Friday, September 25, 2009

What Have VCs Really Done for Innovation?

.... So I’m miffed by the National Venture Capital Association’s (NVCA) claim that companies like Microsoft and Google “…would not exist today without the funding and guidance provided during their early stages by venture capitalists.” And I’m amused that the NVCA claims credit for creating 12 million jobs and generating $3 trillion in revenue (that’s only 21 percent of U.S. GDP). In the software industry (which includes Internet/Web 2.0), they stake claim to 81% of the all jobs created. Yes, 81%. Can they please give the entrepreneurs who risk their life savings, max out their credit cards and put their families in the back seat a little more credit? We’re not talking about divvying up the company’s stock here, just a pat on the back.

How’d they come up with these numbers? They added up all the revenue generated in 2008 by any company a venture capitalist ever invested a dime in. So if John Doerr bought Bill a lunch in 1985, they’d count Microsoft as part of their empire. Maybe I’m exaggerating a bit. But seriously, the NVCA numbers aren’t even remotely credible. How can VCs claim credit for the revenue of a company which they cashed out of twenty or thirty years ago? And even then, claiming credit for 81% of tech jobs and 21% of GDP? More to the point, would those jobs never have been created if the VCs had never appeared on the scene? How can the NVCA prove causality?

The answer is, the NVCA can prove nothing and a growing pool of data suggests that VCs at best have little to no impact on these companies and at worst have a negative impact. I just completed a research project in which we interviewed the founders of 549 successful companies in several high-growth industries – the ones VC’s are most likely to fund. We selected companies that had made it out of the garage and were generating real revenue. Guess what? Hardly ten percent of the serial entrepreneurs took venture money in their first startups. In their subsequent launches, the proportion who took venture money went up to a quarter. In other words, three-quarters of even the most experienced entrepreneurs didn’t rely on venture capital (new report to be released in October).

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