Venture Impact 2004

Venture Capital Benefits to the U.S. Economy

Prepared For:

National Venture Capital Association 1655 Fort Myer Drive, Suite 850

Arlington, VA 22209

By Global Insight

June 2004

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Introduction In late 2003, the National Venture Capital Association asked Global Insight (formerly known as DRI•WEFA) to update its analysis of the landmark 2002 study, “Measuring the Importance of Venture Capital and Its Benefits to the U.S. Economy.” This update using 2003 data compares with the earlier study, which used 2000 data. Global Insight was also asked to explore new research areas, including the increasing contribution of venture-capital-supported companies in the U.S. research and development effort, what the U.S. economy would have looked like without the recent computer-age benefits, and a deeper look at the innovation cycle, including its volatility and venture capital’s role. We will also explore the relation of venture capital to the U.S. stock market and business capital investment (CAPEX), and how the United States compares with other countries in these areas. The results of these studies are outlined in this report.

Highlights and Study Outline

The key findings of this report are outlined below as a “top ten” list. 1. Ventured firms increased their size and share in the economy over the last three

years, despite the dot-com bust and high-tech equipment-buying downturn. 2. Venture-supported company employment is up 7%, even though the three-year

economic slump produced a net loss in U.S. jobs overall. 3. The venture-supported results showed continued solid progress, even though the

funds raised, early-stage financing, venture returns, and IPOs went through another huge boom/bust.

4. This boom/bust is another example of the creative destruction cycle, where hundreds or thousands of firms that push the innovation envelope do not succeed, and go out of business or merge with the winners.

5. New ventured companies have emerged as major successes, including Google, eBay, and Jetblue. Recent medical IPOs include AtheroGenics and Onyx, with treatments for arteriosclerosis and cancer.

6. U.S. research and development is increasingly done by small companies, many ventured.

7. Small company medical research (estimated 70% venture supported) has risen. 8. The high-tech information revolution has helped user industries like

manufacturing, airlines, and retailing be more productive. 9. The dominant U.S. position in venture capital and the widespread U.S.

technological lead has enabled an otherwise mature, wealthy economy to widen its income and standard of living over most other advanced countries.

10. Venture capital fuels the birth of new publicly traded companies. The dynamic stock market that follows enhances fundraising and plant and equipment investment for all companies.

Each of these ten points and many others are discussed in detail in the following chapters.

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Chapter 1 (Three Years of Contrast in 2000–03) reveals in detail the findings of the revised and updated database of companies supported with venture capital. The database now estimates the sales and employment contribution, which is broken down and analyzed by industry sector, state, and region.

Chapter 2 (U.S. Research and Development: The Venture Connection) analyses U.S. research and development data reported by the National Science Foundation, focusing on the small companies supported by venture capital. The research and development trends of the key venture-supported sectors of hi-tech computer and other information technology and medical are highlighted. Chapter 3 (The 1990s High-Tech Productivity Boom: Focus on the Users) details the results of the Global Insight model of what the U.S. economy would have looked like without the high-tech boom. In particular, the high-tech user sectors are modeled to show the additional productivity, sales, and jobs brought about by their recent investment in information technology. Chapter 4 (A Historic View of Innovation) highlights innovation from a historical perspective, looking at examples of creative destruction in earlier technological boom/busts and the progress that followed. Also discussed is how some modern business successes, often adopting new technology, were born even during down-cycles for the economy and investment. Chapter 5 (Venture Investing: a Volatile Input to Business) traces the venture capital links to business capital investment and a successful stock market. The benefits of a buoyant stock market and strong capital investment, and the hi-tech contribution to this in the United States are also discussed. Worldwide comparisons of venture capital availability, stock market size, and capital investment are made, and their relation to economic growth worldwide is analyzed.

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Chapter 1 2000–03: Three Years of Contrast

National Slump, Yet Venture Capital Firm Growth

The venture contribution to U.S. jobs, economic growth, and technological progress has steadily climbed over the last three years, despite turbulent times. For the nation overall, private employment slumped over this period. Venture-supported U.S. companies by key measurements, including jobs created and sales, ignored the national recession and continued their expansion. The strong growth of the heavily ventured medical sector explains part of the growth. However, ventured companies outperformed their un-ventured counterparts in job creation in every industry sector The recent success and growth of ventured companies stands in contrast to venture financing activities. These slumped after the 2000–01 boom, though in all likelihood, only temporarily. Despite the reduced new venture funding, new seed capital is still being planted. Companies recently venture supported have moved forward with Initial Public Offerings (IPOs) of stock, or reached a value level where they were acquired by public companies. Eventually, the most successful will also advance into the ranks of biggest and most valuable firms with the most valued products. They will become the Intel’s and Microsoft’s, The Amgen’s and Medtronic’s, the Southwest airlines and Home Depot's of the future. New Stars in the Venture-Supported World: IPOs in the Last Three Years The recent IPO market is not dead. Since the prior study was released, there have been 186 venture-supported firms IPO’d. While the anticipated Google IPO will be the largest market capitalization, it is not the largest employer, and it is not clear if it has the largest sales. Seagate of California, founded in 1979 as a 5 ¼ disc drive maker, had sales of $6.5 billion in 2003, and employs over 10,000 within the United States. Over the past three years, other computer hardware manufacturers have lost, on average, 14% of their workforce; Seagate has added about 8% or nearly 1,000 workers. Today, Seagate has expanded into disk drives ranging in size from 20 to 180 gigabytes. “Seagate's technology advantage has enabled the company to consistently set and then shatter world records with the highest performing disc drives in the industry. And it also provides drives with capacities of up to 180 gigabytes capable of storing information equivalent to a stack of typed pages three times the height of the Empire State Building.” http://www.seagate.com/newsinfo/about/profile/index.html Seagate may have the most employees and highest sales in the recent venture capital (VC) IPO firms, yet it is Google that is generating the most media frenzy. Google employs 1,900 workers in three locations in California, and is aggressively expanding around the world. Sales are unknown at this point, but are estimated at $0.5–1.0 billion. Recent suggested valuations show that the marketplace expects exponential growth for many years into the future, based on the type of scalable business model the firm has, and some history. Over the past three years, employee growth has increased by a factor of 10, and sales grew by a factor of around 40–80. With growth rates like these, no wonder Wall Street is clamoring for an ownership share, even though Google does not need the cash

