Venture Impact | NVCA

EDITION 6.0

Venture Impact 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 Group Copy: 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.

Introduction

Mark Heesen

President National Venture Capital Association

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 capitalbacked 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.

Mark Heesen President, National Venture Capital Association

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

1

Venture Impact At-A-Glance

Venture-Backed Companies Outperformed Total U.S. Economy 2008 – 2010

Employment Growth

Revenue Growth

0.0

2.0

-0.5

- 2.0%

1.5

VC-Backed Companies

-1.0

1.0

-1.5

0.5

-2.0

0.0

- 3.1%

-2.5

U.S. Private Employment

-3.0

VC-Backed Revenue

-0.5

- 1.5%

-1.0

U.S. Sales

-1.5

-3.5

INVESTED

$1

$6.27 REVENUE

For every dollar of venture capital invested from 1970 to 2010, $6.27 of revenue was generated in 2010.

2

1.6%

INVESTED

< 0.2

%

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.

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

Venture-Backed Jobs â&#x20AC;&#x201C; 2010

11

%

11.9 million venture-backed jobs = 11% of U.S. Private Sector Employment

107.3 million U.S. Private Sector Jobs

Venture-Backed Revenue â&#x20AC;&#x201C; 2010

10

%

$3.1 trillion in venture-backed revenue = 10% of Total U.S. Sales

$30 trillion U.S. Total Sales

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

3

Venture Capital Grows U.S. Jobs and Revenues

14 12 10

4

8.69

11.68

12.36

11.0%

12 10

11.87 8

9.37

6

6 4 2

2 0

2000

2003

2006

VC-Backed Company Jobs

2008

2010

0

% of U.S. Private Employment

U.S. Venture-Backed Company Revenue 2000 – 2010 3.5

19.7%

Trillions of Revenue

3.0 2.5

14.9%

15%

$2.64

20.8%

21%

$2.99

$3.08

1.0

$1.49

10

$1.67

5

0.5 0

20

15

2.0 1.5

25

2000

2003

2006

VC-Backed Company Revenue

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

2008

2010

% of U.S. GDP

0

% of U.S. GDP

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.

8

7.8%

8.6%

10.8%

4

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.

10.2%

% of U.S. Private Employment

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.

U.S. Venture-Backed Company Employment 2000 – 2010

Millions of Jobs

The venture capital community’s positive impact on the U.S. economy far outweighs its relative size.

Venture Capital Investment in the United States 1970 – 2010 120

7000

6420 Venture Capital Dollars Invested ($Billions)

$99.20

5000 80 3845

4000

60

3152 2688

2486

2655

3398 2863

2752

2554

3000

$38.00

40 1565

$20.90

1050

20

$18.90

$21.80 $22.70

$26.30

2000

$30.40 $28.70 $19.50

$23.30

1000 93

314

$.10

0

3383

Companies Funded

Dollars Invested ($Billions)

6000

Companies Funded by Venture Capital

100

1970

$.50

1980

$7.30 $2.60

1990

1995

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0

Venture Capital Investment by Region 1970 – 2010

Northwest: $20 BN North Central: $9 BN

New England: $59 BN New York Metro: $40 BN

Silicon Valley: $165 BN Los Angeles/OC: $32 BN

Colorado: $15 BN

Midwest: $25 BN

Phila. Metro: $13 BN DC Metro: $22 BN

South Central: $2 BN

San Diego: $18 BN Southwest: $8 BN

Southeast: $33 BN Texas: $28 BN

Source: The MoneyTree Report by PwC and NVCA based on data from Thomson Reuters

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

5

Scanners

Venture Capital Creates New Industries Wound Care

Animal Health

Personal Computers

Fabless Consumer and Industrial Products

Biotechnology Gene Therapy

Regenerative Medicine

Fiber Optics Minimally Invasive

Neurostimulation

Prosthetics

Patient Monitoring

Database Management

4800+ Companies Funded

Groupware

Prescription Management Hospital Management

Clinical Diagnostics Imaging Medical Practice Management

Personalized Medicine

6

Genetic Screening and Testing

17,000+ Comp

Surgical Devices

Health Care

Biosensors

Inform Techn

Drug Delivery

Medical Devices

Diagnostics

Wafers

Semiconductors/ Electronics

Lasers

Human Therapeutics/ Biologicals

Vaccines

Compu Hardw

Controllers/ Sensors

Agricultural Products

Cell Therapies

T

Healthcare Services/IT

Electronic Medical Records

Managed and LongTerm Care

Medical Payment Systems

Healthcare Quality Management

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

Cloud Computing

Computer Software

Business/ Office

ERP/ Inventory

Encryptio Security Firewall

Terminals

Lighting Systems

PDAs

uter ware

Social Media Online Gaming

Battery Technology

Pump Storage

Flywheels

Smart Grid

Information Portals

Energy Efficiency

Energy Storage

Email

Internet E-Commerce

Rare Earth Mineral Mining

Search Engines

mation nology

Clean Technology

Air Filtration

Recycling

panies Funded

on/ y/ ls

Advanced Building Materials

Pollution Control

900+ Companies Funded

Water Purification

Solar

Wireless Devices

Communications

Nuclear

Instant Messaging

Alternative Energy

Biomass

Satellites Networking WANS/LANS

Wind

Natural Gas Geothermal

Electric Automobiles Wave Energy

GPS Waste to Energy

Hydropower

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.

