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Perspectives on Venture Capital

This discussion explores the impact of venture capital on the US and EU economies, including job creation and revenue growth. It also discusses how countries can create a more favorable environment for venture capital, such as providing tax incentives and leveraging the diaspora.

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Perspectives on Venture Capital

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  1. Perspectives on Venture Capital October 11, 2007

  2. Today’s Discussion: Perspectives on Venture Capital • Impact on US Economy • Impact on EU Economy • Creating a favorable VC environment 2

  3. Venture Capital Is a Major Force in the US Economy Total revenue of Venture Capital backed companies: 16.6% of US GDP Total employment of Venture Capital backed companies: 9.0% of US Private Sector employment 3 Source: Venture Impact, 2007 – 2005 data

  4. Venture Capital Drives US Economic Growth By Creating Jobs and Revenue Jobs Revenue Millions, Venture Backed Companies USD Trillions, Venture Backed Companies Total US VC investment in 2005 = $23 billion (0.2% of US GDP) 4 Source: Venture Impact, 2007

  5. Venture Capital Backed Companies Have Outperformed Their Non-Venture Counterparts Recent Past: Employment and Revenue growth, CAGR 2003-2005 Employment Revenue Venture backed companies All companies 5 Note: 2003-2005 GDP growth (nominal) was 13.5% (i.e., 6.5% CAGR) Source: Venture Impact, 2007

  6. Venture Backed Firms Have Driven Revenue and Employment Growth Even During Economic Slowdowns Economic Slowdown: Employment and Revenue growth, CAGR 2000-2003 Employment Revenue Venture backed companies All companies 6 Note: 2000-2003 GDP growth (nominal) was 11.7% (i.e., 3.7% CAGR) Source: Venture Impact, 2007

  7. Venture Capital is Not Just About Information Technology VC backed companies, 2005 Employment millions Sales billions Media / Entertainment / Retail Biotech / Medical Devices / Equipment Computers and Peripherals Software Industrial / Energy Financial Services 2.0 1.9 1.2 0.9 0.5 0.9 NA 134 466 211 299 268 7 Source: Venture Impact, 2007

  8. VC Job Creation Relative To Non-Venture Counterparts is Even More Pronounced in Specific Industries Employment Growth in Leading Industry Sectors, CAGR 2003-2005 Financial Services Biotechnology Electronics / instrumentation 8 Source: Venture Impact, 2007

  9. Today’s Discussion: Perspectives on Venture Capital • Impact on US Economy • Impact on EU Economy • Creating a favorable VC environment 9

  10. Venture Capital Investment in Europe Has Driven Job Creation Europe Venture Capital (2004) Total investment in 2004 (€ billions) 10.3 Number of companies funded in 2004 5,557 Total employment in all venture funded companies (# of employees, millions) ~1.0 Employment in venture funded companies as proportion of employment in DJ STOXX 600 companies ~5% 10 Source: EVCA Report, November 2005

  11. Job Growth in Venture Backed Companies Far Exceeded Overall European Job Growth Employment growth, CAGR 1997-2004 Venture backed companies Overall (EU – 25 countries)* 11 * Estimated based on 2000-2004 data Source: EVCA Report, November 2005

  12. Highest Employment Growth in Biotech, Health Care, and Medical Device Industries Employment growth in European venture backed companies, CAGR 1997-2004 Average = 30.5% 12 Source: EVCA Report, November 2005

  13. University Spinoffs Had the Highest Job Growth Employment growth in European venture backed companies, CAGR 1997-2004 13 Source: EVCA Report, November 2005

  14. Venture Funded Firms Have a Strong R&D Focus Employee Mix R&D Spending % of total employees for European venture funded companies R&D expenses, € thousands per employee 33% Work in R&D functions Are researchers or engineers 26% 13% Have a PhD European VC backed companies are spending ~45% of expenses on R&D 14 Source: EVCA Report, November 2005

  15. Today’s Discussion: Perspectives on Venture Capital • Impact on US Economy • Impact on EU Economy • Creating a favorable VC environment 15

  16. Many of Today’s Most Innovative Business Models Came From Venture Backed Companies However, raising VC funding remains a challenge in most developing economies 16

  17. How Can Countries Create a More Favorable Environment for Venture Capital THEMES FOR DISCUSSION • Provide tax incentives • Encourage long term holding • Keep it simple • Unsuccessful attempts to learn from: Australia, South Africa • Educate investors, particularly foreign investors • India example • Create critical mass • Investment in university based research (e.g., on campus incubation) • Immigration laws • “Ok to fail” mindset • “VC zones” with supporting systems (e.g., Silicon Valley, Research Triangle Park) 17

  18. Diaspora Can Have a Significant Impact Nature of contributions Leveraging the Diaspora • Create emigrant networks • Professional • Economic • Educational • Social • Facilitate information flow • Communication infrastructure • E.g., database of expats, information on investment opportunities • Provide incentives • Financial: E.g. Foreign currency deposits, removing restrictions on profit repatriation • Other: High profile awards • Remittances and investment • In 1999, 70% of China FDI came from Chinese people living abroad • Silicon Valley Indians “seeding” startups in Bangalore & Hyderabad • Knowledge and intellectual capital • Advise to government (e.g., policy to encourage venture capital, deregulation of industries) • Financing of elite educational institutions • Business internships and exchange programs 18 Source: McKinsey Quarterly

  19. Leveraging Diaspora for Entrepreneurship: TiE Example The Indus Entrepreneurs (TiE): world's largest not-for-profit organization for entrepreneurs • Founded in 1992 in Silicon Valley by a group of successful entrepreneurs, corporate executives, and senior professionals with roots in the Indus region • Currently 12,000 members in 45 chapters across 10 countries • Mission:foster entrepreneurship globally through mentoring, networking, and education • Achievements: • Largest pool of intellectual capital anywhere • Brand globally synonymous with entrepreneurship • Annual conference, TiECon, regarded largest entrepreneurial forum in the world • Helped boost the economies of the communities in which it operates • Economic wealth creation estimated at $200 billion • Significant involvement in social entrepreneurship • Influenced liberalization of key economic sectors in India and Pakistan 19

  20. Final Thoughts • Venture Capital is a local business • Critical mass is key • It is not technology • Leverage Diaspora • Build networks • Facilitate information flow • Provide incentives 20

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