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infusion. To be fair, neither Seagate nor Google have achieved all of this success on their own. Within our database, we show two ventured firms, which have been acquired by Google. Seagate, likewise, has acquired at least four other ventured companies. This strategy is a time-tested successful business model. Many ventured firms eventually are swallowed by larger entities, both ventured and un-ventured, and in some cases, making it more difficult to count the subsequent jobs and sales contribution. New Stars in the Venture-Supported World—Mergers in the Last Three Years Johnson & Johnson (J&J), which acquired 35 venture companies at the time of our last report, has since acquired many more. Of the six major acquisitions J&J lists on its company information homepage, all six companies acquired over the last three years were originally VC-backed firms. J&J continues to heavily rely on new idea generation and research founded and funded at the venture capital private firm level, then as the products become ready for market, J&J purchases the firm outright, using its size and experience to shepherd the product through the expensive clinical trials and the marketing and distribution of the product. Figure 1: Ventured Companies Acquired by J&J 2001 BabyCenter HealthCare Services Internet Information Web Portal Inverness Medical HealthCare Products Diabetes Self Test Products ALZA Corp. Biotech Drug delivery based pharma products 2002 Tibotec Therapeutics Biotech HIV & AIDS research 2003 OraParma Biotech Manufactures oral healthcare products Scios Inc. Biotech Applies recombinant DNA technology Past mergers still account for major portions of J&J business. Often J&J will purchase a firm, but continue to run the business under the old name. A family of companies lists 58 U.S. domiciled firms, all 100% owned by J&J, but functioning as quasi-autonomous subsidiary firms. Interestingly, the J&J Company Timeline Web page lists one major new innovation over the past three years: a coronary stent. This product was developed by Cordis, a former ventured company, which J&J purchased in 1994, but still operates it under the Cordis name.

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The Global Insight Ventured Company Database Our latest findings show that VC-supported companies were directly responsible for 10.1 million jobs and $1.767 trillion in sales in 2003. This represents 9.4% of total U.S. private sector employment and 9.6% of company sales. It also represents a 6.5% gain in jobs and an 11.6% gain in sales over a three-year period. Both measures outperformed the national numbers as the country waded through a recession. National private employment shrank during that time to -2.3%, and U.S. company sales only rose 6.5%. In effect, for ventured companies as a whole, there was no recession. These results reflect better small company growth prospects and high venture penetration in some of the most technologically advanced sectors, particularly medical, which grew rapidly during this period. Figure 2: Economic Impact of Venture Capital 2000 vs. 2003

2000 2003 % change US Jobs 9.5 10.1 6.5(millions) US Revenues 1.6 1.8 11.6(trillions) The findings come from a database of 26,494 companies. The database enables us to break down the ventured company performance and contribution by:

1) industry (Money Tree’s major employment industry sectors). 2) state and region.

Further details are in Appendix A

Key Findings by Industry

Employment by Industry Job results are striking, as ventured companies added to payrolls at a faster rate than their non-ventured counterparts in every one of ten major categories (Figure 2). Two industries, computer hardware and services and semiconductors and electronics, experienced net job loss for ventured companies, reflecting a slump in the recent recession. The overall industry net job loss—including un-ventured firms—in each of these two sectors was greater. Health-care services job growth was very similar over 2000–03, but ventured firms grew slightly faster. For the remainder of the industries, ventured companies grew appreciably faster than the national counterpart, and in six industries, the national counterpart shrank while ventured companies expanded.

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Figure 3: National and VC Employment by Industry

2000-2003 Employment Growth

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Not only did ventured companies grow faster than their national industry counterparts, but the sector mix was far more favorable to ventured companies. In the sectors where ventured companies were growing the most rapidly, compared with the national averages, ventured companies were more represented in those industries (Figure 4)—computer software is the best example of the sector mix advantage of the ventured companies. In the computer software industry, ventured companies added jobs 24% faster than the national average, growing 16.5%, while the national industry as a whole lost 7.7%. However, the exposure to this industry is widely different in our two aggregates. Computer software firms comprise over 10.0% of all ventured companies, yet only 0.9% of all firms in the United States. This dramatic exposure differential is magnified in the third column, as ventured companies employ 88% of all computer software workers.

Figure 4: Employment Shares of Totals US Share VC Share VC / US

Biotechnology 0.5% 3.4% 54%Business/Financial 19.7% 8.1% 3%Communications 1.4% 8.2% 47%Comp. Hardware & Services 1.5% 11.2% 59%Computer Software 0.9% 10.3% 88%Healthcare Products 0.7% 5.6% 66%Heathcare Services 12.7% 6.5% 4%Industrial Energy 19.8% 17.8% 7%Retailing and Media 42.0% 23.6% 4%Semiconductors & Electronics 0.8% 5.3% 54%

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Figure 5: Share of Total Employment

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This pattern occurs many times—of the top three ventured companies that are over weighted, compared with the national average, the employment growth differential is the highest in two. Likewise, in the industries where employment growth is weakest, the ventured companies are generally not as highly represented. Figure 6 also illustrates how venture capitalists engage in and lead high-growth industries. Ventured companies judged correctly which industries would grow more rapidly, and even within industries, they placed their money on the fastest growing firms. Clearly, VC financiers are efficient movers of capital. Going further, in some respects, they helped in the creation of these fast-growth industries, bringing new ideas to market. Figure 6 breaks down those industries that are significantly more represented in the VC universe, and listed first and last is retailing and media, which is underrepresented. There are ventured retail companies, including Home Depot, Office Depot, and Staples, which have, in some cases, offered a creative business model that is copied. However, most of retailing and virtually no media companies are ventured. The first three industries show rapid growth in sales and employment, compared with the rest of the United States. The next four industries have great employment gains, but not significant sales—two of these industries typify this pattern. Both biotechnology and health-care products are “breeder” industries—they both have significant employment rates, as they are primarily concerned with research and development, and are then commonly acquired by other firms once the concept is ready to market.

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Figure 6: Ventured Companies, Compared With the National Averages Employment Sales

Share Difference Growth Differential Growth Differential

Comp. Hardware & Services 9.7% 13.1% 15%Computer Software 9.4% 24.2% 26%Communications 6.8% 23.2% 9%Healthcare Products 4.9% 18.2% 3%Semiconductors & Electronics 4.6% 16.1% 5%Biotechnology 2.9% 17.2% 6%Industrial Energy -2.0% 10.1% 6%Heathcare Services -6.2% 0.5% 1%Business/Financial -11.6% 5.0% 0%Retailing and Media -18.4% 12.6% 12%

Sales by Industry Ventured companies outperformed the national economy in overall sales growth. Like employment, ventured companies increased sales more rapidly than their national counterpart in every industry category. In one industry, VC sales fell, but national sales fell by a greater rate. There were several industries where the national growth rates fell while ventured companies expanded. However, sales are not the ideal unit of measurement. Economists prefer GDP, GSP, and other value-added type measurements. Value-added statistics measure the added input at each step in the marketing cycle. Imagine that a ventured company makes a product from nothing and sells it for $1.0 million to a middle man/wholesaler type firm, who in turn resells it for $1.1 million to a retailer. Both firms have nearly identical sales volume, but the wholesaler has a cost of goods of $1 million and is only adding $100,000 in value to the product. In simple sales terms, the firms are quite similar; in value-added terms, the ventured companies are providing ten times the value to the economy the wholesaler firm is providing. Once again, the favorable industry mix of the ventured companies vis-à-vis the national averages is in the overall total sales growth. Ventured companies expanded their sales by 11.2%, whereas nationally, sales only expanded 6.5%. Yet, looking at Figure 7, this appears to be at odds with the individual industries, as sales growth rates in the ventured companies only appear to dramatically exceed national sales in half the industries, and are nearly even in four industries. As illustrated in Figure 6, those industries where VC sales outstripped national sales (column 3) are the same industries where ventured companies tend to be found (column 1).