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

7

Venture Capital Drives the Hi-Tech Sector VC-backed companies keep growing faster than their peers â&#x20AC;&#x201D; 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 â&#x20AC;&#x201D; 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.

8

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

Percent of VC-Backed Jobs In Major Industry Sectors

90%

Software

734,064 VC-BACKED JOBS

74%

Biotechnology

427,353 VC-BACKED JOBS

72%

Semiconductors/Electronics

620,773 VC-BACKED JOBS

54%

Computers

1,179,287 VC-BACKED JOBS

48%

Telecom

445,596 VC-BACKED JOBS

Percent of VC-Backed Revenue In Major Industry Sectors

88%

Semiconductors/Electronics

$234.4 MILLION VC-BACKED REVENUE

80%

Biotechnology

$161.6 MILLION VC-BACKED REVENUE

46%

Computers

$402.3 MILLION VC-BACKED REVENUE

40%

Software

$226.5 MILLION VC-BACKED REVENUE

39%

IT Services

$22.5 MILLION VC-BACKED REVENUE

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

9

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.

Costco

Genzyme

Genentech

First Solar

Zynga

Kyphon Google Amyris Biotechnologies

FedEx eBay

Zipcar Boston Scientific

Intel Opower Starbucks Twitter Cephalon

MedImmune Amazon Staples Tesla

Apple

10

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

Microsoft

Cephalon

Facebook Silver Spring Networks, Inc.

Outback SteakHouse

Home Depot

EnerNOC, Inc.

Intuitive Surgical Solazyme

Skype

BrightSource Energy

Medtronic Cisco

Companies Founded With Venture Capital:

Amgen Zappos

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

part of this process, the venture capitalist also

after successful careers as scientists, engineers,

guides the company through multiple rounds

doctors or entrepreneurs. Working through tight-

of financing. At each point, the company must

knit firms, they raise money from pension funds,

meet certain milestones to receive fresh funds

endowments, foundations and high-net-worth

for continued growth. If the company fails to

individuals to form a venture fund. This fund

meet these goals, the VC’s responsibility to his

is then invested in the most promising startup

investors may require him to walk away.

companies (which become part of the VC’s “portfolio”), typically over the course of 10 years.

The VC’s goal is to grow the company to a point where it can go public or be acquired

VCs focus exclusively on companies developing

by a larger corporation (called an “exit”) at a

significant innovations — be it a new piece of

price that far exceeds the amount of capital

software, a life-saving cancer drug, or a new

invested. Approximately one-third of portfolio

model for consumer sales. Unless the company

companies fail, so those that do succeed must

is poised for significant growth, a VC won’t

do so in a big way. Typically, when a venture-

invest. Making investments at the earliest

backed company exits the portfolio, the VC

stages of a company’s development — often

distributes the profits to the fund’s investors

before a product or service is more than just

and eventually leaves the portfolio company’s

an idea — involves significant entrepreneurial

board of directors. Once all the investments

risk, which severely limits capital sources for

of a particular fund have been exited and the

such companies. Yet, venture capitalists assume

proceeds have been distributed, the fund

this risk alongside the company founders by

ends. In many cases, however, the institutional

providing capital in exchange for an equity stake

investors reinvest these earnings in a new

in the company.

crop of funds and the process begins anew.

During this investment stage, a venture

These elements — the patience, the hands-

capitalist provides more than just money to

on guidance, the willingness to take on risk

the company. Typically, the VC takes a seat on

and fail — make venture capital unique as an

the board of directors and participates actively

asset class and enable it to drive U.S. economic

in company operations. This commitment

growth faster and generate more jobs than

often includes providing strategic counsel

other asset classes. Historically it has helped set

regarding development and production, making

the U.S. economy apart from our international

connections to aid sales and marketing efforts,

competitors.

and assisting in hiring key management. As

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

11

The Characteristics of Successful Regional VC Ecosystems Most venture capital hubs start with a steady flow of early stage innovations â&#x20AC;&#x201D; 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

Top 5 States for U.S. VC-Backed Company Employment 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

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.

Top 5 States for U.S. VC-Backed Company Revenue

Encouragement from state and local government in the forms of favorable tax

RANK

STATE

and investment policies, common-sense regulatory structures and funding of basic

VC-BACKED COMPANY REVENUE

1

California

$845,601,000

2

Washington

$256,081,000

scene, completes the system.

3

Texas

$242,608,000

By assembling and pursuing these elements

4

Pennsylvania

$238,383,000

5

Massachusetts

$189,722,000

research provide a third essential component.

Healthy infrastructure, which includes a strong transportation network, affordable housing, high-quality schools and a robust cultural

smartly, states and regions can establish favorable environments for venture-backed companies to grow and contribute to the local economy in meaningful ways.

12

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

Methodology 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 Insightâ&#x20AC;&#x2122;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 capitalbacked 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 venturebacked 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.

1. IHS Global Insightâ&#x20AC;&#x2122;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.

About NVCA Venture capitalists are committed to funding Americaâ&#x20AC;&#x2122;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 communityâ&#x20AC;&#x2122;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.

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