Venture Capital and U.S. Trade Competitiveness by znr91839

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									          Venture Capital
                and
    U.S. Trade Competitiveness

          How Does Innovation Translate
              Into American Jobs?


        April 4, 2005          Karen G. Mills
Council on Foreign Relations   kmills@mmpgroupinc.com
             How does innovation translate into
                     American jobs?



   DISCOVERY              BUSINESS FORMATION           JOB CREATION




Basic
Research      Invention
                                 Commercialization          Growth

           Innovation




                           • Growth Capital          • Small Business
                             and Expertise           • Entrepreneurship


                                                                      2
     Each quarter the U.S. economy creates
              over 7 million jobs
                            Private Sector Gross Job Gains and Losses
 Millions                                    1993-2003
10
                  Job Gains
                  Job Losses

 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
            Components of Private Sector Gross Job Gains and Job Losses
                                     1994-2003
Millions
 8                                                                          Expansions
                                                                            Openings
 7                                                                          Contractions
                                                                            Closings
 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)
   Millions
   1.2                                                                     Job Gains
                                                                           Job Losses
     1

   0.8

   0.6

   0.4

   0.2

     0
         1994




                                 1997




                                                        2000




                                                                    2003
                                           Year




     Source: U.S. Department of Labor, Bureau of Labor Statistics
                                                                                        5
    Job losses and job creation are influenced
                by different forces



      Job Losses                Job Creation

                           • New business openings
• Business Closures
                           • Business expansions
• Productivity
                              – Small business

• Offshore transfers          – Venture backed businesses




                                                        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           Small Firm   Total New Jobs
                                  Expansion            Expansion    New/Small Firms
                                     <20                20-500
                                   Employees           Employees



 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

                                                                                             2001
  Source: U.S. Department of Labor, Bureau of Labor Statistics




                                                                                                    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              •    Private Equity            •   Public Equity
•   University               •    Bank Debt                 •   Public Debt
    Support
                             •    Personal Savings          •   Company
•   Government                                                  Profits
                             •    Corporate Profits
                                                                Reinvested
                                                                               10
Over $250 billion is currently in the hands
         of U.S. Venture funds
                                   Capital Commitments to
120
                                U.S. Venture Funds ($ Billions)
100

80

60

40

20

 0
      1980




                         1985




                                            1990




                                                            1995




                                                                   2000
300

                                 Capital Under Management
250
                                U.S. Venture Funds ($ Billions)
200


150


100


 50


  0
      1980




                         1985




                                            1990




                                                            1995




                                                                   2000
                                                                          11
 Source: NVCA Yearbook
Venture Capital backed companies grow faster
            and create more jobs
                           Venture Backed Growth
                         2000-2003 Percentage Change


       Sales Growth                                              Job Growth
         12%




                    5 pp

                    7%                                         7%




                                                                                      9 pp



               Venture   Total U.S.                          Venture
               Backed                                        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)


                                              -10%
   Semiconductors          -26%
                                                                                         VC Employment Growth
Computer Hardware
                                                          -1%
     and Services                        -14%                                            Total Employment Growth
   Industrial/Energy                                              1%
                                                -9%

 Business/Financial                                                    4%
                                                          -1%

   Communications                                                      5%
                                    -18%

Healthcare Services                                                             10%
                                                                               9%
Retailing and Media                                                              12%
                                                          -1%
Healthcare Products                                                                    16%
                                                        -2%

Computer Software                                                                      17%
                                                 -8%

     Biotechnology                                                                           23%
                                                                          5%

                          -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                         3%
          (1983-1992)


 Percent of Industrial Innovation*
accounted for by VC Backed Firms                                              8%
           (1983-1992)



    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                                   Change in Employment
            ($ Millions)                                      (# of employees)



       Comparable                                  Comparable
                       $1.1                                             5.8
         Firms                                       Firms




           SBIR                                        SBIR
                         $4.0
         Awardees                                                                     26.2
                                                     Awardees




     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                                       Retail and Media            9%
     Products
                              11%


     Computer
     Software
                                    14%
                                                     Industrial/Energy             11%

      Semi-
    Conductors                        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

                                                       Mid
  Start        Early         Later      Growth                      Large
                                                       Market
  up/Seed      Stage         Stage      Capital                     Buyout
                                                       Buyout


              Venture Capital



                                               Buyout/Mezzanine



                                                                        17
                           Last year $57 billion was invested in
                                      Private Equity
250
                                                                     Capital Commitments
                                                              To Private Equity Funds 1979-2003

200                  Other Private Equity Capital
                     Buyouts and Mezzanine Capital
                     Venture Capital
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
                                                               Pension Funds
     ($ Billions)




                    150



                    100



                     50



                      0
                           1999       2000        2001       2002        2003

                                                  Year


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

								
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