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Figure 7: National and VC Sales by Industry

2000-2003 Sales Growth

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Wages by Industry Wage growth by industry shows yet again how ventured companies tend to cluster in fast-growing and higher-paid industries. Figure 8 is sorted left to right according to the industries that ventured companies are over-represented as expressed in Figure 6. The wages in the industries to the left of the chart are growing more rapidly than the industries to the right of the chart, with the exception of computer hardware and services. Once again, VC financing shows its hand, as capital tends to be lent to firms in occupations and industries where employees are rapidly being added, and those that saw rapid appreciation in their wages. In the following chart, the five industries with the most rapid wage gains are communications, computer software, biotechnology, health-care products, and semiconductors. In the VC universe, 33% of all VC employees are in these five industries, yet in the national economy, these five industries only employ 4.2% of all workers. More simply stated, a worker who is employed by a firm founded with VC is more likely to see their wages rise more rapidly than the national average.

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Figure 8: 2000–03 Wage Growth by Industry and National Wage Growth vs. Ventured Company Wage Growth

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Latest Findings by State Total employment growth rates over time by state showed some correlation with the VC dollars invested in the state over the same period; however, limited to 2 data points for 2000 and 2003 for actual ventured company employment, our finding were not compelling enough for further testing. However, several other measures were significant. GSP growth rates over 1998–2003 showed correlation with VC funding per capita per state. More interesting and perhaps more relevant to the impact of VC in the United States is the correlation between our proxy for productivity growth and VC funding. Figure 9 suggests the more VC funding per worker in a state, the more likely that state is able to grow output per worker over time.

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Figure 9

GSP/Employment: Average Annual Growth 1995–2003

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The upward sloping line above supports our working hypothesis that VC-funded companies produce more than their share of idea generation, the foundation of what eventually shows up as aggregate productivity growth. The fit might be even stronger if the three outliers in the upper left quadrant, DE, OR, and RI, were omitted. There is also a strong relation between VC input and the level of output per worker. Figure 10 uses the horizontal axis to create relative size bubbles by state. Therefore, as VC funding per capita per state increases, states move left to right, and the bubble size increases. Figure 10: Higher Output per Worker in the Big VC Supported States…

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Related to the theme of higher productivity gains is the level of output per worker. Figure 10 illustrates that the states that have high rates of VC funding per worker are the same states that have reached a higher level of output per worker. The four outlying states of DE, NY, CT, and NJ all benefited from the financial boom of the 1990s without direct VC input. If ventured companies contribute more than their share of new ideas, operate in high value industries, and generate higher wages, it is no surprise that each VC workers would contribute more GSP or value-added output per person. The following chart shows wage levels, compared with VC input. Figure 11: …Means Higher Wages

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It is important to create jobs. It is equally important to create well-paid jobs. So, it should be no surprise that the states with the most productive workers are also the states with the highest wages, as shown in Figure 11. As in Figure 10, the relation is even stronger if the East Coast states benefiting from the 1990s’ financial boom are omitted. In summary, the findings on VC-supported company performance are surprisingly favorable for the last three years, given venture capital’s image of supporting high-tech companies, many of which languished or failed during this period. Direct venture-supported company employment rose 7% over this period, to a record 10.1 million jobs. The total direct estimated sales of venture-supported companies is $1.8 trillion, a 12% gain during this period.

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Chapter 2 U.S. Research and Development: The Venture Connection

U.S. research and development (R&D) is the envy of the world. Academic- and government-sponsored research centers often contribute to the new ideas that make ventured companies work. However, we find that ventured companies, often in partnership with academics or founded by academics, are doing more and more of total U.S. research. First, the increasingly ventured small-company sector is doing a rising share of U.S. research. Second, the heavily ventured IT and medical sectors are performing an increasing share of total U.S. R&D. Third, as some of the originally small ventured firms grow to be among the biggest in their industry, they remain the leaders in R&D. Of the top 50 firms in U.S. R&D, 41 were either ventured themselves or were major acquirers of ventured firms. Total U.S. R&D is projected to be $283.8 billion, or 2.61% of GDP, in 2003, among the highest rates in the world. A significant amount of this is done by the government, including military, universities, and other non-business sites. By and large, though, U.S. R&D is performed by U.S. industry, which reached $193.7 billion in 2003, or 1.78% of GDP. Most of the analysis that follows will discuss the portion of total U.S. R&D performed by private industry. However, there is an additional amount of direct and indirect support, including by ventured companies, for research performed by universities and other non-business researchers. Most of these findings are based on reporting by the National Science Foundation.

U.S. Research is Increasingly Done by Smaller Companies The share of U.S. R&D done by firms with less than 500 employees has risen from 5.9% in 1984 to an estimated 20.7% in 2003, a truly remarkable increase in share.

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Figure 12: Rising Small Company Contribution to R&D (% of Total U.S. Industry-Performed R&D 1984–2003 est)

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Source: NSF, R&D in Industry: 1991–2000, Tables A3 & A4 NSF, Preliminary Release, 2001 and 2002, Tables A3 & A4 NSF, Infobrief "U.S. R&D Projected to Have Grown Marginally in 2003"

