The Role of Venture Capital in the US Economy

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National Venture Capital Association

Venture Capital’s Voice:
Public Policy & American Competitiveness

Robert E. Grady
Managing Director, The Carlyle Group
Chairman, NVCA
Chicago, Illinois
December 6, 2006

Published in: Business, Economy & Finance
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  • The Role of Venture Capital in the US Economy

    1. 1. National Venture Capital Association Venture Capital’s Voice: Public Policy & American Competitiveness Robert E. Grady Managing Director, The Carlyle Group Chairman, NVCA Chicago, Illinois December 6, 2006
    2. 2. The Role of Venture Capital in the US Economy
    3. 3. Venture Capital has grown up Source: 2004 NVCA Yearbook, prepared by Venture Economics, page 18
    4. 4. Venture Capital Has Been Good for Investors Investment Horizon Performance - as of 6/30/06 11.7 6.2 10.2 5.6 NASDAQ 9.8 6.6 9.2 6.7 S&P 500 13.4 8.9 16.3 27.3 All Buyouts 16.5 20.8 9.0 16.2 All Venture 20 Year 10 Year 3 Year 1 Year Fund Type
    5. 5. Venture Capital: America’s Job-Creating Engine <ul><li>In 2003, venture-backed companies: </li></ul><ul><ul><li>Provided 10.1 million US jobs (9.4% of all US employment) </li></ul></ul><ul><ul><li>Had sales of $1.8 trillion (9.6% of all US GDP) </li></ul></ul><ul><ul><li>10% of US economy on < 2% of capital invested since 1970 </li></ul></ul><ul><li>VC-backed companies outperformed during economic softness: </li></ul><ul><ul><li>Between 2000 and 2003: </li></ul></ul><ul><ul><li>US private sector jobs down 2.3%... </li></ul></ul><ul><ul><li>Venture backed companies grew jobs by 6.5% </li></ul></ul><ul><ul><li>Sales nationally up 6.5% </li></ul></ul><ul><ul><li>Sales at venture backed companies up 11.6% </li></ul></ul>Source: Venture Impact 2004 by Global Insight (Wharton/DRI)
    6. 6. Venture capital is invested broadly in the US Source: NVCA and Thomson VentureXpert, 2006. 1970 1980 1990 2005
    7. 7. Jobs in All 50 States <ul><li>California 2.5MM </li></ul><ul><li>Texas 899,000 </li></ul><ul><li>Massachusetts 712,000 </li></ul><ul><li>Pennsylvania 604,000 </li></ul><ul><li>Georgia 551,000 </li></ul><ul><li>Tennessee 543,000 </li></ul><ul><li>New York 471,000 </li></ul><ul><li>Washington 400,000 </li></ul><ul><li>Virginia 333,000 </li></ul><ul><li>Illinois 235,941 </li></ul>Source: Venture Impact 2004 by Global Insight
    8. 8. VC’s Contribution to Productivity : Annual Productivity Growth: 1970s vs. 1990s Source: U.S. Bureau of Economic Analysis, 2006. 1 Growth in output per person Growth in output per person
    9. 9. Market Trends: Venture Capital Today
    10. 10. VC Fundraising 1996 – 2006 (thru Q3) Source: VentureXpert™ Database by VE & NVCA
    11. 11. Computer Hardware Sales Source: U.S. Bureau of Economic Analysis, 2006.
    12. 12. Computer Software Sales Source: U.S. Bureau of Economic Analysis, 2006 .
    13. 13. RFID Hardware Sales Source: Gartner, Sept 2005.
    14. 14. Venture Capital Investment Q1 2002 – Q3 2006 Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report; Data: Thomson Financial
    15. 15. Cell Phone Users Source: IDC, April 2005. (# in mils)
    16. 16. Mobile Device Explosion Source: IDC, April 2005 (# in mil) Source: Motorola, October 2006 Time to achieve 1st billion users: 20 years Time to achieve 2nd billion users: 3 years Time to achieve 3rd billion users: 2 years
    17. 17. Rapid Growth in Medical Devices <ul><li>Market size: $63.8 billion (2004) </li></ul><ul><li>Key Growth Drivers: </li></ul><ul><ul><li>Tech innovation </li></ul></ul><ul><ul><li>Aging of population </li></ul></ul><ul><ul><li>Rise in wealth </li></ul></ul><ul><ul><li>Physician/patient acceptance </li></ul></ul><ul><li>CAGR of 11.7% from 2004-2011, to $139.9 billion </li></ul>Source: Frost & Sullivan ($ in billions) U.S. MEDICAL DEVICE INDUSTRY: REVENUE FORECASTS, 2001 – 2011
