Venture Impact - Research Into The Impact Of Venture Capital-backed Companies On The U.s. Economy

Venture Impact - Research Into The Impact Of Venture Capital-backed Companies On The U.s. Economy

Loading
Loading Social Plug-ins...
Language: English
Save to myLibrary Download PDF
Go to Page # Page of 24

Description: In 2008, venture capital-backed companies employed more than 12 million people and generated nearly $3 trillion in revenue. Respectively, these figures accounted for 11 percent of private sector employment and represented the equivalent of 21 percent of U.S. GDP during that same year.

These findings extend trends regarding venture capital’s outsized impact – or “ripple effect” – on the U.S. economy that stretch back to the first edition of this report, published in 2001.

 
Author: Mark Heesen  | Visits: 258 | Page Views: 419
Domain:  Business Category: Entrepreneurial 
Upload Date:
Link Back:
Short URL: https://www.wesrch.com/business/pdfBU1QYB000HLRC
Loading
Loading...



px *        px *

* Default width and height in pixels. Change it to your required dimensions.

 
Contents:
Fifth Edition

Impact
The Economic Importance of
Venture Capital-Backed Companies
to the U.S. Economy

About IHS Global Insight
IHS Global Insight provides the most comprehensive economic, financial and political coverage available
from any source to support planning and decision making. Using a unique combination of expertise,
models, data and software within a common analytical framework, we cover over 200 countries and
more than 170 industries.
Recognized as the most consistently accurate forecasting company in the world, IHS Global Insight has
more than 3,800 clients in industry, finance and government with revenues in excess of $100 million, 700
employees and 25 offices in 14 countries covering North and South America, Europe, Africa, the Middle
East and Asia.
For more information about IHS Global Insight, Inc., visit www.ihsglobalinsight.com.

Content: The National Venture Capital Association
Design: Frost Miller Group
Copy: Michael Kooi
All data provided by IHS Global Insight except where noted.
ISBN: 0-9785015-7-8
Copyright 2009 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.

Fifth
Edition

Venture
Impact
The Economic Importance of
Venture Capital-Backed Companies
to the U.S. Economy

Table of Contents
Introduction

1

Report Summary

2

Venture Capital 101

3

Impacting the U.S. Economy

7

Driving Entire Industries

11

Delivering Value to All Regions

13

Building a Regional VC Ecosystem

17

The Role of Government in Entrepreneurship and Innovation

19

Methodology/Endnotes

20

Introduction
By Mark Heesen, president, National Venture Capital Association

Welcome to the fifth edition of Venture Impact, our overview of IHS Global Insight’s research into
the impact of venture capital-backed companies on the U.S. economy. The NVCA commissions this
study every two years to help illustrate the significant amounts of jobs, revenue and overall growth
impetus that innovative companies with venture backgrounds provide across the country. Such
companies include Intel, Genentech, Facebook, Microsoft, Starbucks and FedEx.
Few would dispute that these companies and thousands of others would not exist today without
the funding and guidance provided during their early stages by venture capitalists. Venture
capitalists are patient, long-term investors who are willing to take entrepreneurial risks alongside
company founders. No other asset class has the wherewithal or the appetite for this type of critical
high-risk investment in our country’s most promising ideas.
In addition to providing funding, venture investors also instill their portfolio companies with a
number of key cultural practices and traits that keep them growing over the long-term. These
include: an appreciation for continuous R&D, the habit of setting and reaching milestones, strong
corporate governance practices, the ability to pivot in uncertain markets and adjust business plans
when needed, and a global approach to operations. These tenets drive companies during their
formative years with venture backers and remain integral parts of their DNA long after – often
enabling them to grow faster and longer than their non-venture counterparts.
Like the ripples from a raindrop on the surface of a lake, innovation’s effects fan out from the heart
of the U.S. economy – bringing opportunities for growth and progress with every wave. Venture
capitalists continue to seek out these opportunities and fund ground-breaking ideas in good times
and bad – constantly transforming single ideas into economic growth. This growth can drive the
development of entire new industries – helping the U.S. to evolve and providing opportunities to
all segments of the workforce. As this year’s data suggests, no state or region holds a monopoly
on innovative ideas and the benefits they can bring. And while the venture phenomenon has
been uniquely American for some time, other countries are beginning to tap into the possibilities
that venture-backed companies can offer. Their success and America’s response could change the
economic tide considerably for future generations.
The data from IHS Global Insight continues to confirm that venture capital matters deeply, not
only to our economy but to the everyday lives of Americans, who use venture-backed innovations,
work at venture-backed companies and dare to bring new ideas to market. The venture industry
is committed to being an important part of economic growth, technology advancement and the
ongoing improvement of the quality of life for our country and our world.