At latest count, the dollar value of small company R&D spending rose from $4.4 billion in 1984 to an estimated $40.1 billion in 2003, about a nine-fold increase. In terms of growth rates, this was up at a 12.3% annual rate for the entire period, far higher than the 5.1% average annual gain for U.S. R&D as a whole. The research-driven startup has been a staple of the ventured industry, and is actually shifting the entire mix of U.S. R&D toward smaller firms—our earlier study showed that ventured firms, adjusted for size, spend over twice as much on R&D as unventured firms. Complete breakdowns by size of firm and sector are limited by confidentiality requirements, but the fragmentary evidence shows that small firms in the venture-dominated information technology and medical-related sectors are major contributors to these trends. In 1998–2002, within the smallest company group, companies with 5–24 employees performed 16.0% of the total R&D spending, 25–49 performed 11.9%, 50–99 performed 20.3%, 100–249 performed 29.4%, and 250–499 performed 22.4%. Since 2000, there has been a significant downturn in the smallest of companies, 24 or less employees, but the small sector in total has otherwise held its share. The downturn in the very smallest R&D effort may relate to the massive falloff of so-called “seed and early” venture funds, comprising only 6% of total VC funds placed since 1980. As venture investing recovers from its “seed and early” downcycle, this very small company “seed money” research for new ideas and feasibility should recover strongly. Big Firms Have a Venture Connection as Well VC was in its infancy 30 years ago, and grew slowly at first. Even so, many of the ventured companies founded in the early period of 20 years or more ago have quickly grown from small private companies to among the largest in the country, as detailed in earlier sections. In many cases, they have also become the largest in total dollar R&D. Of the top-ten U.S. R&D spenders (NSF, 2001), Cisco ($3.922 billion), Intel ($3.897), and Microsoft ($4.379), all founded in the postwar period, were directly ventured. Of the other top ten, J&J ($3591 billion) and Pfizer ($4.847) have a massive record of acquiring ventured firms. J&J alone was the eventual acquirer of over 30 such firms. In

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fact, much of the entire drug, biochemical, and medical device sectors operate on a basic business plan of acquiring either the small research-oriented firms themselves or their products or patents. Motorola ($4.318 billion) is also a substantial venture acquirer. Rise of Information Technology and Medical Research The sector R&D trends of the heavily ventured IT and medical industries are clear: they are performing an increasing share of total U.S. R&D. Biotech R&D spending grew from 4.28% of total funding to an estimated14.51% of total in 2003. High-tech crept up from 30.53% of total to 32.02% of total by 2003, despite the large dip from 1989–92, when it averaged 20.83% of total R&D spending. (Note: in the National Science Foundation R&D classification, medical equipment falls in the high-technology category. Biotech includes all research on drugs and medicines, as well as the broad category scientific R&D.)

Figure 13: Medical and Information Technology R&D Shares

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Nominal R&D funds for Biotech companies grew at an annual rate of 12.1% in 1984–2003. Within Biotech, R&D for scientific services grew faster, at 19.0%, while pharmaceuticals and medicines were a bit slower, at 9.0%. The rate for high tech was 5.4%, while the total funds grew 5.1%. Within high tech, navigational, measuring, electromedical, and control instruments was the fastest growing sector (12.4%), followed by software (10.7%), then semiconductors and electrical components (8.3%). Communications and computer equipment both actually received less R&D funds in 2003 than in 1984 (-1.5% and -3.9%, respectively). While the precise calculations of VC R&D are beyond the scope of this study, the venture contribution is clearly large. Venture high-tech activity is estimated at 65–80% of the three high-tech categories. The venture share of medical is smaller. The large pharmaceutical companies have been around for a long time and are generally not ventured (Many are major acquirers of ventured companies of their research as noted elsewhere). The venture share of successful small medical companies is estimated at 70%. The increased penetration of small company research is most striking in the biotech sector. The small company share of biotech research has expanded massively from 3.2% in 1984 to 39.4% in 2003, while the share of the largest companies (25,000 or more) shrank from 30.7% to 17.6% in 2003. We do know that of 2,842 total ventured medical

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device/biotech companies in the Global Insight database, there are 2,740 small companies, defined as less than $100 million in estimated sales. Figure 14: Small Company Biotech Research is Booming (Percent of Biotech Research Performed by Small Companies)

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Small company biotech R&D spending rose from $103 million in 1984 to an estimated $11,1 billion in 2003, an astounding 108-fold increase. In terms of growth rates, this was up 27.9% for the entire period, far higher than the 12.1% average annual gain for biotech R&D as a whole. In stark contrast, large company biotech R&D spending rose at just a 8.9% clip during the same period. The increasingly common drug development model is for the invention and new idea to be developed by a small startup firm. Later, the patent or other rights, or the firm itself is bought by the large pharmaceutical firms who bring their comparative advantage in final testing regulatory approval and marketing. While we have tracked the actual acquisitions of small drug companies and accounted for their activity, the R&D data suggest there is also a large acquisition of patent rights or other non-M&A acquisition.

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Figure 15: R&D Share of Small versus Large Hi-Tech Companies

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High-Tech Small Co. (% of High-Tech) High-Tech Large Co. (% of High-Tech)

Source: NSF and Global Insight estimates

Not to be left behind, nominal R&D funds for the smallest high-tech companies grew an estimated annual rate of 8.5% in 1984–2003. The rate for the largest high-tech firms (>25,000) was 2.7%, while for high-tech R&D spending in total, it was 5.4%. High-tech small companies (<500) increased from an estimated 12.4% of the total dollars spent on high-tech R&D in 1984 to a projected 21.6% in 2003, while the share of the largest high-tech companies (25,000 or more) shrank from 43.6% in 1984 to 26.8% in 2003. This is still an admirable gain for small companies. However, it is worth noting that this is a sector where most of the big players like Intel, HP, Microsoft, and Cisco were ventured. IBM stands out as the largest exception, though it has done major venture acquisition as described in our prior report. Small Company Medical Research is Booming Yet, if small companies are increasing the growth engine for R&D, then biotech could soon be the share leader of an ever-expanding pie. Small biotech companies only accounted for 1.2% of the funds allocated to small firms in 1984, while small high-tech firms garnered 64.4%. By 2003, however, the two sectors were almost even in their respective shares of the funds given over to small firms for R&D—28.6% for biotech firms and 33.4% for high-tech companies. As less and less R&D dollars flow to more mature industries such as computer and communication equipment, expect biotech to outpace the stalwart of high-tech, software, and take over as a key venture capital destination.

18

Figure 16: Biotech and Hi-Tech Shares of Small Company R&D

0%

10%

20%

30%

40%

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1984

*19

85*19

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90*

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Biotech Small Co. (% of Small Co.) High Tech Small Co. (% of Small Co.)

Source: NSF and Global Insight estimates

Information technology is a long way from dead. Recent sales data show a sustained pickup—business investment in and consumer expenditures on high-tech equipment growth is expected to be in the double-digit range through 2004–05, after exiting the recent slump in 2002. The medical field showed even more strength, however, with an acceleration of activity through the recent recession. We may be in a period where cross fertilization and earlier work in gene mapping, etc., will permit a further acceleration of the creation of new medicines and devices.

