America’s Greatest Economic Assets? The Venture Capital Industry Has to Be near the Top of Any List. (2024)
By James Pethokoukis
What are America’s greatest economic assets? Certainly our democratic capitalist system — democracy, rule of law, property rights, the price system — would be at the top of that list. But then what? Lots of candidates, from our vast natural resources to our world-leading university system to our ability to attract the very best of global talent. And, of course, the existence of some assets affects others. Our largest technology companies are the economy’s crown jewels, but they wouldn’t exist if not for some of the above factors, among others (immigration + universities + property rights + California weather).
Here’s another asset: the American venture capital industry. Looking at total funding and funding per capita, it’s clear America is the global leader:
Evidence of the deep impact of all those billions comes from “The Economic Impact of Venture Capital: Evidence from Public Companies” byWill Gornall (Sauder School of Business, University of British Columbia) and Ilya A. Strebulaev (Graduate School of Business, Stanford University and National Bureau of Economic Research). From their updated 2021 working paper:
Venture capital-backed companies account for 41% of total US market capitalization and 62% of US public companies’ R&D spending. Among public companies founded within the last fifty years, VC-backed companies account for half in number, three quarters by value, and more than 92% of R&D spending and patent value. The US did not spawn top public companies at a higher rate than other large, developed countries prior to 1970s ERISA reforms, but produced twice as many after it. Using those reforms as a natural experiment suggests that the US VC industry is causally responsible for the rise of one-fifth of the current largest 300 US public companies and that three quarters of the largest US VC-backed companies would not have existed or achieved their current scale without an active VC industry.
Gornall and Strebulaev highlight a key pivot point in that abstract: a 1979 regulatory clarification by the US Department of Labor of the meaning of the “prudent person” statutory standard for pension funds. The trickle of pension fund doubt into VC funds became a flood. The following finding is pretty remarkable:
Both the US and the other G7 countries saw a dozen or so current top companies founded in each decade from the 1900s to the 1970s. The US had more companies in the 1930s and fewer in the 1950s, but differences were transitory. … After the enaction of ERISA in 1974 and then the 1979 prudent person rule clarification, there was a dramatic divergence. The US had two to three times as many current top companies founded in the 1980s, 1990s, and 2000s. While European company formation decreased to about one per year in the 1990s and 2000s, US company formation surged. In total, 105 US companies in the top 300 were founded after 1968, compared with just 49 in other G7 countries, a difference of 56 companies.
That divergence can be seen clearly in this chart of VC-backed companies in the US and non-US G7 economies over time.
Bottom line: The dramatic surge in the US company creation “strongly suggests” that the ERISA reforms and the VC industry have impacted long-term macroeconomic growth.
Venture capital is a linchpin of American economic dynamism and innovation. A greater understanding of its importance and the right public policy environment are essential for fostering the growth of companies that could become the industry giants of tomorrow.
From their updated 2021 working paper: Venture capital-backed companies account for 41% of total US market capitalization and 62% of US public companies' R&D spending.
Without the ability to access this venture capital, many startups would not have the ability to raise the necessary funds with which to develop products, promote them or even hire staff.
The capital in VC comes from affluent individuals, pension funds, endowments, insurance companies, and other entities that are willing to take higher risks for potentially higher rewards. This form of financing is distinct from traditional bank loans or public markets, focusing instead on long-term growth potential.
By injecting capital into these high-growth startups, VCs enable them to scale operations, develop new products, and, most importantly, hire more employees. These newly created jobs not only reduce unemployment but also stimulate consumer spending, contributing to a robust economic cycle.
In conclusion, venture capitalists add value to the companies they invest in not only by providing financial means, but also through an active ownership approach in partnership with management teams.
Venture debt is a type of financing that companies may be eligible for when seeking capital from outside sources. It is a loan offered by special lenders such as banks, venture capital (VC) credit funds, or other financial institutions to entrepreneurs and businesses in exchange for their equity stake.
From the VC's perspective, VC investments are primarily subject to capital gains tax. When a VC invests in a startup and later exits at a higher valuation (through an IPO, acquisition, or another liquidity event), the profit is considered a capital gain, taxable at capital gains rates.
Venture capital (VC) is generally used to support startups and other businesses with the potential for substantial and rapid growth. VC firms raise money from limited partners (LPs) to invest in promising startups or even larger venture funds.
Venture capital provides funding to new businesses that do not have enough cash flow to take on debts. This arrangement can be mutually beneficial because businesses get the capital they need to bootstrap their operations, and investors gain equity in promising companies.
While non-VC firms measure success through factors like profitability and market impact, VCs navigate a different terrain. They generate income through an annual management fee and a performance fee (typically 20%, known as 'carried interest').
How Are Venture Capitalists Compensated? Venture capitalists make money from the carried interest of their investments, as well as management fees. Most VC firms collect about 20% of the profits from the private equity fund, while the rest goes to their limited partners.
Contrary to popular belief, venture capitalism does not require a huge bank account. After all, venture capitalists are not necessarily investing their own assets. That said, having a large amount of personal wealth makes it easier to break into any investment scene.
VC and PE firms raise capital from pension funds, endowments, foundations, fund of funds and high net worth investors. These sophisticated investors have an allocation for alternative investments as a portion of their total portfolio that also includes stocks and bonds.
Independent businesses provide their local economies with new jobs, products, revenue, services and more. Small businesses not only contribute economic benefits to their community but also charitable and innovative ones as well. Research shows that 66% of small business owners donate to charity.
One of the primary advantages of venture capital is that it helps new entrepreneurs gather business expertise. Those supplying VC have significant experience to help the owners in decision making, especially human resource and financial management.
In economics, capital refers to the assets—physical tools, plants, and equipment—that allow for increased work productivity. By increasing productivity through improved capital equipment, more goods can be produced and the standard of living can rise.
Pros. Entrepreneurs boost economic growth by introducing innovative technologies, products, and services. Increased competition from entrepreneurs challenges existing firms to become more competitive. Entrepreneurs provide new job opportunities in the short and long term.
Address: Apt. 203 613 Huels Gateway, Ralphtown, LA 40204
Phone: +2135150832870
Job: Regional Design Producer
Hobby: Nordic skating, Lacemaking, Mountain biking, Rowing, Gardening, Water sports, role-playing games
Introduction: My name is Fredrick Kertzmann, I am a gleaming, encouraging, inexpensive, thankful, tender, quaint, precious person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