Venture Impact

1

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

Report Summary
In 2008, venture capital-backed companies employed more
than 12 million people and generated nearly $3 trillion in
revenue. Respectively, these figures accounted for 11 percent
of private sector employment and represented the equivalent
of 21 percent of U.S. GDP during that same year. These
findings extend trends regarding venture capital’s outsized
impact – or “ripple effect” – on the U.S. economy that stretch
back to the first edition of this report, published in 2001.

The Economic Impact of
Venture Capital at a Glance
Revenue at U.S.
Venture-Backed
Companies

Jobs at U.S. Venture-Backed Companies

12.1 million

$2.9 trillion

Venture-Backed Jobs
as a Percent of
Private Sector
Employment

11%

Venture-Backed
Revenue as a
Percent of U.S. GDP

Total
115 million jobs

21%

Other macro trends that persist include:
Venture-backed companies outperformed the overall economy

Job Growth

in terms of creating jobs and growing revenue. Venture capital’s

The venture capital industry continues to grow entire new
industries nearly from scratch. In recent decades, venture

capital has played an instrumental role in creating high-tech,
high-growth industries such as information technology,
biotechnology, semiconductors and online retailing. 2008
investment data suggests that other critical industries such
as clean technology and social media will join that list.
Venture capital’s impact across the country grows via the

Venture-Backed
Company
Revenue Growth
2006-2008

6
5
Percent Growth

focus on innovative and high-growth-potential companies
continues to produce some of the U.S. economy’s best
performers. These companies are wired for driving and
capitalizing on change.

Revenue Growth

5.3%

4
3
2
1

Venture-Backed
Company Job
Total U.S.
Growth
Private Sector
2006-2008
Job Growth
1.6%
2006-2008

0

Total Revenue
Growth
2006-2008

3.5%

.2%

Total Venture Investment from 1970-2008 i

$456 billion into 27,000 + companies

continued development of regional VC hubs. While well-

established venture capital hubs like California and New
England continued to perform well in terms of overall jobs,
revenue and invested dollars, a number of upstarts outpaced
them in terms of growth. Areas such as the Pacific Northwest,
the Mid-Atlantic and the Southwest continue to grow venture
capital and entrepreneurial ecosystems that will serve them
well economically over time.

Top States for Venture-Backed Jobs and Revenue

California
New York
Texas

Massachusetts
Pennsylvania

Top Industries for Venture-Backed Jobs and Revenue

Retailing/Distribution
Industrial/Energy

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

Healthcare Services
Computers & Peripherals

2

Venture Impact

Venture Capital 101
The venture capital industry drives job creation and economic growth by helping entrepreneurs turn innovative
ideas and scientific advances into products and services that change the way we live. Venture capitalists do this
by providing the funding and guidance – and by assuming the risks – necessary to build high-growth companies
capable of bringing these innovations to the marketplace.

A Passion for Innovation
Not all venture capitalists start out as business people. In fact, many come to the industry
after successful careers as scientists, engineers or doctors. Driven by a desire to find
new and better ways of doing things, they combine their industry expertise with their
experiences as entrepreneurs to identify the most promising innovations in their fields
and then build companies around them.
In most cases, venture capitalists partner with other like-minded professionals with
complementary backgrounds and sector expertise to establish venture capital firms.
Generally, these firms function as small, tight-knit teams in which risks and responsibilities
are shared. In 2008, the average venture firm consisted of nine investing professionals.
In fact, nationwide, venture capital firms number fewer than 900ii.
Through their firms, venture capitalists pool their money with additional funds from
institutional investors such as pension funds, endowments and foundations. These
investors become “limited partners” in the firm’s funds, which are typically designated
for investment in specific industries (e.g. information technology, life sciences, clean
technology). Venture funds have a life span of approximately 10 years. During the first
several years, venture capitalists invest in promising new companies that then become
part of the firm’s portfolio. Over the course of the fund’s life, these companies are
nurtured with the hope that they will be acquired or go public at a premium to the
total amount invested. This process is called an exit.
Neither the venture capitalists nor the limited partners see a return on their total
investment unless the fund’s successful exits outnumber its losses. Approximately
one-third of portfolio companies fail, so those that do succeed must do so in a big way.
Because venture capital is considered to be a high-risk investment, investors expect

Venture Impact

3

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

VCs evaluate
potential company
investments based on:
Management team
Concept
Scalability
Market conditions
Fit to the fund’s objectives
Capital needs
Potential returns

a higher rate of return than they would receive in other asset classes.
Collectively, the venture industry has delivered on this criterion and typically
outperforms the public markets over the long-term.