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Chapter 3 The 1990s High-Tech Productivity Boom: Focus on the Users

We have already documented the venture contribution to the high-tech (information technology) industry. This chapter documents the high-tech industry’s contributions to national productivity. We also look at detailed examples of how user industries apply technology. Finally, we use the Global Insight large-scale model of the U.S. economy to determine what major industries, and the U.S. economy as a whole, including jobs, would have looked like without the high-tech investments made in the 1990s. What is Productivity? Productivity is the output of each worker in the U.S. economy, sometimes also referred to as labor productivity. It is usually expressed as a growth rate. U.S. statistics count the productivity of the nonfarm private sector, rather than every worker. They also express the labor in hours worked rather than the number of workers. Another less-used measure of productivity is the so-called Total Factor Productivity (TFP). This measure estimates gains from more investment, gains from labor skills, as well as the number working, and estimates a TFP residual not produced by these factors. Below is the labor productivity measure. Why is Productivity Important? “Productivity,” Paul Krugman wrote in a famous essay 13 years ago, “isn’t everything, but in the long run it is almost everything.” By this, he meant that when productivity growth is high, a country’s central economic challenges—budget deficits, balance-of-payments deficits, inflation, and income redistribution—become tractable, but when productivity sags, these problems become intractable. Productivity is the key statistic determining a country’s long-run vitality. It essentially measures all of the country’s economic progress not due to the ongoing expansion of the workforce. Productivity growth accelerated in the second half of the 1990s, after nearly 20 years of sluggish growth. The economy underwent fundamental changes with the proliferation of information technologies, leading many to term it the “new economy.” Productivity History Former Fed governor Laurence Meyer has gathered labor productivity estimates dating back to 18891. Admittedly, the quality of the data is not as good for the pre-World War II period, but it does help to put today’s innovations in information technology into perspective. Figure 17 presents a summary of productivity growth over some interesting sub-periods of the more than a century 1889–2002 period, judgmentally identified by Governor Meyer. Meyer notes that average labor productivity growth over the entire period was 2%, with three periods of above-average growth and three periods of below-average

1 Remarks by Governor Laurence H. Meyer, before the New York Association for Business Economics and The Downtown Economists, New York, June 6, 2001.

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growth. Most of the periods span relatively long periods, with the exception of one ten-year period (1917–27) and the current period (which has probably not run its course). Above-average growth averaged close to 3.0%, while below-average growth was in the 1.5% range. Meyer concludes that this is a “new economy again.” That is, this is “another period like others over the long span of American economic history, during which a bunching of innovations has propelled the economy to a higher rate of growth for a while.” Figure 17: Labor Productivity Trends (Compound Annual Growth Rate)

ost World War I tivity boom followed the first auto assembly line (Henry Ford 1913)

ost World War II wth in 1927–45 accompanied the Great Depression and World War

to slump again in the early 1970s. Higher oil prices undoubtedly

mainframes, calculators, etc. of the earlier era and the 1990s boom. Slower growth of

0.00

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PThe 1917–27 producand the proliferation of the mass-produced, low-cost automobile. Roadways and all the retail, movietheater, and other services of a mobile economy followed. Productivity soared. Broadcast radio, electricity, and mass-produced household and business electric appliances became widespread. Modern “skyscraper” construction and air travel emerged, and Lindbergh made his famous transatlantic flight. Labor productivity growth averaged 3.8% per year, the highest growth rate for the six segments. PSlow productivity groII era, while two factors combined to boost productivity in the years following the war. First, output had dropped so far during the Great Depression that simply returning to trend growth required a period of faster economic growth. Second, the economy benefited from a wave of innovations, included the building of the interstate highway system, antibiotics and other medical advances (penicillin came earlier), transistors, and the calculators and mainframes that used them, and commercial jet aviation. In 1945–73, annual labor productivity growth averaged 2.8%. Post Oil Embargo Productivity began played a role in slowing output during the 1970s. Other possible explanations include a cooling in the rate of innovations. For information technology, there was a lull between

21

workers’ skills and greater government regulations may have contributed. In 1973–95, labor productivity growth averaged only1.4% per year. Late-1990s Resurgence While there are still unanswered questions about why productivity gains slowed after

med in academia that the surge in productivity growth we have

lusions of Steven Oliner and Daniel Sichel,

nvironment to explain. In Baily’s words,

tailed industry analysis showing accelerating

etailing Retailing has been transformed, not only by the Internet revolution, but also by other technology, including, at point of sale, bar code scanners, automated payment by credit

1973, a consensus has forenjoyed in recent years (3.0% since 1996) is coming from investment in information technologies (i.e., computers, software, and communications equipment). Dale Jorgenson, in his “2001 Presidential Address” to the American Economic Association, summarized this research as follows: “A consensus is building that the remarkable behavior of information technology prices provides the key to the surge in economic growth.” According to Jorgenson, Intel’s shift in its product cycle for semiconductors from three to two years was a pivotal event. Numerous studies have used growth to explain the step-up in labor productivity from 1973–95 to the post-1995 period. The concthe Economic Report of the President, and Jorgenson, Mun Ho, and Devin Stiroh were summarized by Baily. While all three use slightly different data to support their analyses, there are fundamental similarities in their conclusions. As in Baily’s analysis of the earlier time period, information technology was the largest identifiable factor contributing to labor productivity growth. Meyer, Baily, and others look to the bunching of productivity-enhancing innovations, combined with a favorable U.S. economic e“rapid advances in computing power, software and communications capabilities formed a set of powerful complementary innovations.” An increasingly deregulated U.S. economy created a highly competitive environment that drove out inefficiencies, displaced low productivity firms with high productivity ones, and forced the adoption of new innovations in order to survive. While the new innovations were available globally, the highly competitive environment may explain why U.S. productivity rates benefited more from them than other world economies. Kevin Stiroh found that the recent productivity revival is broad-based, with nearly two-thirds of the 61 industries in his deproductivity gains.2 This finding knocks down Robert Gordon’s objection that productivity growth was confined to durable goods manufacturing. Stiroh also found that productivity growth was concentrated in industries that either produced information technologies, or used them intensively, the latter further discussed below. Thus, Stiroh’s industry analyses supports the growth accounting conclusions that information technology capital was a significant contributor to the post-1995 productivity surge. User Industry Benefits R

2 Stiroh, Kevin, J. “Information Technology and the U.S. Productivity Revival” What do the Industry Data Say?” American Economic Review, December 2002, 92(5), pp.1559-1575. 3 Wall St. Journal, June 17, 2004. P1

22

and debit cards, and capture of all the sales information on a real-time basis. This and mpany inventory and supply chain management systems have allowed

k. As stores have improved inventory controls they have also been better

These other related The im -reported data below

-tailing has been growing rapidly in percentage terms, but is still at only a

related coautomated inventory replenishment, sometimes communicated directly to suppliers, and real-time information on what is selling and what is not. To quote from a recent Wall St. Journal front page:

…today big retailers know what is selling at each of their stores every day by the hour. So they don’t have to rely on suppliers to tell them how much to stoc

able to cut costs and lower prices. The lower prices, in turn, helped spur Americans to keep shopping through the recent recession. 3

point-of-payment systems have also permitted major productivity gains in areas like automated toll payment and gasoline station transactions. pact of so-called E-tailing has also been widespread. U.S.

show that Emodest 5.2% of total retailing. Figure 18: E Commerce Share of Total Retailing Rising

6

0

2

4

2000 2001 2002 2003020

6080

Ecomm Share of Total Retailing (left scale)Ecomm Year over Year % change (right scale)

40

Still, the total is moving into the noticeable area, at $72 billion per year. The recent 25–

0%-per-year growth is showing no sign of slacking, suggesting that share can rise still urther in the next few years. E-tailing now accounts for about 40% of all the recent rowth

3fg in retailing.

