A Mouse That Roars

I’ve been working in the venture capital industry for 17 years so, of course, I think this is a pretty important industry. But is it an important industry to the U.S. economy as a whole? Only .02 percent of all financings in the country are venture capital financings. So we’re a niche compared to the buyout groups, the hedge fund groups, or the mutual funds.

But it truly is an important industry when you look at it quantitatively. The latest numbers from Global Insight, an independent research firm in Pennsylvania, show that companies that were, at one point or another, venture-backed now represent 10.4 million U.S. jobs. Almost 18 percent of U.S. gross domestic product comes from that .02 percent of venture investment. It truly is a mouse that roars. It is an integral part of this U.S. economy. And those of you who are going to be getting venture financing over the next several years are going to be part of this economic engine that continues to keep this country moving along.

Whether it’s the biotech industry, the information technology industry, or the clean technologies industry, once a company is venture backed, they will be better than those companies in the same field that were not venture-backed. They grow jobs faster than non–venture-backed companies. They spend more on research and development. And they are going to continue to grow, even after the venture capitalists get out of the way. They do better in the public marketplace, once they go public.

Note: This article is adapted from a speech given by Mark Heesen at the Minnesota Venture Conference in October. The conference was hosted by The Collaborative and the Minnesota Venture Capital Association in Minneapolis.

I think this is a healthy environment for the venture capital industry in general. Since 2002, we have seen very consistent investing, quarter after quarter after quarter. Every year since 2002, we’ve seen between $26 billion and $30 billion per year invested in emerging growth companies by venture capitalists. This year is going to be a little higher than the last couple of years, but not dramatically higher. And I think that’s actually good news. There are hot sectors, but there aren’t irrational sectors right now. There are always going to be hot sectors; that’s part of the venture process. But we’re not seeing silly money at this point.

Where is that money going? It is unquestionably moving away from some traditional areas—IT and communications—and into the life science arena, both biotechnology and medical devices. The first two quarters of 2007, we saw record amounts of money and deals in the medical device arena. We are also seeing very strong interest in early-stage to late-stage biotech. Even health care services received some additional interest, which had really petered out over the last several years.

And what’s happening to IT? With IT, we have basically worked ourselves out of a job in that we have helped create companies that now make it very easy for an IT company to create itself without a whole heck of a lot of money. The cost of the computers and related technologies has come down dramatically in recent years. You can start a Web 2.0 company and the like very easily without a lot of money today. You don’t need to go to a venture capitalist. You can basically bootstrap it yourself or even try to get a bank loan.