Penchants for Prescience and Risk
Given the high incidence of failure, venture capitalists focus only on
innovations that have the potential to revolutionize existing industries or
give birth to new ones. Venture capital’s role in creating the biotechnology
sector through its investments in Genentech and Amgen is a good example
of the latter. Other areas of venture innovation include semiconductors,
software and the Internet. In the 21st century, venture capitalists are poised
to create a new sector – clean technology – that holds the same tremendous
promise for job creation and economic growth as those ground-breaking
sectors that have preceded it.
Ironically, finding innovative ideas isn’t the hard part. Government- and
university-funded research produces startling new discoveries all the time.
The challenge lies in determining which innovations can be translated into
commercially viable products and services and then building companies
from scratch to market them.
While tales of crumpled cocktail napkins scribbled with formulas and
diagrams may exaggerate the point, VCs often have little more to go on
initially than an entrepreneur’s idea expressed in a rudimentary business plan.
For this reason, VCs employ a rigorous vetting process (see sidebar). For every
100 plans, it is estimated that only 10 make it to the due diligence phase and
only one gets funded.
Making investments at the earliest stages of a company’s development
involves extraordinary risk. Young companies have little or no collateral to
secure bank loans, no assets or track records to attract financing from private
equity firms and no opportunities for short term gain to interest hedge
funds. Venture capitalists step in and assume this risk by providing capital

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

4

Venture Impact

in exchange for an equity stake in the company. The VC’s goal is to grow
the company to a point where it can go public or be acquired by a larger
corporation – at which time the firm and its limited partners may capture
their return if the exit is worth more than the total investment.

One Part Nature, Two Parts Nurture
Unlike most other investors, venture capitalists provide more than just
money. Typically, VCs take seats on the boards of their portfolio companies
and participate actively in firm management. This often includes connecting
the company with resources and expertise for development and production,
providing counsel and contacts for marketing and assisting in hiring
management. In this way, they remain partners with the entrepreneurs in
growing the company to a point where it can stand on its own.
As part of this process, the venture capitalist 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, or if the risk profile changes significantly due to
market conditions or regulatory policy, the VC’s responsibility to their limited
partners will require them to walk away.
These elements – the patience, the hands-on guidance, the willingness
to take on risk and fail – make venture capital unique as an asset class. In
no other ecosystem are all of the stakeholders aligned around one simple
objective: company growth. This alignment drives U.S. economic growth
and generates more jobs than other asset classes, and it has set the U.S.
economy apart from those of other countries.

Venture Impact

5

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

Changing the World
Venture capital has
played a role in
creating many
high-tech industries.
Information technology
Biotechnology
Medical devices
Network security
Online retailing and
social media
Clean technology

For decades, the U.S. venture capital industry has garnered the envy of the
world. It has spurred the development of many high-tech industries (see
side bar) and has helped to build innovative powerhouse companies that
are now household names: Amazon, Google, Apple, Cisco, Staples and eBay.
These successes have made the U.S. a magnet for the globe’s best and
brightest scientists and entrepreneurs.
Today, countries around the world have begun to emulate the U.S. model
by adjusting their tax and regulatory policies and by strengthening
intellectual property protection. This will inevitably lead to more innovation
worldwide – but also to increased competition for venture capital dollars
and the benefits they produce. The primacy of the U.S. industry is no longer
the given that it once was.
For this reason, U.S. policymakers must evaluate the potential impacts and
consequences of new rules and regulations with great care. They must also
weigh the benefits of such policies against the risk of hobbling what has
been one of America’s most decisive competitive advantages over the past
half century.
With a supportive public policy environment, venture capital promises
to provide for the efficient distribution of capital and expertise to the
most promising ideas in the U.S. It remains a key ingredient—along with
entrepreneurial spirit, support for scientific discovery and an appetite for
risk—for ongoing innovation.

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

6

Venture Impact

Small Drops, Big Splash
Venture-backed companies impact the U.S. economy
Representing just 0.2 percent of U.S. gross domestic product in 2008, venture capital remains a relatively small
asset class. Yet, the companies it funds impact America’s economy in large ways.

Take job creation. Venture-backed companies in the U.S. account for more than
12 million jobs (Chart A ), or 11 percent of total private sector employment (Chart B).
These numbers reflect the industry’s focus on finding and funding only those companies
with high growth potential. This may be one reason that job growth generated by
venture-backed companies outstripped overall U.S. job growth between 2006 and
2008 (Chart C).
Of course, quality matters as much as quantity. In building companies from scratch,
venture capitalists create opportunities for all segments of the workforce. In addition
to the entry-level jobs generated from the creation of large-scale employers such as
Starbucks, FedEx and Home Depot, the industry’s emphasis on information technology,
life sciences and clean tech furthers the development of highly skilled and “green collar”
jobs that many economists point to as critical for future health and growth.