    18. 18. Software as a Service/”On Demand” <ul><li>CAGR (’04-’09): 28% (IDC) </li></ul><ul><li>Benefits: </li></ul><ul><ul><li>Pricing </li></ul></ul><ul><ul><li>Measurability </li></ul></ul><ul><ul><li>Security </li></ul></ul><ul><ul><li>Manageability </li></ul></ul>U.S. On-demand software revenues Source: IDC $ in mil 2004-09 CAGR: 28%
    19. 19. Tech IPOs Enter 6 th Year of Darkness Source: America’s Growth Capital
    20. 20. Venture Exit Counts- IPOs and M&A by Year Source: Thomson Financial/National Venture Capital Association
    21. 21. M&A vs. IPO for Venture Exits Source: National Venture Capital Association.
    22. 22. Storm Clouds Confronting the U.S. Venture Capital Industry (partial list) <ul><li>Stock Option Expensing and 409(A) </li></ul><ul><li>U.S. Budget Priority Setting and the R & D Enterprise </li></ul><ul><li>The Search for Talent and H-1B Visas </li></ul><ul><li>The Next Generation and K-12 education </li></ul><ul><li>Sarbanes-Oxley </li></ul><ul><li>Smooth Functioning of the Capital Markets </li></ul>
    23. 23. What We Are Doing About It: NVCA’s Public Policy Agenda
    24. 24. “ MAGNET USA” : A Competitiveness Agenda for America <ul><li>Invest in R & D </li></ul><ul><ul><li>Federal commitment to sustained funding for basic science </li></ul></ul><ul><li>Attract the Best and the Brightest </li></ul><ul><ul><ul><li>Companies need access to hire key talent </li></ul></ul></ul><ul><ul><ul><li>Reverse unduly onerous post-9/11 procedures </li></ul></ul></ul><ul><ul><ul><li>Increase Caps on H1B Visas </li></ul></ul></ul><ul><li>Reform K-12 Education </li></ul><ul><ul><ul><li>Long-term approach to attracting talent to math and science </li></ul></ul></ul><ul><ul><ul><li>Market-oriented reforms for teachers </li></ul></ul></ul><ul><li>Improve Our Capital Markets </li></ul><ul><ul><ul><li>“ Sliding Scale” Sarb-Ox Implementation for Small Firms </li></ul></ul></ul><ul><ul><ul><li>Steps to Ensure Research for Small Companies </li></ul></ul></ul><ul><ul><li>Announced at NVCA Annual Meeting April 2006 </li></ul></ul>
    25. 25. NVCA Public Policy Philosophy <ul><li>Bi-partisan Approach </li></ul><ul><ul><li>PAC Giving to Pro-Growth Members of Both Parties </li></ul></ul><ul><ul><li>$929K Given in 2006 Cycle </li></ul></ul><ul><ul><li>181 Candidates Supported </li></ul></ul><ul><li>Federal Focus </li></ul><ul><ul><li>Cooperation with Regional Associations on State Issues </li></ul></ul><ul><li>Policies that Support Capital Formation, Company Formation and Innovation </li></ul><ul><ul><li>The Voice of High Growth Companies, and the Firms That Back Them, in Members’ States and Districts Is Critical </li></ul></ul>
    26. 26. Sarbanes-Oxley/Capital Markets Reform <ul><li>NVCA Board Meetings at White House Sept 14, 2006 </li></ul><ul><ul><li>Chief of Staff Josh Bolten </li></ul></ul><ul><ul><li>Chief Economic Advisor Allan Hubbard </li></ul></ul><ul><ul><li>OMB Director Rob Portman </li></ul></ul><ul><ul><li>Deputy Domestic Policy Advisor Tevi Troy </li></ul></ul><ul><li>Met with SEC Chairman Christopher Cox October 2, 2006 </li></ul><ul><li>NVCA Represented on SEC Advisory Committee on Small Businesses (Ted Schlein, Kleiner Perkins) </li></ul><ul><li>Press Outreach and Education </li></ul><ul><ul><li>WSJ, NY Times, Business Week, San Jose Mercury, etc. </li></ul></ul><ul><ul><li>Regional Roundtables </li></ul></ul>
    27. 27. Sarbanes-Oxley/Capital Markets Reform <ul><li>NVCA/Business Week Research on Sarb-Ox </li></ul><ul><li>Companies with revenues between $1 million and $5 billion (n=763) </li></ul><ul><ul><li>77% SOX not improved transparency of financials </li></ul></ul><ul><ul><li>83% SOX not improved confidence in company </li></ul></ul><ul><ul><li>77% SOX not improved corporate governance </li></ul></ul><ul><ul><li>76% SOX not improved discovery of weaknesses </li></ul></ul><ul><ul><li>49% SOX diverts resources from core business </li></ul></ul>
