What’s the impact of venture capital on the U.S. economy?
Understanding the Economic Impact of Venture Capital on the U.S. Economy
Entrepreneurship, combined with support from venture capital, is a major force driving economic growth in the United States. Thomas McConnell of New Enterprise Associates said, “Venture capital investment is a national phenomenon that helps set the U.S. economy apart from others in the world.” Venture capital financed groundbreaking research and untold improvements in infrastructure and technology.
The average venture-backed company employs nearly 100 workers within five years and creates almost twice as many jobs as their nonventure-backed competitors. In his 2002 presentation before the U.S. Senate Committee on Small Business and Entrepreneurship, Mark Heesen stated it clearly. He said, “Investments by venture capitalists over the past thirty years have built companies that are responsible for nearly 11 percent of the U.S. gross domestic product, have created 12.5 million jobs, and have generated $1.1 trillion in revenue in the year 2000 alone.”
John Taylor from the NVCA provides more details. A NVCA-supported study found that for every dollar invested in 1970–1999 there was $6.50 in U.S. revenue during 2000. And for every $13,775 of venture capital investment between 1970–1999, there was one job in the year 2000. In 2000, U.S.venture-backed firms paid $58.8 billion in federal taxes, $7.8 billion in state and local taxes, had net income of $13.8 billion, exported $21.7 billion, and invested $157.3 billion in R&D.
There is no doubt that venture capital will continue to play an increasingly vital role during difficult economic times like we experienced after the Perfect Storm. It is one of the few sources of risk capital available to innovative businesses. In fact, as Heesen adds, “Some of today’s most successful companies were founded in difficult economic environments.”
In the course of one decade, the venture capital segment of risk capital went from a $3 billion industry to a $100 billion industry. Taylor describes venture capital as a unique alignment of interests between entrepreneurs, venture capitalists (VCs), and the VCs’ investors. Depending on where you stand, venture capital can be cash investment, capital resources, leadership and contacts, economic development, commercializer of innovations, job creator, or research magnet. The NVCA defines venture capital as money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors.