Venture Capital and U.S

Venture Capital and U.S. Trade Competitiveness How Does Innovation Translate Into American Jobs? April 4, 2005 Council on Foreign Relations Karen G. Mills kmills@mmpgroupinc.com How does innovation translate into American jobs? DISCOVERY BUSINESS FORMATION JOB CREATION Basic Research Invention Commercialization Innovation Growth • Growth Capital and Expertise • Small Business • Entrepreneurship 2 Each quarter the U.S. economy creates over 7 million jobs Millions Private Sector Gross Job Gains and Losses 1993-2003 Job Gains Job Losses 10 9 8 7 6 1993 1995 1997 1999 2001 2003 Source: Bureau of Labor Statistics, U.S. Department of Labor 3 New jobs come from business expansions and from newly formed firms Millions 8 Components of Private Sector Gross Job Gains and Job Losses 1994-2003 Expansions Openings Contractions Closings 7 6 5 4 3 2 1 1994 1996 1998 2000 2002 Source: Bureau of Labor Statistics, U.S. Department of Labor 4 The United States is losing manufacturing jobs Employment - Manufacturing Industry (1994-2003) Job Gains Job Losses 1 0.8 0.6 0.4 0.2 0 Millions 1.2 1994 1997 2000 Year Source: U.S. Department of Labor, Bureau of Labor Statistics 2003 5 Job losses and job creation are influenced by different forces Job Losses Job Creation • New business openings • Business expansions – Small business – Venture backed businesses • Business Closures • Productivity • Offshore transfers 6 New firms and the expansion of small businesses create most of the jobs Percent of Total New Jobs Created by Firm Type 1991-2001 24% 61% 18% 19% New Firms Small Firm Expansion <20 Employees Small Firm Expansion 20-500 Employees Total New Jobs New/Small Firms Source: Small Business Administration; MMP Analysis 7 Entrepreneurs launch over 500,000 new firms annually Numbers of New Employer Firms Launched 1990-2001 (Thousands) 620 600 580 560 540 520 500 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: U.S. Department of Labor, Bureau of Labor Statistics 2001 8 Successful Venture Capital backed businesses have a large economic impact • 1970-2003 Venture Capitalists invested: $340 billion invested 21,600 companies • VC backed companies represent 9% of total U.S. jobs and revenues 10.1 million jobs 1.8 trillion in revenues 9 Growth capital transforms innovation into commercial enterprises and jobs DISCOVERY BUSINESS FORMATION JOB CREATION Basic Research Invention Commercialization Growth Innovation • • • R&D Funding University Support Government • • Private Equity Bank Debt • • Public Equity Public Debt • • Personal Savings Corporate Profits • Company Profits Reinvested 10 Over $250 billion is currently in the hands of U.S. Venture funds 120 100 80 60 40 20 0 Capital Commitments to U.S. Venture Funds ($ Billions) 1980 1985 1990 1995 300 250 200 150 100 50 0 Capital Under Management U.S. Venture Funds ($ Billions) 1980 1985 1990 1995 2000 2000 Source: NVCA Yearbook 11 Venture Capital backed companies grow faster and create more jobs Venture Backed Growth 2000-2003 Percentage Change Sales Growth 12% Job Growth 5 pp 7% 7% 9 pp Venture Backed Total U.S. Venture Backed -2% Total U.S. Source: National Venture Capital Association; Global Insights study 12 This growth occurred in a number of important industries Employment Growth at Venture Capital Backed Companies vs. Total by Industry Sector (2000-2003) Semiconductors Computer Hardware and Services Industrial/Energy Business/Financial -10% -26% -14% -9% -1% -18% -1% 1% 4% 5% 10% 9% -1% 12% 16% 17% 23% 5% VC Employment Growth Total Employment Growth Communications Healthcare Services Retailing and Media Healthcare Products Computer Software Biotechnology -2% -8% -30% -15% 0% 15% 30% Source: National Venture Capital Association; Global Insights study 13 Venture capital funding spurs innovation more powerfully than R&D VC Spending as a percent of R&D (1983-1992) 3% Percent of Industrial Innovation* accounted for by VC Backed Firms (1983-1992) 8% Percent accounted for in 1999 14% * Innovation is measured by patent production Source: Samuel Kortum and Josh Lerner, RAND Journal of Economics, Winter 2000 14 The Small Business Innovation Research (SBIR) Program had similar results Change in Sales ($ Millions) Change in Employment (# of employees) Comparable Firms $1.1 Comparable Firms 5.8 SBIR Awardees $4.0 SBIR Awardees 26.2 Note: The SBIR program provided $7 billion to small high technology firms between 1983 and 1997 Source: J. Lerner, Harvard University and National Bureau of Economic Research 15 Venture intensive industries had higher wage growth Wage Growth 2000-2003 Venture Intensive Industries Non-Venture Intensive Industries Healthcare Products Computer Software SemiConductors 11% Retail and Media 9% 14% Industrial/Energy 11% 16% Healthcare Services 13% Biotechnology 18% Communications 18% Business/Financial 13% 16 Private equity now funds the growth of private companies at all sizes and stages Average Investment $0-3 mil $3-10 mil $10-50 mil $50-100 mil $100-500 mil $500+ mil Start up/Seed Early Stage Later Stage Growth Capital Mid Market Buyout Large Buyout Venture Capital Buyout/Mezzanine 17 Last year $57 billion was invested in Private Equity 250 Capital Commitments To Private Equity Funds 1979-2003 Other Private Equity Capital Buyouts and Mezzanine Capital Venture Capital 200 150 100 50 0 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: 2004 NVCA Year Book 18 Buyouts and Mezzanine Capital is also being used to grow businesses Capital Commitments to Private Equity Funds 100% Other Private Equity Capital 75% Buyouts and Mezzanine Capital 50% 25% Venture Capital 0% 1979 1985 1991 1997 2003 Year Source: 2004 NVCA Year Book 19 Institutions not individuals provide most of the funds Private Equity Commitments By Limited Partner Type 250 Corporations Endowments & Foundations 200 Individuals & Families Financial & Insurance ($ Billions) 150 Pension Funds 100 50 0 1999 2000 2001 Year 2002 2003 Source: 2004 NVCA Year Book 20 Conclusion: Venture Capital and U.S. Trade Competitiveness • America’s spirit of entrepreneurship, entrepreneurial capital and expertise are important competitive assets • Private equity is a major new source of growth capital and expertise that did not exist in this fashion 20 years ago This risk capital plays a disproportionately important role in driving economic growth • 21 Karen Gordon Mills Karen Gordon Mills was a Founder and Managing Director of Solera Capital, a private equity fund based in New York City. She has been in the industry since 1983 and is an expert in investing and growing companies in traditional U.S. based industries such as food, textiles, media and industrial components. Some of these companies and brands include Telex Communications, Mrs. Fields Cookies, Bruce Hardwood Floors and Annie’s Macaroni and Cheese. Her background also includes consulting for McKinsey & Co. and product management at General Foods. Ms. Mills received her A.B. from Harvard University in Economics in 1975 and her MBA from Harvard Business School in 1977, where she was a Baker Scholar. She currently serves on the Boards of the Scotts Company and Arrow Electronics and is Vice-Chair of the Harvard Overseers. 22