A

Economic Benefit of U.S. Venture-Backed Companies 2000-2008
$2.9

18

$2.6

$2.5

$1.7

14

$1.5

11.7

12
10

8.7

Revenue

12.1

$1.5

9.4

$1

Jobs

8
6

2000

7

2003

$2

2006

Revenue (trillions)

Jobs (millions)

16

Venture Impact

$3

$.5

2008

$0

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

B

VC Backed Companies
Total
Employment at Venture-Backed Companies as a Percent Private Sector Employme
of Private Sector Employment 2008

12.1 million jobs

11%

Total 115 million jobs
Venture-Backed Companies
Total Private Sector Employment

C

Employment and Revenue Growth at Venture-Backed
Companies vs. Total Economy 2006-2008
Venture-Backed

6

Total Private Sector Growth

Percent Growth

5

5.3%

4
3.5%

3
2
1
0

1.6%
.2%
Employment

Revenue

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

8

Venture Impact

Venture-backed companies also have a significant impact on U.S. revenue. With
almost $3 trillion in revenue – equivalent to one-fifth of the country’s gross domestic
product in 2008 (Chart D) – these companies have grown their revenue at a swifter
clip than the overall U.S. growth rate since 2006 (Chart C).

D

Revenue at Venture-Backed Companies Relative to U.S. GDP
$15
$14.3
trillion

Dollars (trillions)

$12
$9
$6
$3
$0

21%

$2.9
trillion
Venture-Backed
Companies

Total U.S. GDP

Perhaps it’s this amplified effect of each dollar that has motivated venture capitalists
through upswings and downturns. Since its formative years in the early 1970s, the
U.S. venture capital industry has invested approximately $456 billion in more than
27,000 companies (Chart E). While many of these companies ultimately failed,
successes like Genentech, eBay and Intel went on to create entire new industries
and ways of doing business.
After several years of anomalous growth and contraction spurred by the technology
bubble and its subsequent burst in 2000, the industry in recent years has returned to
a steadier growth trajectory, with venture capitalists investing $20-$30 billion annually.
The industry learned that it cannot scale to large extents within existing industry
sectors. However, with promising innovations taking place in the clean technology
category, breakthroughs occurring in personalized medicine and advances in cloud
computing, it is expected that VC investment will continue its steady growth for
years to come. With that growth comes the promise of even more jobs and revenue
for the U.S. economy.

Venture Impact

9

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

Venture Capital Investment in the United States 1970-2008

E

$101.8

$105

7000
6,334

Number of Companies

6000

Dollars Invested (billions)

$39.3

$40

3,095
2,638

$30

2,462

2,627

2,709

3,312
$30.6

3,276
$28.1

3000

$26.3

$25

1,174

1,539
1,036

$20

$22.1

$21.3

2000

$22.9

$19.3

1000

$15
500

386

$10
$5
$0

$7.6
116
$0.1
1970

300
$0.5
1980

$2.6

$2.6

1985

1990

1995

2000

2001

2002

2003

2004

2005

2006

2007

2008

0

Source: The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.

For every dollar of venture capital invested from 1970-2008,
of revenue was generated in 2008.

$6.36

In 2008, one U.S. job existed for every
of venture capital invested from 1970-2008.

$37,702

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

10

Venture Impact

Number of Companies

Dollars Invested (billions)

5000
3,787

$35

From the Ground Up
Venture-backed companies drive employment and revenue in entire industries
Like water, innovation is nearly impossible to stop once it gets flowing. It often begins buried deep within layers
of academic and government research. Heated by entrepreneurial zeal and funding, it pushes to the surface like
a hot spring – giving life to and nourishing whole economic ecosystems.

Venture Capital Nourishes Entire Industries
Throughout its history, venture capital has developed numerous life-changing
innovations into entirely new industries in just this way. In the 1970s, VCs helped found
the biotechnology industry through their investments in pioneering companies like
Genentech and Amgen. A decade later, venture funding was growing the software
development and semiconductor industries into prime drivers of the U.S. economy.
Online retailing (Amazon, eBay) followed in the 1990s and clean technology is poised
to extend this legacy today.
Venture capital’s impact on these industries is reflected in the continued dominance of
venture-backed companies in generating employment and revenue within them. Even
today, eight out of every 10 people employed in the software development industry
work for companies with venture-capital roots. (Chart F) Additionally, venture-backed
companies generated more than half of all revenue in the electronics/instrumentation,
semiconductor and telecommunications industries in 2008 (Chart G ).

