How Venture Capital Impacts Economic Development

Venture capital continues to be a dominant force in the financing of innovative startup companies. The experience of the company’s founders, and indicators of early innovation such as initial patenting and trademarking, can be precursors to subsequent growth and contribution to the economy.

Since venture capital’s formal inception in the 1940s, the economic growth of the country has been powered by technology and other innovative firms. The success can be attributed to the risk-and-reward nature of the venture capital industry, which is a vital ingredient in driving economic growth, attracting talent, creating wealth and raising the quality of life.

Let’s start by looking at VC-backed companies. According to studies by Gompers and Lerner, employment, sales, gross margin, total assets, intangible assets and corporate taxes grow faster in VC-backed firms. The same sentiment is shared in government as policymakers recognize that entrepreneurial ventures are vital to reduce unemployment.

In terms of jobs, public companies in the United States with venture capital backing employ about four million people and account for one-fifth of total market capitalization, according to a study by Stanford University. Examples include Apple, Facebook and Microsoft.

Meanwhile, the Bureau of Labor Statistics shows that 415,226 startups were created in 2017, leading to 1.7 million new jobs. This correlates with a study by the Small Business Administration that states that have startups with 20-500 employees have the greatest effect on job creation in years 1-5.

Finally, it’s worth noting that a regional fund-of-funds can stimulate economic growth. Brookings reports that a “regional fund would allocate investors’ money into a network of well-run state and local/regional VC funds, and co-invest with them in promising companies” to help create new businesses and local jobs, as it can facilitate much-needed expansion in the size and scale of the venture capital network. We have seen examples of this effect in Ohio and Michigan.