    28. 28. Commission on Capital Markets Reform (“The Scott Commission”) <ul><li>Correct Identification of the Problem </li></ul><ul><ul><li>Declining competitiveness of US capital markets </li></ul></ul><ul><ul><li>High cost of regulation and litigation </li></ul></ul><ul><li>Correct Principles in Addressing Problems </li></ul><ul><ul><li>Weigh costs and benefits in regulation </li></ul></ul><ul><ul><li>Better definition of “material weakness” </li></ul></ul><ul><li>A “Popgun” for a Solution </li></ul><ul><ul><li>No fix for micro and small caps </li></ul></ul><ul><ul><li>No “design only” standard </li></ul></ul><ul><ul><li>No legislation recommended </li></ul></ul><ul><ul><li>Weaker than SEC Advisory Committee </li></ul></ul><ul><ul><li>CEOs of PWC and Deloitte were on the panel </li></ul></ul>
    29. 29. Will the US continue as the home of the capital markets? # 2005 New Listings 2005 Average Deal Size for New Listings ($ mil)
    30. 30. Immigration and H1-B Visas <ul><li>Research on Contribution of Foreign-born Nationals to US Economy: </li></ul><ul><ul><li>“ American Made” </li></ul></ul><ul><ul><ul><li>National Foundation for American Policy </li></ul></ul></ul><ul><ul><li>Released November 15, 2006 </li></ul></ul><ul><ul><li>Press Coverage: </li></ul></ul><ul><ul><ul><li>CNBC, WSJ, Bloomberg, AP, NY Times, NPR, Miami Herald, San Diego Union Tribune, etc. </li></ul></ul></ul><ul><ul><li>Copies Provided to All Members of Congress </li></ul></ul>
    31. 31. Highlights of “American Made” <ul><li>25% of venture-backed companies which have come public since 1990 were founded by foreign-born nationals </li></ul><ul><li>40% in high tech sector </li></ul><ul><li>Includes Intel,Yahoo,Google,Yahoo,Sun,Ebay </li></ul><ul><li>Total market cap of such companies > $500 billion </li></ul><ul><li>47% of responding privately-held venture-backed startups were founded by foreign-born nationals </li></ul><ul><li>46% of immigrant entrepreneurs came to the U.S. as students </li></ul><ul><li>69% became American citizens </li></ul>
    32. 32. Immigration: Where We Stand <ul><li>Senate bill would raise H1-B cap from 65,000/yr. to 115,000/yr. </li></ul><ul><li>Also exempts Masters and Ph.D. students from cap </li></ul><ul><li>No House provision </li></ul><ul><li>Candidate for lame duck action – now unlikely </li></ul>
    33. 33. Declining number of H1-B visas Source: Bureau of Consular Affairs, U.S. Department of State. (‘000s)
    34. 34. R&D Funding <ul><li>NVCA has supported bi-partisan authorizing legislation and “competitiveness” initiatives by both parties </li></ul><ul><li>Appropriations likely subject to Continuing Resolution – could be same as FY ’06 </li></ul><ul><li>Participation in Tech Transfer Conference at BU </li></ul>
    35. 35. Education <ul><li>NVCA focus has been bi-partisan legislation to increase supply of math and science teachers and offer scholarships for math and science teachers </li></ul><ul><li>Outreach to multiple groups across the nation: </li></ul><ul><ul><li>National Foundation on Teaching Entrepreneurship </li></ul></ul><ul><ul><li>BUILD </li></ul></ul><ul><ul><li>FIRST (For Inspiration and Recognition of Science and Technology) </li></ul></ul><ul><ul><li>New Schools </li></ul></ul><ul><li>Entrepreneurship Week USA </li></ul><ul><ul><li>Big Ideas essay event </li></ul></ul>
    36. 36. Legislative/Regulatory Challenges Ahead <ul><li>Sarb-Ox Reform </li></ul><ul><li>Immigration Reform </li></ul><ul><li>Education Reform </li></ul><ul><li>Basic Research Funding </li></ul><ul><li>FDA and CMS Reauthorization </li></ul><ul><li>Hedge Fund Registration/Regulation </li></ul>
    37. 37. How We Can Work Together <ul><li>Members Care About Job Creation in Their States </li></ul><ul><ul><li>Entrepreneurs </li></ul></ul><ul><ul><li>Funds </li></ul></ul><ul><li>Local Press Education and Features </li></ul><ul><ul><li>Regional Roundtables </li></ul></ul><ul><li>Role of Venture Capital in the US Economy Still Not Well Understood in Washington or in State Capitals </li></ul>
    38. 38. www.nvca.org

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