Back to the Well
Given the growth these industries have experienced and the role of venture-backed
companies in driving it, it probably comes as no surprise that venture capitalists
continue to fund innovations within them. In 2008, the software, life sciences
(biotechnology and medical devices) and industrial /energy industries garnered the
most venture investment; these numbers are consistent with the venture legacy
of investing in high-innovation areasi. Other areas of investment that have ebbed
and flowed over time but continue to receive billions of dollars each year in new
venture investment include media and entertainment, IT services, semiconductors
and telecom.

Venture Impact

11

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

F

Venture-Backed Company Employment as a Percentage of Total Industry
Employment Top Five Industry Sectors - 2008
Venture-Backed
Total
Employment Employment

Industry

Venture-Backed
Companies Share
of Employment

Software

1,008,929

80.99%

736,961

994,862

74.08%

Semiconductors

309,437

418,998

73.85%

Networking and Equipment

392,505

668,058

58.75%

Electronics/Instrumentation

G

817,166

Telecommunications

271,224

528,148

51.35%

Venture-Backed Company Revenue as a Percentage of Industry Revenue
Top Five Industry Sectors - 2008
Venture-Backed
Revenue
(millions)

Industry
Electronics/Instrumentation
Semiconductors

Total Sector
Revenue
(millions)

Venture-Backed
Companies Share
of Revenue

$129,597

$193,427

67.00%

$86,776

$157,660

55.04%

Telecommunications

$256,136

$501,729

51.05%

Biotechnology

$209,358

$444,028

47.15%

Computers and Peripherals

$315,054

$711,331

44.29%

Industry Profile: Clean Technology
Just as venture capital has played integral roles in the development
of the biotechnology, semiconductor and Internet industries, the
industry is poised today to use its expertise gained in building
these industries to create a new one: clean technology.
H

Venture Capital Investment in
Clean Technology 2004-2008
$4.1

Dollars Invested (billions)

$4
$3

$2.7

$2
$1
0

$1.5

$.4

$.5

Dollars Invested

The development of clean tech, which comprises companies
operating in areas such as alternative and renewable energies,
recycling, electric cars, clean water, power-grid management
and battery technology, comes at a critical time for the U.S.
economy. VCs invested $4.1 billion into clean tech companies in
2008 – making it the industry’s fastest growing sector (Chart H).
Clean technology investment is quintessential venture capital in
the sense that there is a tremendous amount of innovation to be
realized in the space and a growing demand to employ these new
technologies. Like all venture-backed companies, these start-ups
will take years to mature, but they offer the promise of green
jobs that will remain here in the U.S. – employing Americans and
addressing critical climate change and sustainablility issues.

2004
2005
2006
2007
2008
Source: The MoneyTree Report by PricewaterhouseCoopers and the National
Venture Capital Association, based on data from Thomson Reuters.

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

12

Venture Impact

Rippling Coast to Coast
Venture-backed companies impact regional economies throughout the U.S.
Over the course of its growth, the venture capital industry has stimulated swirls of activity across the nation.
While mature venture hubs like Silicon Valley and Boston’s Route 128 corridor tend to get most of the attention,
smaller hubs like Pennsylvania, Minnesota, Florida and Washington have positioned themselves to become
consistent drivers of the U.S. economy.

That said, venture capital’s traditional powerhouse regions – California, Massachusetts
and Texas – led the way in 2008 in terms of both revenue and employment by
venture-backed companies. (Charts I and J) While IHS Global Insight calculates the
figures in this section based on where venture-funded companies are headquartered,
in many cases, the impacts of the job creation and revenue streams generated by
these companies flow across state and regional borders.

Riding Its Own Wave
California perennially tops the list of venture impact regions – in part because of
momentum it has built from decades of venture investing. The state’s continued
strength flows from a number of factors. First, its venture community invests in
companies across multiple sectors (e.g. information technology, life sciences, clean
technology). This increases the overall impact of those invested dollars on the
state-wide economy while providing a measure of protection against sector-specific
downturns. Second, California has developed more than one venture hub: the
aforementioned Silicon Valley in the north, San Diego in the south, and a burgeoning
new corridor in Orange County. Third – and no less important – local venture-backed
companies and their investors have worked consistently with California policymakers
to ensure that young innovative companies and the technologies they develop have
the opportunity to grow and succeed within the state’s larger business climate.
These factors have led to nearly $200 billion in venture investment in California since
1970i. Entire new industries have grown out of the state during this period – providing
jobs, prosperity and enhancements in quality of life that have rippled out across the
state and the country.

