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Venture Capital and the Economy

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Venture Capital and the Economy Powered By Docstoc
					President’s Advisory Panel
on Federal Tax Reform

Robert E. Grady
Managing Director
The Carlyle Group
March 31, 2005
About the NVCA
 460 member firms
 Majority of all professionally managed
  venture capital in the United States
 American Entrepreneurs for Economic
  Growth: 14,000 growth company CEOs
 United States = 72% of all venture capital
  professionally managed worldwide
About the Carlyle Group
 $24.8 billion under management in 26 funds
 24 offices in 14 countries
 $1.8 billion in 5 venture capital funds
 377 portfolio company investments
   Total of 151,000 employees
   Annual sales = $31 billion
 34.2% gross internal rate of return on
  realized investments since founding
Agenda
The Role of Venture Capital and
 Entrepreneurial Start-ups in The
 U.S. Economy
Venture Capital Investing
Suggestions for Tax Policy
The Role of Venture Capital and
 Entrepreneurial Start-ups in the
         U.S. Economy
 Venture Capital:
 America’s Job-Creating Engine
 Companies backed by venture capital since 1970:
   – Provide 10.1 million US jobs
   – Had 2003 sales of $1.8 trillion
    10% of US GDP on under 2% of capital invested
 Venture-backed companies outperform others:
   Between 2000 and 2003:
   – US private sector jobs down 2.3%;
   – Venture backed companies grew jobs by 6.5%.
   – Sales nationally up 6.5%;
   – Sales at venture backed companies up 11.6%.
 Venture backed wages grow faster than national average

                 Source: Venture Impact 2004 by Global Insight (Wharton/DRI)
The Increasing Role of Startups
in U.S.-Led Innovation
 Venture backed firms spend twice as much on
  R&D as non-venture backed firms
 Share of US R&D performed by firms with <500
  employees:
   – 1984: 5.9% ($4.4B)
   – 2003: 20.7% ($40.1B)
 Major source of productivity growth
  – CAD/CAM, JIT, Auto-ID, payments, POS, e-Tailing,
    internet travel
 Major source of U.S. Competitiveness:
  – 72% of all venture capital worldwide is in the US
                            Source: Venture Impact 2004 by Global Insight;
                                    National Science Foundation
Whole New Sectors Have Been
Created…And Will Be Created
 Biotechnology          Auto ID
 Network Security       WiFi Networks
 Package Delivery
                         Genomics
 OnLine Retail
 Health Care Devices    Wireless Messaging
 CRM                    Security Technology
 Intelligent            Web Services
  Merchandising
 ERP Software
 Medical Devices
The US Venture Industry Has Grown

  At Year   # Venture Capital Under
   End        Firms        Mgt
   1970         28         $1B
   1980         89         $4B
   1990        399        $31B
   2001        943       $257B
   2003        919       $257B


                    Source: 2004 NVCA Yearbook,/Venture Economics
Venture Capital Investing
The Venture Capital Investment Cycle
 Investment:
   – Series A, B, C Preferred Stock
   – Expansion, Pre-IPO Capital
   – Use of Proceeds:
       • R&D, Product Development
       • Expansion of Sales Force
 Realization
  – M&A, IPO
  – Valuation Metrics:
       • Price/Net Income Ratio
       • Price/Revenue Ratio (More Prevalent in Late 1990s Bubble)
       • Control Premium to Shareholders (in M&A Transactions)
Characteristics of the Start Up Sector
 Higher Proportion of Ownership/Options
  – Attractiveness of Opportunity Tied to Potential
    Gain in the Stock
  – NVCA Survey: 70% of Member Firms
    Portfolio Companies Award Options to 100%
    of Employees
 Prior to IPO, M&A Transaction, or
  Institutional Financing, Many Firms Are
  Flow Through “S” Corps
Carlyle Venture Partners Example
 Fund I: 1997
   –   31 Investments
   –   6 Trade Sales
   –   6 IPOs (3 Unrealized)
   –   7 Write Downs
   –   12 Remaining Private Unrealized Investments
 Fund II: 2001/2002
   –   29 Investments
   –   4 Trade Sales
   –   2 Write Downs
   –   23 Remaining Private Unrealized Investments



 Employees at 38 Active Companies: 4,100
Suggestions for Tax Policy
Key US VC Building Blocks
 Capital formation
     – Prudent man rule – enabled pension investment
     – 1978 Steiger capital gains tax cut
     – Capital gains tax reductions
   Empowered entrepreneurs
     – Stock options/team building tools
     – Reasonable bankruptcy laws
   Protection of intellectual property
   Abundant customers willing to do business with small
    and medium enterprises
   Exit markets – the NASDAQ
   Face-to-face investing/proximity
   Cultural acceptance
Tax Reform Objectives:
The Entrepreneurial Sector
 Policies Friendly to Capital Formation
   – Availability of Risk Capital Has Driven Innovation and
     Job Creation
   – Make Permanent Low Capital Gains Tax Rate
 Simplicity
   – Complex Provisions Distort Capital Flows
   – Most Entrepreneurial Companies Have Modest Finance
     Departments
 Low Rates
   – Corporate Tax Rates Largely Left Out of Debate
   – Most Small Companies Valued on Multiples of Net
     After Tax Income
 Conclusion
 Low Rates Enhance U.S. Competitiveness
   – Attract Capital
   – Attract Companies
   – Attract People
 Job-Creating Sector Decision-making is
 Growth-Driven Not Tax-Driven
  – Complex Provisions Create More Annoyance
    Than Value
 Technology and Capital Flows Increasingly
 Global
  – U.S. Will Have to Compete to Remain the
    Home of Innovation, Growth and Job Creation
www.nvca.org

				
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posted:8/14/2012
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