The Impact of Venture Backing-Recipients’ Sales, Spending Top Traditionally Funded Firms’

Companies backed by venture capital generate
twice the sales, pay three times the federal
taxes and invest far more heavily in research
and development as their traditionally financed
counterparts, according to an industry study to
be presented today on Capitol Hill.

By Nicholas Johnston
Washington Post Staff Writer

The two-year study, sponsored by the National
Venture Capital Association, an industry trade
group, attempted to quantify the effect firms
built with venture capital have on the economy.

"I think we documented that this is going to be
a key ingredient in continued U.S. high-tech
dominance," said Andrew Hodge, a managing
director at DRI-Wefa, an economic consulting
firm that assisted in the study. "It also shows
that it’s an essential supplement to start-ups."

The data will be released at a luncheon this
afternoon sponsored by the Congressional
Economic Leadership Institute. Rep. Anna G.
Eshoo (D-Calif.), whose district includes much
of Silicon Valley, will speak at the event.

"I think the Congress needs to understand and
appreciate even better what venture capital
actually brings about," Eshoo said. "It’s an
important industry."

The study shows that companies backed by
venture capital generate $634 in sales for every
$1,000 in assets, compared with traditional
companies, which have only $391 in sales. Venture-backed firms also spend considerably more money
on research and development costs: $44 per $1,000 in assets compared with $15 for others.

Those involved in the study attribute the sharp contrasts to the nature of venture investing and the goals of
venture capitalists. The desire of venture capitalists to fund higher-growth companies is one factor, as is
the focus of those companies on emerging technologies. Venture capital investors also lend their
management expertise and business connections to help their investments grow.

"The entrepreneur that gets venture capital gets more than money," said John Taylor, vice president for
research at the NVCA. "The entrepreneur is getting the entire network."

California led the list of states that had received the most venture capital investment and also was home
to the most jobs and revenue created by venture-backed firms. In 2000, venture capitalists sank $41.9
billion into California companies. About 2.7 million Californians worked at venture-backed firms, generating
$250.7 million in revenue, in 2000.

Virginia ranked seventh in venture capital investment with $2.9 billion; it had 388,000 jobs and $33.3
million in revenue. In Maryland, which ranked 10th, 113,000 jobs were linked to venture-backed
companies, which had revenue of $10.4 million. The District had just under 2,000 employees at
venture-backed firms, which generated $29 million in revenue.

The study also showed that venture capital investment was not concentrated in states that are perceived
to be technological hubs. That’s because venture capital is not exclusively invested in high-tech firms.

Tennessee was sixth on the list for total number of jobs, for instance, primarily because venture-backed
FedEx Corp. is based in Memphis. Retail stores Home Depot Inc. and Office Depot Inc. were also
included in the study, as was discount carrier Southwest Airlines Co.

More stories in VENTURE CAPITAL online at washingtonpost.com/technology.

http://www.washingtonpost.com/wp-dyn/articles/A45410-2002Jun25.html