Venture Impact

13

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

I

Employment at Venture-Backed Companies Headquartered in the State
2008
Rank

State

2008 Venture-Backed
Company Employment

1

California

3,885,888

2

New York

1,694,316

3

Texas

918,451

4

Massachusetts

651,239

5

Georgia

621,181

6

Pennsylvania

561,525

7

Tennessee

434,376

8

Minnesota

365,584

9

Virginia

360,424

10

New Jersey

289,720

11

Florida

242,074

12

Washington

219,954

13

214,432

Ohio

158,876

15

J

Illinois

14

Connecticut

141,539

Revenue at Venture-Backed Companies Headquartered in the State
2008
Rank

State

2008 Venture-Backed
Company Revenue (millions)

1

California

$997,288

2

New York

$328,665

3

Texas

$221,888

4

Pennsylvania

$205,661

5

Minnesota

$159,092

6

Massachusetts

$146,211

7

Virginia

$115,649

8

Washington

$79,805

9

Florida

$75,538

10

Georgia

$72,619

11

Tennessee

$64,157

12

New Jersey

$55,298

13

Illinois

$47,121

14

Maryland

$40,367

15

Connecticut

$39,113

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

14

Venture Impact

Rising Tides
While traditional venture capital regions maintained their relative strength with regard to total venturebacked employment and revenue, a number of upstart states rose to the top in terms of job creation
and revenue growth over the 2006-2008 timeframe.
The state of Washington set the pace for compound annual growth of venture-backed companies
during this time in both job creation (Chart K) and revenue growth (Chart L). Much of this growth
was driven by venture-backed retailers like Amazon, Microsoft, Costco and Lowe’s – all of which are
headquartered there. Maryland, with its strength in the healthcare industry, edged out perennial
powerhouses Massachusetts and Texas for second place with 3.7 percent compound annual job
growth and bested fellow upstart Arizona for second place in revenue growth.

K

Employment Growth of
Venture-Backed Companies
Headquartered in the State
2006-2008

Rank

L

State

Rank

1

Washington

2

Maryland

3

Massachusetts

4

Texas

5

Arizona

6

Minnesota

7

Pennsylvania

8

California

9

New York

0

2

15

6.5%

Minnesota

6.4%

New York
Iowa

9

California

3

4

5

6

0

13.4%
9.3%

6.1%
5.8%

West Virginia

10

Compound Annual Growth Rate in Percentage

Venture Impact

Louisiana

8

1.9%

7.8%

7

2.2%

8%

Massachusetts

6

2.1%

Arizona

5

2.5%
2.4%

Maryland

4

3.1%

1

3

3.7%

2.7%

1

State
Washington

2

5.6%

Tennessee 1.4%

10

Revenue Growth of
Venture-Backed Companies
Headquartered in the State
2006-2008

3

5.5%
5.1%
6

9

12

Compound Annual Growth Rate in Percentage

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

15

Flowing Out From Many Centers
Years ago, venture capitalists rarely travelled beyond their own area codes to find new deals.
During these early years, innovators and entrepreneurs flocked to emerging hubs like Silicon
Valley and Boston to give their ideas the best opportunity to get noticed by investors. These
areas subsequently grew into the venture centers they are today (Chart M).

M

Venture Capital Investment Around the Country
1970-2008
Dollars Invested (billions)

Northwest $18.5

New England $55.2
North Central $8.3

Silicon Valley $150.2

Colorado $14.2

Midwest $22.7

NY Metro $37.2
Philadelphia Metro $12.7
DC Metroplex $20.3

LA/Orange County $29.2
San Diego $16.3

Southwest $7.2

South Central $2.1

Texas $26.1
Southeast $31.9

Source: The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.

Naturally, not everyone with a great idea moved to one coast or the other. Within the last decade,
venture capitalists have begun to identify and nurture companies by following the trail of
innovation across the U.S. – even to states and regions with little or no previous venture capital
history but with vibrant research communities and ambitious entrepreneurs.
As a result, certain regions have grown into venture capital hubs for different industry sectors.
Minnesota, for example, has developed a strong medical technology presence. Other
emerging specialty hubs include Tennessee for healthcare and financial services, New Jersey
for biotechnology, and New Mexico and the Southwest for solar and renewable energies.

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

16

Venture Impact

Catching the Venture Wave
Building Successful Regional VC Ecosystems
While its innovations ripple through the lives of people around the country and around the world each day,
venture capital still flies mostly below the public’s radar. In those regions that have built thriving venture hubs,
however, the industry’s effects on job creation, revenue growth and the tax base send a consistent signal to
everyone: There’s opportunity here.