, but not so good for the “dot-com” E-tailers. It turns out that with

There are other benefits to Web-based shopping. Consumers can now easily access a wealth of supporting information free, even if the final purchase is on site or by phone. So, the data above, tracking Web payment only, are undercounting this. The “free” part is great for consumersheavy competition and a near-zero cost of additional consumer information access, the

23

permanent long-run competitive price of this valuable service is near zero, or zero with advertising. This was, to state the obvious, a disappointment to investors during the dot-com bust. However, there is a lesson here. The tremendous value that investors foresaw for the consumer is actually there—we just do not need to pay for it in most cases. The Web

lso gives good information to customers—it is fair to

mplications

he airline industry and airline travel have been transformed in the last ten years. First omes their essential equipment: the aircraft. There are major advances, like modern

voidance. The aircraft manufacturing industry is also applying unique advances

ermits schedule changes,

anufacturing was (and still is) a dominant user of IT investment, and is clearly the ctor with the largest productivity gains. A comparison of actual manufacturing

results under no high-tech gains scenario are shown below.

infrastructure and E-tailing knowledge created during the investment boom is there permanently for all of us to enjoy. In limited cases, some value can be captured by firms. The Web auction site eBay, a recently IPOd venture-supported firm, is a good example. This extra market-making function can be charged for, and asay that such businesses as purchasing antiques have been revolutionized by this. Customer search costs are a fraction of what they were ten years ago, and information on what is available is now nationwide, or even worldwide has been multiplied. Without high tech, retailing sales productivity would be less and prices higher. Our model scenario suggests that with no high-tech investment boom in the 1990s, retail prices would be much higher by now. The unfavourable overall productivity iare noted later. Airlines Tccollision ain Computer-Aided Design and Manufacturing (CAD/CAM). The advances in airline travel service technology and the investments that support that have been even more striking. Modern route planning actually requires a lot of computer power to optimise. The Sabre airline information system pcustomer tracking, bar code luggage tracking, and real-time seat assignment. While air travel is often no picnic, especially with the new security requirements, the new technology also permits a level of security that would be unthinkable 20 or even 10 years ago, including high-tech scanners and information sharing on potential terrorists. Web-based travel booking has also produced dramatic changes. The Web is a natural for air travel, and various E-travel services—some venture supported—are proving economically viable, as well as offering valuable service. Manufacturing Mseproductivity with

24

Figure 19:

0.00.20.40.60.81.01.21.41.61.8

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

No High Tech Boom Baseline

Manufacturing Productivity (in levels)(1992=1)

In the real world, manufacturing productivity showed dramatic gains of 4.2% per year since 1993, well above the overall productivity gains. Also shown on the chart above, as our model estimates without hi-tech investment growth, the growth would have been much less, only 0.8% per year on our calculation. The dominant share of manufacturing productivity growth (81%) was due to the extra hi-tech investment.

Individual high-tech applications are as diverse as the sector itself. The CAD/CAM noted earlier allows specialized short runs of different items at low cost. Bar coding, route planning allows just-in-time inventory and other supply chain management practices that are similar in some ways to the retailing sector, as noted above. Automated machine tools and process control are productivity-enhancing investments unique to the goods-producing industries. It is fair to say that U.S. industries have led the world in the application of high tech, even though user industries anywhere in the world can buy and use the equipment. Total U.S. Economy Benefits What did high-tech mean for the United States the last ten years? We “shocked” the Global Insight U.S. Macro model over recent history, since 1993, with the assumption that dollar computer and telcom equipment sales (the purchase by each user industry) stayed constant over the last ten years. With a reduced assumption of price decline, “real” growth in these two categories was held at 3% per year for computers and 1% per year for telcoms. In reality, they grew 12.1% and 5.2% per year, respectively. These are fairly limited assumptions about “no high tech.” They still assume small real growth in purchases. If new products and applications had ground to a halt, there might even have been large outright declines in the annual outlays. Total national (private nonfarm) productivity in this scenario continues to grow, but at reduced rates. The trend of productivity in index levels is shown below.

25

Figure 20:

0.7

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1.1

1.2

1.3

1.4

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

No High Tech Boom Baseline

Nonfarm productivity (in levels)(1992=1)

In the cumulative period since 1993, productivity is 9.1% higher than the high-tech boom, or about 0.9% per year. This may not seem like a huge amount, but it is most of the acceleration noted earlier in the Meyer study for the latest high-tech boom (he measured from a 1995 date, and the comparison also holds for that period). This can also make a substantial difference over time. The following chart shows levels of real GDP per capita in dollars for the history and scenario. Figure 21: Real GDP per Capita (in Levels)

2829303132333435363738

1990 1992 1994 1996 1998 2000 2002 2004No High-Tech Boom Baseline

Per capita GDP(Thousands)

As indicated, the GDP per capita difference in any area was only about 1% or less by the end of the ten-year simulation. U.S. GDP per capita, a good measure of the standard of living, was 7% lower in the simulation, compared with history. Clearly, the high-tech surge was good for economic progress and the overall standard of living. Will the Productivity Surge Continue? This is a good question, and central to how well the country as a whole will perform economically. However, there are naysayers, including Steven Roach of Morgan Stanley,

26

who argues that the productivity surge is illusory because it is being badly measured. However, the dominant academic school of thought, including Stiroh and Jorgenson noted earlier, Bradford DeLong of Berkeley, and former Treasury Secretary Lawrence Summers (the current president of Harvard), argue that productivity will surge for at least several more years. Delong 3writes:

Will this new, higher level of productivity growth persist? The answer appears likely to be “yes.” The most standard of simple applicable growth models…predicts that the social return to information technology investment would have to suddenly and discontinuously drop to zero for the upward jump in productivity growth to reverse itself in the near future. More complicated models that focus in more detail on the determinants of investment spending or on the sources of increased total factor productivity appear to strengthen, not weaken, forecasts of productivity growth over the next decade.

