Beyond Fund Returns: Contribution of Venture Investments to Economic Growth

In addition to generating financial returns for the investors, VC investments contribute significantly to the economic growth as well as creation of new industries. In fact many industries such as…

In addition to generating financial returns for the investors, VC investments contribute significantly to the economic growth as well as creation of new industries. In fact many industries such as Information technology, biotech, medical devices, clean tech etc have been created through VC investments. This post makes an attempt highlight the contribution of VC investments to the economic growth. As US VC industry is the oldest and most successful, the data outlined in this article is from the US. As the VC industry build scale outside US, one could expect similar trends.

Here are some interesting facts about the contribution of VC investments to the US economy (Source of the data: Venture Impact, 5th edition, NVCA/IHS Global insight study)

  • In 2008, venture capital-backed companies employed more than 12 million people and generated nearly $3 trillion in revenue
  • Total US Private sector jobs: 115 Million, jobs at US venture backed companies: 12.1 Million. Venture-Backed Jobs as a Percent of Private Sector Employment 11%.
  • Revenue at U.S Venture-Backed Companies:$2.9 trillion, Venture-Backed Revenue as a Percent of U.S. GDP :21%
  • Venture-Backed Company Revenue Growth 2006-2008: 5.3%, Total Revenue Growth 2006-2008: 3.5%
  • Venture-Backed Company Job Growth 2006-2008: 1.6%, Total U.S Private Sector Job Growth 2006-2008: 0.2%
  • Total Venture Investment from 1970-2008: $456 billion into 27,000 + companies
  • For every dollar of venture capital invested from 1970-2008, $6.36 of revenue was generated in 2008
  • In 2008, one U.S. job existed for every $37,702 of venture capital invested from 1970-2008
  • Even today, eight out of every 10 people employed in the software development industry work for companies with venture-capital roots.
  • Venture-backed companies generated more than half of all revenue in the electronics/instrumentation, semiconductor and telecommunications industries in 2008.

As can be seen from the above, total venture investment from 1970-2008 amounted to $ 456 billion across 27,000 companies. What is interesting to note is that in spite of majority of companies failing, at an aggregated level, the contribution of VC industry to US economy is substantial.

Compared to the US, the Indian VC industry is still nascent and still has a long way to go. As the Indian VC industry builds scale/traction, it is not unreasonable to assume that similar trends could be witnessed in India also.

Whenever such data is presented, lot of people may want to know the methodology adopted and for those people, here is the methodology that was adopted by IHS Global Insight

To conduct this study, IHS Global Insight created a database comprised of 23,565 venture-backed firms. This database was updated from the 2007 Venture Capital database (containing 2006 statistics) which measured venture-backed employment and revenue across states and industries.

This database was rolled forward to 2008 using transactions which included: (a) companies that went public, (b) companies which received venture-backed financing rounds, or (c) companies acquired during the April 1, 2007 to February 11, 2009 period. Careful crosschecking and research was conducted to avoid double counting.

Current 2008 employment and revenue statistics or estimates were entered into the database as available for the top 500 companies, as well. For the remainder of the companies’ in the database, 2008 employment and revenue figures were projected using industry growth rates. Each company in the database is assigned a MoneyTree and a Thomson industry sector code which IHS Global Insight mapped to a specific North American Industry Classification Code System (NAICS) code. Using IHS Global Insight’s Business Demographics Navigatoriii, sales and employment growth figures for the 2006 to 2008 period were estimated. These growth rates were applied to the 2006 sales and employment observations to obtain estimated 2008 employment and sales.

[Guest article by Pavan Krishnamurthy, Partner at Ojas Venture Partners.]

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