Venture Capital Investments Are Growing

WHY IS THIS IMPORTANT? In relative terms, venture capital amounts to a small share of overall capital markets, but its value goes beyond a simple dollar figure. Venture capital spurs growth at the critical early stages of growing companies' development. Moreover, venture capitalists don't just throw their money at startup companies hoping to get lucky and pick a winner. They become involved as board members and management advisors, suggesting strategic partnerships and helping to refine business plans.

It's important to keep an eye on the straight dollar amount of venture capital in the economy, but it's just as important to remember the exponential ripple effect of the cash. Many of the gazelles of the New Economy are venture-backed companies, and they are having a profound impact-employment in venture-backed companies increased 34 percent annually between 1991 and 1995 while employment in Fortune 500 companies declined 3.6 percent. Moreover, venture-capital backed firms are more technologically innovative than other firms.⁴⁰

THE TREND: () U.S. venture capital activity, which barely registered as a blip on the radar screen in the 1970s, hit a peak in the mid-1980s, and then a slump during the recession of the late 1980s and early 1990s. Since then it has rebounded, increasing from an average of $6 billion in the mid-1980s to $12 billion in 1997 (constant 1992 dollars) and from 0.10 percent of GDP to 0.16 percent of GDP. In 1997, it was disbursed to some 2,485 companies, five times more than in 1980. This is a real innovation advantage for the United States, which saw its venture capital activity grow twice as fast as European venture capital from 1993 to 1996 as a percentage of GDP.

THE DATA:

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