For this reason, business leaders and government officials often ask: How can we develop a venture
ecosystem like California’s Silicon Valley or Boston’s Route 128 corridor in our region? While these
communities may thrive based on different industry sector concentrations, they mostly feature the same
elements working in the same symbiotic ways.
Most start with a steady current of ideas – usually generated by a top-flight research university,
government laboratory or academic community. The presence of an innovative, venture-backed anchor
company with an entrepreneurial streak – one that draws talent to the area (e.g. Dell or Genentech) – is
another plus. These organizations are often breeding grounds for the entrepreneurs of tomorrow and
regularly spin-out new ideas and companies from existing operations. Regions with anchor companies
also have pools of qualified middle management from which to draw.
Naturally, these entrepreneurs need significant operations support to get their ideas off the ground.
That’s why a healthy network of lawyers, accountants and other business professionals who understand
the challenges of the start-up community remains essential to building a viable venture capital hub.
These networks develop over time and provide start-ups and VCs with specialized services such as
intellectual property protection, IPO registration, auditing and workforce development.
Support from state and local government in the form of favorable tax policies, common-sense
regulatory structures and encouragement of basic research provide a third essential component.
Lawmakers must realize that the local business environment they create can affect fledgling start-up
companies in significant ways. Even small blips in policy can register as huge waves in the balance
sheets and risk profiles of young companies.
Good old fashioned infrastructure completes the system. This means easy access for business travelers
in the form of efficiently run and convenient airports and a high quality of life (i.e. affordable housing,
manageable commutes, high-quality schools) for the potential labor pool.
These same components helped develop areas like San Diego and northern Virginia into focal points of
venture activity. By pursuing them smartly, other states and regions can create their own VC ecosystems.

Venture Impact

17

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

Regional Profiles
The development of Seattle’s South
Lake Union area into a hub for life
sciences symbolizes the city’s growing
innovation economy

Washington State

Photo by Lauren Curtin

For some, venture capital isn’t so much an asset class as it is a state of mind –
what with its predilection for innovation, energetic self-reliance and reasoned
acceptance of risk. In recent years, few states have embraced this state of mind
more readily than Washington. The state attracted nearly $1 billion in investment
in 2008i while its venture-backed companies grew employment and revenue
faster than those of any other state – including California. Washington’s venture
capital culture springs from a number of sources. First, it hosts top-flight research
institutions such as the University of Washington, the Seattle Institute for Systems
Biology and the Fred Hutchinson Cancer Research Center. Second, three of the
most innovative companies of the past three decades – Microsoft, Amazon and
Starbucks – make their homes and exert enormous cultural influence in the
state. Third, the state’s gorgeous geography, outdoor/adventure scene and hip
coffee-house culture have drawn a deep pool of young, energetic talent. Like an
inevitable chemical reaction, these elements have spawned a robust venture scene
that has produced leading companies in the fields of SAS software development,
personalized medicine and clean technology. Furthermore, local venture
capitalists have championed the industry’s benefits and represented its interests
by vigorously engaging business leaders and policymakers through organizations
like the Technology Alliance. In 2008, venture-backed companies in Washington
employed nearly 220,000 people and generated nearly $80 billion in revenue.

San Diego

The University of
California, San Diego
plays an integral role in the
city’s venture ecosystem.

Courtesy UC San Diego, Photo by
Marc Tule, copyright© 2001

Twenty-five years ago, San Diego was little more than a sleepy navy and resort
town. Today, it’s the kind of place where 400 people show up at 7 a.m. for a San
Diego Venture Group seminar. The city has grown into a vibrant venture capital
hub ($1.2 billion in venture investment in 2008i) through close cooperation
between its public, private and academic sectors. This process actually began
in the 1960s, as a world-class research community started to coalesce around
the newly established University of California campus in town. Before long,
researchers began to spin their innovations into young companies like Hybertech
and Idec Pharmaceuticals in the biotechnology space, Linkabit and Qualcomm
in the telecomm industry and Chipsoft in the software sector. Sensing the same
synergies that had recently put Silicon Valley on the map, local business leaders
partnered with UC San Diego to connect small companies with investors and
talent. Recognizing an opportunity to remake its economy, the city worked to
create a favorable growth environment for young companies and began to market
San Diego as a center for technology and knowledge workers. Today, the city
boasts thriving biotechnology, information technology and software development
sectors and keeps pace with larger geographical regions such as the Midwest, the
Southeast and state of Texas for venture investment.

