Venture capital is important for the economy
Last week I attended a clean tech VC conference here in Finland, and met some relevant, exciting entrepreneurs, and some potentially fundable ventures. Entrepreneurs were looking for funding for building winning businesses, and VCs were looking for investment opportunities.
At the event there were also attendees who were more or less just hanging around. I heard some of them talking about why we shouldn't compare our VC industry to others’, especially to U.S.’ or Israel’s. I was quite amazed: why shouldn’t we compare? There is no reason why we should not compare VC industries or entrepreneurial ecosystems. High-tech companies are competing at global business arenas, and basically all of them are competing in the open category with “rules for all”. There is no golf type of handicap system, or gender and weight categories like in boxing and wrestling. There is only open category.
I am bringing up this topic over and over again because I think this is extremely important. If I think of any entrepreneur, investor, politician, or public official, there is no single person who should not be aware of competitive advantages of entrepreneurial and financial landscapes around the world. For companies, market and customers should be top priority for their interest. But I think it is also important to build understanding from what kind of background new ventures join the global competition, and what kind of support they will get. It is about screening the competition.
National Venture Capital Association (NVCA) announced just recently “Venture Impact” report on the impact of venture capital to the U.S. economy. Here are the results at a glance (NVCA, 2009):
According to the report, venture-backed companies outperformed the overall economy from 2006 to 2008. Jobs at venture-backed companies grew 1.6 percent, compared to 0.2 percent in the entire US private sector, and revenue at those companies grew 5.2 percent, compared to 3.5 percent in the entire private sector.
Venture capital is not an ancient industry; it has emerged during past couple of decades. Samuel Kortum and Josh Lerner have described history and emergence of the current VC industry; look at the figure here.
We can see clearly that current VC industry emerged in early 1970’s, but peaked for the first time in early 1980’s. If you think about how young industry this is, and compare it to the economic impact, results are dramatic.
I have no evidence whether the results of NVCA report are accurate or non-accurate. It is absolutely clear that VC has not been only financial instrument for successful high-tech companies, but it is similarly clear that venture capital has been contributing on many successful ventures. For quite many, it has played a crucial role. By having a close look at Israeli high-tech success story, one can see that it has been highly dependent on emergence and evolvement of venture capital industry. There is strong scientific evidence supporting this claim.
Venture capital industry will transform dramatically in near future. How or to what direction, we have only guesses. The good news is that smart people will figure out new type of financing instruments which will work for high growth ventures. And it is important to remember that success is not only dependent on one financial instrument; it is much more dependent on a complete entrepreneurial and financial ecosystem, and competencies of entrepreneurial teams.
The fact is that economy is dependent on highly successful ventures; those are generators of new markets, new solutions, new jobs, and new logics for business. This is the core reason and justification for comparing our entrepreneurial and financial environment to others’. We need to understand what happens in the world, create new competitive landscapes for our own new success stories, and we need to understand what our competition is. It is much about building the market understanding.
References
Kortum, Samuel & Lerner, Josh (1998): Does Venture Capital Spur Innovation? NBER Working Paper No. 6846. www.hbs.edu/research/facpubs/workingpapers/papers2/9899/99-078.pdf
National Venture Capital Association (2009): Venture Impact - The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy. www.nvca.org/index.php?option=com_docman&task=doc_download&gid=482&Itemid=93
Comments
I had interesting experience last week also. Microsoft\'s Annual VC Summit in the Valley. Microsoft had the whole management team, from Ballmer down, dedicating 48 solid hours to only communicating their messages across business units to VCs. This shows that (arguably, or maybe not...) the most important tech company in the world finds delivering a clear message to the VC community as a very very high priority. Even Microsoft cannot fund whole ecosystem around their strategy, they need partners (i.e. VCs!) to help them.
This is the key. The WINNING TECH COMPANIES, large and small, rely on leveraging their own investments by partnering with VCs. Thus, we need to support the growth of our own industry to be powerful enough to have global relevance. It was relevant in 2000 (witness from Digia, Solid, MySQL, etc. etc.), and it is not today. We urgently need to change that, and as a high tech community we need to find the ways to do this!
Once again you made me thinking about which challenge we should solve first; building more fundable ventures, or establish more viable VC industry? Or should we actually build these both same time? I think the answer is building “demand” and “supply” same time - in balance. Without fundable ventures there are no investment opportunities for VCs and VC is going to diminish. If there are fundable ventures but no suitable venture funding available, high growth ventures are going to diminish. These should be built somehow in balance.
Venture capital is basically a local business. Professional VCs want to have their portfolio companies close to them because they want to contribute actively in building the company. Or they want to have some syndicate investor close to the portfolio company which is able actively build the company. If we are not able to build more viable VC industry, but we assume our ventures are fundable, it means that ventures should move to those locations where suitable venture capital is available. Is this what we want? I don't think so. There has to be another solution...
There has not been real recovery since 2000-2001. We need a quick change, but strangely I have not seen too much sense of urgency in our ecosystem. Recovery could get some boost through activities of large technology companies, and as you say, Microsoft points out the importance of collaboration between large high-tech companies and the VC industry. This also highlights the need for development of whole business ecosystem.
Here are some of my quick thoughts after reading this post and comments. In modern world most of the resources are global. Financing, key management, design and manufacturing etc. can be found and acquired all over the world. Like Ilkka pointed out even international VC's are looking for best potential investment targets here in Finland. Therefore it is essential to understand how the VC industry and global business ecosystem works and how it is changing. In my opinion if we deny the global trends and do not build a new high growth venture ecosystem here in Finland, we will miss a big opportunity and lose many potential high growth ventures without getting any of the economical benefits related to their growth.
I am not sure if it is a some kind of conflict of interests between different players that causes the denial of VC industry's impact on high growth but I really find it strange that we are doing only a little to build a new better high growth ecosystem. Most of the players have been talking the talk but now it is time to walk the walk and make the real change.