To give some examples, the spreadsheet, the World Wide Web, and Amazon.com were all innovations made possible and accessible to the masses by cheaper computing prices. Delong argues that the pace of innovation will continue into the foreseeable future because of the still-declining price of information technology. The latest data showing the sustained R&D effort and continuing VC-related activity, even if the latter is at post-boom levels, also points to a continuing flow of productivity-enhancing innovations. In 2002, productivity growth surged 5.3%, the highest performance in the past 50 years. It slowed only modestly in 2003 and 2004, estimated at 4.4% and 4.0%, respectively. These amazing numbers indicate that the surge in productivity that started in the 1990s is not only continuing but also accelerating. Some of this recent productivity came from an austerity-related temporary reluctance to hire workers, and a workoff of earlier excess hiring. However, even this was partly enabled by the ongoing application of technology. However, some slowing appears in the latest data. Some of the exceptional austerity-driven productivity of the last three years is moderating. In Global Insight’s latest long-term forecast (May 2004), productivity growth averages 2.6% in 2003–14, still well above historical averages. This forecast assumes that some of the temporary austerity-related sources will fade, but the permanent long-term benefits to productivity coming from information technology and medical gains, and the venture activity that helped to give birth to them, will persist for another ten years.

3 Productivity Growth in the

2000s

J. Bradford DeLong1

University of California at Berkeley and NBER

27

Chapter 4 A Historic View of Innovation

This section examines key elements of how U.S. innovation has proceeded in history. We examine how new technological sectors evolved in the pre-WW II period through a process of “creative destruction.” We also look at the pattern of formation of the biggest U.S. Fortune 500 industrial firms over the U.S. business cycle since 1906. The business sectors examined—automobiles, radio, and aircraft— were all technological leaders in their day, and all had a massive early expansion of new small companies, each attempting to find the best business model to apply to the new technology. What followed was a massive shakeout, as most of the new, small firms either went bankrupt or were merged and reorganized. Creative Destruction The term creative destruction was coined by the famous economist Joseph Schumpeter in his work “Capitalism, Socialism and Democracy.” He described a process. “the gale of creative destruction.” where new dynamic firms eventually drove their competitors out of business. Phrases he used included “industrial mutation…that incessantly revolutionizes the economic structure from within.” He cited “steel…from the charcoal furnace to our own type of furnace” and “transportation from the mail coach to the airplane.” The following are detailed looks at several sectors in history that best illustrate this. Of course, the process is still under way, as seen in the recent shakeouts of PC-producing and Internet companies. Automobiles The great early pioneers of automobile technology often had companies and models named after them. According to the Antique Automobile Club of America1 (http://www.aaca.org/autohistory/01.html), it was the “original mechanical wizards like Henry Ford, Ransom E. Olds, David Dunbar Buick, William Knudsen, Henry Leland, Charles Kettering and the Dodge brothers (as well as the Packard brothers and foreign inventors like Mercedes, Benz and Peuguot) who invented and figured out how to build the automobile.” Most of these founders formed their first companies before 1900. Between 1900 and 1910, there were 290 identified automobile companies formed, and no doubt many more uncounted. Of note, Henry Ford, fired from the bankrupt Detroit Auto Company, formed the present Ford Motor Company in 1901. Bankruptcies, reorganizations, and mergers were common during this period. The automobile assembly line was invented by Ford in 1913. The subsequent growth of the Model T's market share to over 75% marked the beginning of major consolidation in the industry forced by the economies of scale. Technology advanced rapidly, with balloon tires, batteries, and starters being key features that triggered smaller innovation surges in auto supply industries. By 1926, there were 43 auto companies. No more U.S. entrants were formed after that. By 1929, the big three—GM, Ford, and Chrysler—had consolidated at least 80% of U.S. auto sales. By 1939 and the end of the great recession, the big three had at least 90% of

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the market. Of the remaining 10%, most was Hudson, Nash, Packard, Studebaker, and Willys—names we remember that are no longer around—which later merged under pressure. So the recent upheaval, consolidations, and major bankruptcies of the dot-coms, telcom, fiber optic, and other new technologies are not really new. Human ingenuity is not at a level where it can choose the best path and technology ahead of time. Radio Manufacture Radio is notable for having gone through at least two separate creative destruction cycles. In the first stage, wireless telegraphy, invented by Marconi in 1895, went through a huge cycle of excess investment in sending and receiving stations, especially for maritime and cross-ocean messages. From Modern Electronics, December 1911: “The commercial stations communicate without difficulty to ranges in excess of five hundred miles. Commercial stations as well as government ones, dot the coasts from one boundary to the other, sending countless messages and safeguarding the lives of thousands of human beings on ship-board. It is with deep regret that a number of unscrupulous men should have gained a footing in the wireless industry, and used it as a tool for extorting money from thousands of victims in promoting stock sales. This money has been used, not for wireless stations and service, but for the foundation of huge fortunes made by these men in their dishonest undertaking. Today it may be said that the wireless industry is undergoing a state of purification, and will issue from this state, a clean and prosperous organization, its main financial income being secured as tolls for messages. The promoting stage is one to be passed by every new invention, and if that industry survives through this period of criticisms and abuse, its future success is certain.” Some things don’t change. At least most of the modern dot-coms, fiber optic, and other recent failed ventures thought they would have a viable business and failed for other reasons. The second radio boom was for broadcast sound, including the equipment, and “content.” From Oscar Lescarboura, Radio for Everyone, 1922:

There are various other organizations devoting a goodly part of their efforts to broadcasting radio-phone news and concerts. In fact, as things stand at present it is safe to state here that virtually every part of the United States is covered by one or more stations. To give a list of stations is virtually impossible, for in an art that is so new there are bound to be frequent changes. Hence no attempt is being made to offer a list, because it would be hopelessly obsolete by the time it got into print. The reader is referred to the radio periodicals and to the daily newspapers that have radio sections, for the last-minute information on radio-phone stations.

Consolidation began almost immediately. Somewhat as today with dot-coms, there was a struggle to find a profitable business model. There was even a contest with a prize for the best money-making business proposal. Like today, as described earlier for the dot-coms, the pricing model turned out to be quite similar—“free with advertising.” RCA (spun off from General Electric) and Westinghouse moved quickly to consolidate both radio broadcast networks and production of receivers, and quickly became dominant

29

in both these areas. Thousands of broadcast stations went out of business, particularly after licensing and laws controlling the airwaves were passed.

Aircraft Following the first controlled, powered flight by the Wright Bros, the industry expanded rapidly. The Curtiss company achieved early dominance, and eventually merged with the Wright’s. Other planebuilders we recognize also went into business before 1920, including Douglas, Boeing, Loughead (Lockheed), and Martin. There were at least ten other companies that never achieved the recognition stage, like Gallodet and Thomas Bros, that were merged or went out of business. Postwar WWI brought many new names, including Convair, Northrup, and Hughes, and a lot more, at least 20, that merged or went out of business, like Consolidated Vulta. There was first airmail and then the emergence of scheduled airlines in the 1930s that fueled new civilian aircraft interest. Civilian aircraft production by then had seen some consolidation down to Boeing, Douglas, and Ford (the auto company) as major suppliers. WWII brought a massive demand for warplanes. More than 160,000 were produced by war’s end. By then, the largest companies were:

• Boeing: B-17, B-29 bombers. • Convair: B-24 bomber. • Lockheed: P-38 fighter. • Curtiss: P-40 fighter, C-46 transport. • Douglas: C-47, C-54 transports. • North American: P-51 fighter. • Republic: P-47 fighter.

