeds have been distributed, the fund
ends. In many cases, however, the institutional
investors reinvest these earnings in a new
crop of funds and the process begins anew.
These elements — the patience, the hands-
on guidance, the willingness to take on risk
and fail — make venture capital unique as an
asset class and enable it to drive U.S. economic
growth faster and generate more jobs than
other asset classes. Historically it has helped set
the U.S. economy apart from our international
competitors.
12 Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy
Most venture capital hubs start with a steady flow of early stage innovations — often generated by scientists or entrepreneurs at top-flight research universities, government laboratories or existing startups.
The presence of at least one established,
innovative, venture-backed anchor company
that draws talent to the area (e.g. Dell in Austin
or Medtronic in Minneapolis) and spins out
entrepreneurs also helps seed the ecosystem.
In addition to capital, these entrepreneurs need
ongoing counsel from lawyers, accountants
and other business professionals to get their
ideas off the ground. Such support networks
build up over time and provide startups
and VCs with specialized services such as
intellectual property protection, IPO registration
compliance and human resources support.
Encouragement from state and local
government in the forms of favorable tax
and investment policies, common-sense
regulatory structures and funding of basic
research provide a third essential component.
Healthy infrastructure, which includes a strong
transportation network, affordable housing,
high-quality schools and a robust cultural
scene, completes the system.
By assembling and pursuing these elements
smartly, states and regions can establish
favorable environments for venture-backed
companies to grow and contribute to the local
economy in meaningful ways.
The Characteristics of Successful Regional VC Ecosystems
Top 5 States for U.S. VC-Backed Company Employment
RANK STATE VC-BACKED COMPANY REVENUE
1 California $845,601,000
2 Washington $256,081,000
3 Texas $242,608,000
4 Pennsylvania $238,383,000
5 Massachusetts $189,722,000
RANK STATE VC-BACKED COMPANY EMPLOYMENT
1 California 2,887,063
2 Texas 1,129,551
3 Pennsylvania 783,527
4 Washington 778,579
5 Massachusetts 775,151
Top 5 States for U.S. VC-Backed Company Revenue
IHS Global Insight created a database comprised of 23,623 venture capital-backed firms. This database, created from four unique databases, measures venture-backed employment and sales revenue across states and industries for the 2008 to 2010 period. The previous update in 2009 used the 2009 Venture Capital Database. From this catalog, the top 500 companies in terms of 2008 revenue were identified. Revised 2008 employment and revenue estimates were updated as available. Current 2010 employment and revenue estimates were entered into the database as available for the Top 500 companies as well. For the remainder of the companies in the database, 2010 employment and revenue figures were projected using industry growth rates. Every company in the database is assigned a MoneyTree and a VEIC code which IHS Global Insight mapped to a specific North American Industry Classification Code System (NAICS) code. Using IHS Global Insight’s Business Market Insights1, sales and employment growth figures for the 2008 to 2010 period were estimated. These growth rates were applied to the 2008 sales and employment observations to obtain estimated 2010 employment and sales.
Three databases were subsequently added to the 2009 Venture Capital Database to generate the current database consisting of 23,623 venture capital-backed firms. The databases consisted of companies that offered IPOs, received venture capital-backed investment funds, or were part of mergers or acquisitions during the January 1, 2009 to February 14, 2011 period. For all of the companies investigated in these three databases, 2008 and 2010 sales and employment numbers were entered as available. Careful cross-checking and research were conducted across all four databases to avoid redundancy.
Venture-backed companies which were acquired were reviewed further. To ensure proper counting, if a venture-backed company was acquired by another venture-backed company it was removed from the database because its jobs and revenue were already included in those of the acquirer. If an acquirer was not venture-backed, if the acquired companies comprised more than 50 percent of the acquirer, it was prorated. If the acquired company comprised less than 50 percent of the acquirer, the company was deleted from the database. While this likely understates the totals, no obvious methodology was identified to track these minority components going forward.
Methodology
1. IHS Global Insight’s Business Market Insights provides historical and forecast data projections for nominal sales, real sales, employment, and establishments at the national, state, and metro geographies for six-digit NAICS codes.
1655 Fort Myer Drive / Suite 850 / Arlington, Virginia 22209 / T: 703.524.2549 / F: 703.524.3940 / www.nvca.org
About NVCA Venture capitalists are committed to funding America’s most innovative entrepreneurs, working closely with them to transform breakthrough ideas into emerging growth companies that drive U.S. job creation and economic growth. As the voice of the U.S. venture capital community, the National Venture Capital Association (NVCA) empowers its members and the entrepreneurs they fund by advocating for policies that encourage innovation and reward long-term investment. As the venture community’s preeminent trade association, NVCA serves as the definitive resource for venture capital data and unites its 400-plus members through a full range of professional services. For more information about the NVCA, please visit www.nvca.org.