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

18

Venture Impact

The Role of Government in
Entrepreneurship and Innovation
Even though many venture-backed companies have the DNA to grow faster and generate more jobs than their
non-venture counterparts, their success cannot be taken for granted. For this reason, the venture capital industry
advocates for public policies that support the entrepreneur. These include intellectual property protection, open
trade provisions, immigration support for highly-skilled workers and encouragement of capital formation. In these
areas, government can play a vital role in maximizing venture capital’s impact on the economy.

Supporting capital formation begins with a tax policy that rewards long-term investment and
encourages calculated, entrepreneurial risk taking. Tax differentials, such as favorable rates for capital
gains and carried interest, serve as important tools for encouraging investment in emerging growth
companies. In our current financial system, venture capital is the only source of long-term, institutional
funding for such companies. When government increases the tax burden on venture capital, however,
it inhibits the flow of dollars to innovative young start-ups.
Venture-backed companies also require a reasonable, efficient and predictable regulatory apparatus.
Due to the relatively long-term investment horizons (typically five to seven years and often longer)
and the uncertainties inherent in new product development, venture capital is already one of the
most risk-intensive asset classes in the world. Additional delays and uncertainties caused by swings in
regulatory policy, inconsistent guidelines and processes for federal agency approvals and slow-moving
bureaucracies can push the risk profile of even the most exciting innovation beyond what a venture
capitalist can consider acceptable. A promising company has a greater chance of receiving venture
funding if there is transparency around the regulatory approval process through which it will move.
Finally, the government has an important role to play in the funding of basic research. It’s from this
pipeline of scientific advances in fields like information technology, life sciences and clean technology
– achieved at government and university labs – that the venture capital community has traditionally
drawn its innovations. VCs then commercialize these advances through a process called applied
research. In this way, the government and the venture capital community have enjoyed a symbiotic
relationship in bringing new discoveries to market. Without government funding of basic research,
however, this pipeline would dry up.
By understanding the effects of policy on venture capital and the innovative young companies it seeks
to build, government can help ensure the health of this vital source of economic growth. In fact, many
countries have begun to adjust their tax and regulatory policies and increase their research funding
levels in order to provide the same competitive advantages that U.S. companies have enjoyed for
decades. For this reason, U.S. lawmakers will have to consider the implications of government policy
for venture capital firms and their portfolio companies more closely than ever.

Venture Impact

19

The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy

Methodology
To conduct this study, IHS Global Insight created a database comprised of 23,565 venture-backed firms. This
database was updated from the 2007 Venture Capital database (containing 2006 statistics) which measured
venture-backed employment and revenue across states and industries. This database was rolled forward to 2008
using transactions which included: (a) companies that went public, (b) companies which received venture-backed
financing rounds, or (c) companies acquired during the April 1, 2007 to February 11, 2009 period. Careful crosschecking and research was conducted to avoid double counting.
Current 2008 employment and revenue statistics or estimates were entered into the database as available for the
top 500 companies, as well. For the remainder of the companies’ in the database, 2008 employment and revenue
figures were projected using industry growth rates. Each company in the database is assigned a MoneyTree and a
Thomson industry sector code which IHS Global Insight mapped to a specific North American Industry Classification
Code System (NAICS) code. Using IHS Global Insight’s Business Demographics Navigatoriii, sales and employment
growth figures for the 2006 to 2008 period were estimated. These growth rates were applied to the 2006 sales and
employment observations to obtain estimated 2008 employment and sales.
Venture-backed companies which were acquired were reviewed further. To ensure proper counting, if a venturebacked 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.
About the underlying venture capital activity data:
U.S. venture capital investment information is derived from PricewaterhouseCoopers/National Venture Capital
Association MoneyTree Report, Data: Thomson Reuters, the official venture capital activity database of the NVCA.
This report derives its data from several sources including quarterly surveys of NVCA members. We are grateful for
the active participation of the venture industry in this survey.

End Notes
i  ource: The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based
S
on data from Thomson Reuters.
ii

Source: National Venture Capital Association 2009 Yearbook, prepared by Thomson Reuters.

iii  lobal Insight’s Business Demographics Navigator provides historical and forecast data projections for
G
nominal sales, real sales, employment, and establishments at the national, state and metro geographies
for 6 digit NAICS codes.

The National Venture Capital Association represents approximately 460 venture capital
firms. NVCA’s mission is to foster greater understanding of the importance of venture
capital to the U.S. economy and support entrepreneurial activity and innovation.
NVCA represents the public policy interests of the venture capital community, strives
to maintain high professional standards, provides reliable industry data, sponsors
professional development and facilitates interaction among its members.
National Venture Capital Association, 1655 Fort Myer Drive, Suite 850, Arlington, VA 22209-3114
703.524.2549 Fax: 703.524.3940 www.nvca.org