Earlier this month, the National Venture Capital Association and the University of North Carolina’s Kenan Institute of Private Enterprise released a report on job growth in U.S. venture-backed firms.
The headline finding: Employment at VC-backed firms grew faster than employment at non-VC-backed firms between 1990 and 2020. This is like saying the world’s hot-dog eating champion can eat more hot dogs than the average hot-dog eater.
I raised this question to the the lead researcher.
“The finding of much more rapid job growth at VC-backed firms may not be surprising to people that understand the industry, but it is not well-documented in the literature with hard data,” said Prof. Gregory W. Brown, the executive director of the Frank H. Kenan Institute of Private Enterprise, and a professor at University of North Carolina, in an email. “The point that VC (backed) firms are different is also part of the conclusion. They are different in a way that accounts for a significant part of net job creation in the U.S. (with the reason being tied back to innovation and productivity growth which is well established in the literature).”
“Economic growth and net job creation are very much two sides of the same coin.”
How Venture Works
Venture capitalists pour capital and know-how into companies to make them big enough to sell, either to the public or to private buyers. Sometimes, the companies aren’t even profitable – (that’s kind of like the way hot dog champions throw up their dogs).
The conventional economic wisdom about the benefit of venture is only tangentially about jobs. The argument for venture has been that it’s an efficient way to get capital to innovative companies, and therefore it is a tool for broad economic development because it raises standards of living through innovation. But there are increasing reasons to doubt that, widening economic inequality in our country being one of them. That is probably why the established venture capital industry is launching a job-based argument.
Most of the media swallowed the message they were supposed to out of the report. The immediate takeaway, in interviews, was that America needs an entrepreneurs’ visa.
“If you look at the largest companies by market cap — most were venture backed, and many have immigrant CEOs and cofounders,” said NVCA president Bobby Franklin told Business Insider. “Public policy can make a significant difference.”
But if you wanted to make the case for an entrepreneurs’ visa, you’d look more directly at jobs or companies created by immigrants (very few of which receive venture finance).
The Jobs-Venture Argument
The underlying narrative of the venture industry’s recent campaigns appears to be to make a broader jobs-venture argument, encapsulated to some extent in this report. There are significant problems with that argument.
The returns of venture as an asset class depend on a few big winners (the champions) emerging into the public marketplace. Venture has yet to show that it can adapt to fund companies where the central innovation doesn’t rely on software. And the jury is still out on whether software, versus technology or innovation broadly, creates more jobs than it destroys. Of course, venture may be able to adapt — and there are venture capitalists working on this question.
Venture produces king-sized success stories (one of the reasons it holds such sway in the American imagination). The report used a dataset of 67,000 companies from Pitchbook, cross referencing it with other data. But it’s very likely that those 67,000 were already anointed winners – hot-dog champions working their way up to the state fair, if you will. Pitchbook draws a lot of its data from press releases, and doesn’t claim to cover the universe of venture-backed companies. When I asked the researchers, in a followup question, how they accounted for a possible winner bias, they didn’t respond. But it’s important especially if the conclusions are being used to bolster support for venture as a finance system for economic development.
The report found an annualized average growth of 8.2% in employment over the 30 years. In the email Brown said the study was “in some sense a lower bound because we were not able to identify all VC-backed establishments in the NETS data because of some of the complicated legal structures companies (especially larger ones) use,” and that the researchers used only direct jobs and not spillovers and multipliers.
Data is terrible for all kinds of small businesses in the United States. And over-selecting for winners is one of the most common problems in research in the business world. Mutual funds, for instance, neglect to count the failed funds when they tally up their average returns, a problem I wrote about for CNBC a few years ago.
The report also found that the 3.8 million jobs at the 67,000 venture-backed firms in 2020 are geographically dispersed, which undercuts the argument being made by some in the industry that the federal government ought to subsidize VC funds in states outside New York and California.
A Gross Assumption
Finally, the report makes one of the most terrible assumptions in public economic policy. I want to call it out, not to single out the researchers or the backers of the report in the venture industry. This assumption is widespread, but it needs to be corrected. That’s the idea that the reason that Main Street businesses don’t grow as large as VC-backed firms is because their founders have less or different ambition.
The controlling fact here is the U.S.’s patriarchal finance system.
Venture capital is the profit-making tip of the capitalistic enterprise. Most venture capitalists are white men, and the people they fund remain predominantly male and white (probably more than 80% are both those things). Meanwhile, the broader landscape of business today – the 99% of startups that don’t get venture finance — is dominated by women and people of color.
The reasons some people emerge as “winners” at the heads of big businesses and others don’t are obviously complicated –capital, networks and culture all play a role.
But here’s what the report said, in a throwaway line:
“Our results also reinforce the findings of prior research that young, knowledge-intensive companies increase their labor force more rapidly than other young, so-called “Main Street” businesses which often lack similar ambitions to evolve into large companies.”
The underlying assumption is that women and people of color choose to exclude themselves from the world of fast-growth startups, from big success, and king-sized seats at the table. For that statement to be true, ambition would have to be distributed on a downward scale, with white men at the top.
That’s just gross.
Nobody doubts that a tiny hand of successful VC-backed firms grow fast and add jobs. That’s what they are designed to do. And quantifying their rate of growth is a worthwhile endeavor. But the question about where the United States should invest limited public dollars and energy if it wants broad-based, equitable economic development is a much bigger conversation. Change is not likely to happen if the conversation is controlled by the people who benefit from the current system.