Nearly $60 billion in venture capital was deployed to the U.S. entrepreneurial ecosystem in 2015 to help grow innovative startup companies providing products and services ranging from cyber security technologies to online lending marketplaces to Web-based educational courses and everything in between.
Many of these companies and their predecessors are making great strides in advancing innovation around the globe, but that’s only a small part of the venture capital story and its impact on our lives, our society and our economy.
As you are well aware, at a truly fundamental level, venture capital is much like any other asset class, where investments are made and, if successful, distributions are returned to university endowments, pension funds, foundations and other investors who commit capital to venture funds. However, as we are often reminding lawmakers and others in Washington, D.C., the true impact of venture capital goes well beyond quarterly investment statements. In addition to the innovative products and services that have transformed our society and shaped our daily lives, many venture-backed startups go on to mature into large, publicly listed companies that have profound effects on our public markets and broader economy.
Fortunately, the outsized role of venture capital in helping grow innovative American companies that then go on to fundamentally strengthen our economy is not lost on academic researchers and others. In fact, many are actively working on models to better measure the true impact of venture capital beyond financial returns to limited partners.
One notable example is a recent study by Will Gornall of the University of British Columbia and Ilya Strebulaev of Stanford University that quantifies the long-term impact of venture capital on the U.S. economy. In their study, “The Economic Impact of Venture Capital: Evidence from Public Companies,” the authors note that Apple, Google and Microsoft, three of the five largest U.S. public companies by market capitalization, all received most of their early, external funding in the form of venture capital.
Using public companies as their measuring stick, the authors conclude that of the 1,339 companies that have gone public since 1974, 42 percent (556) can trace their roots back to venture capital.
As a testament to their commitment to innovation, those 556 companies account for an impressive 85 percent of all research and development spending by companies that went public after 1974 and 63 percent of total market cap. They also employ over 3 million American workers.
Of course, measuring the impact of venture capital based solely on public companies only tells part of the story, an admission made clear by the authors in their analysis.
Not all successful venture-backed companies make an IPO. More often than not they are acquired by another company, usually one that has already gone public. Knowing this, how then do you account for contributions of these venture-backed companies to the economy? Or what about the network effects venture-backed public companies create?
As the authors point out, “From Microsoft’s Windows to FedEx’s overnight deliveries, the technologies developed by VC-backed firms have changed the world.” How do you account for their impact on the economy and the American worker through greater efficiencies in productivity? The truth is, you can’t—which is why Gornall and Strebulaev admit that it’s likely they understate the true economic impact of venture capital, leaving the door open to follow-on research.
In spite of the study’s shortcomings, Gornall and Strebulaev have embarked on a worthy cause to better quantify the true impact of venture capital beyond financial returns. From a pure advocacy perspective, this is a valuable tool for NVCA to have in its back pocket when we go to Capitol Hill to speak with lawmakers and staff about the important role venture capital plays in the entrepreneurial ecosystem. More often than not, a typical audience in Washington tends to view the industry through the narrow lens of venture capital as an asset class without considering the larger role we play in shaping the world around them.
As we often say in these situations, “Writing the check is the easy part. The hard part is rolling up your sleeves and getting to work building the next great American success story.”
That’s the true impact of venture capital.