While jet aviation created new technological marvels and commercial interest, U.S. civilian aircraft companies were by then dominated by Boeing and McDonnell Douglas. Foreign competition had always been strong, and the U.S. civilian aircraft market saw more foreign supply, including Airbus, consolidated in the 1970. Boeing and Airbus, with some smaller suppliers like the Brazilian Embraer, are the only survivors of the global civilian aircraft market. The military market continued to expand, and the technological lead fell to aerospace and the massive U.S. NASA and military space and missile effort. Companies Created in the Down-cycle Years of the U.S. Economy This section includes a number of Fortune 500 companies listed in the down-cycle years. It also compares the number of companies listed in the up-cycle and down-cycle years and gives an overall picture of the economy. Figure 22 depicts the trend since 1906 of companies in the United States filing their initial public offerings (IPOs). The years highlighted in orange show the companies created in down-cycle years of recession in the U.S. economy. Figure 22: Identified IPOs of Fortune 500s Since 1900

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Of the 237 Fortune 500 companies with identified IPOs since 1906, 207 companies filed their IPOs in up-cycle years, and the remaining 30 in downcycle years Prior to World War II, there was a small number of Fortune 500 companies with identified IPO dates. While thousands of companies were created during this period, only 21 are in the current Fortune 500 list. Of these, seven were created in pre-war down-cycle years. The 1930s were particularly depressed, and only four companies were created. They were Masco, Northrop Grumman, PepsiAmericas, and Parker Hannifin. Postwar, there was a comparatively small business cycle link until 1980. The 1970s were a particularly dry period. After 1980, business picked up, with a lull in 1988–91. It is interesting to note that more recently, 66 Fortune 500 companies had IPOs in the 1990s. Well over half of these were venture-supported companies, but most filed their IPOs in the up-cycle years. The IPO trend followed a pattern similar to that followed by the U.S. economy. As elaborated on in the next chapter for recent IPO history, the formation of these companies was quite cyclical, driven by the U.S. business and financial cycles. Nevertheless, once born, they proceeded to expand and mature. They ended up as the biggest U.S. companies, with relatively stable performances that are only affected in a minor way by the fluctuations in the financial markets and economy.

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Chapter 5 Venture Investing: a Volatile Input to Business

This chapter discusses the volatility of venture activities and returns and stock markets, a troublesome feature of all free markets. We conclude that while the early stage VC IPOs and the financial markets are all highly volatile, the later, more mature stages of expansion become much less volatile. In the final mature stages, we note that new spending investment and stock market growth on capital equipment and the key high-tech sector still shows some cycle in new spending. However, the U.S. capital stock, both total business plant and equipment and the high-tech part, has continued to display an upward growth pattern. This embodiment of all the usable plant and equipment we have has never had a down year for growth, though the positive growth rate shows some fluctuation. VC Investments with Respect to the Business Cycle Starting at the very beginning, there are six early stages in the investment financing of a firm: seed, startup, expansion, mezzanine, buyout, and (if needed) turnaround. Most venture outlays focus on the seed, startup, and expansion stages. Let us look at so-called seed activities. A tiny fraction of VC money, about 2%, goes in earliest-stage financing, called seed money, which constitutes funds for initial research to prove a concept. A significant proportion of VC is invested to support product development and initial marketing (often referred to as startup funds). The figure below shows the VC disbursement in startup/seed activities:

Figure 23: VC Investment in Startup/Seed Activities

0

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Source: Thomson Venture Economics/National Venture Capital Association

In 1980–2002, seed/startup activities constituted $21.4 billion out of the total US$339.9 billion invested in all the business stages, accounting for approximately 6.3% of all U.S.

32

VC disbursements. Seed/startup activities rose from $157.5 million in 1980 to a first peak of $1.5 billion in 1986, a nearly ten-fold increase. They then fell to $241 million in 1991, for an 83.9% decline. Seed/early money then ramped up to a peak of $3.3 billion in 1999, leading the high-tech (and medical) boom and other sectors as well. The latest contraction was also dramatic: a 90% decline from 1999 to a low of $352 million in 2002. It remained roughly the same last year, at $354 million. This early cycle may be driven by funds availability and optimism or pessimism. However, it also may reflect how many promising ideas have been generated at that point by ongoing innovation and the advance of knowledge. The early seed cycle will also partly drive the later cycles. The cycle for overall venture placements is also highly volatile, as shown in the table below. The following figure shows the percentage change in the value of VC and VC-backed IPOs, compared with the previous year, in 1983–2003. Figure 24: High Volatility for Total VC and VC-Backed IPOs

-100

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1981 1985 1989 1993 1997 2001

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Source: Thomson Venture Economics/National Venture Capital Association

Total VC placements jumped at growth rates exceeding 100% in 1981 and 1999, but demonstrated less volatility than the seed/startup cycle. The two VC cycles look somewhat similar, especially the declines in 1989–91, partly because seed/startup drives the later infusions. IPO activity has been even more volatile in both numbers and total value. Note that in percentage terms, the early cycles were about as severe as the 2000–02 boom bust in both upturns and downturns.

The following chart shows the number of VC-supported and non-VC IPOs since 1992.

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Figure 25: VC-Backed and Total Number of IPOs in the United States in 1992–2003

0100200300400500600700800

1992 1994 1996 1998 2000 2002

Num

ber

of IP

Os

101520253035404550

Ven

ture

Sha

re,

perc

ent

No. of IPOs in the US (left scale)No. of Venture-backed IPOs in the US (left scale)Venture Share of Total (right scale)

Source: Thomson Venture Economics/National Venture Capital Association

VC-backed and total IPO numbers also show high volatility, and a clear disposition to boom/bust cycles. While there were earlier cycles, including a 71% decline in 1996–98, the 1999–2003 cycle was the biggest in absolute numbers, falling from 244 to only 22 VC-backed companies IPO’d in 2002, with a slight recovery to 29 in 2003. Of note, the venture share of IPOs has been rising from roughly 25% before 1999 to 45–46% at the peak in 1999–2000, about 30% the next two years, and 40% in the still-reduced 2003. Given the heavy recent funding, it seems likely that VC-supported companies may maintain this higher recent share of IPOs, even as the market accelerates. Mergers and acquisitions (M&A) have been and will remain an important liquidity strategy for venture capitalists and the start-up firms they fund. As expected, there has also been a recent boom bust in (M&A) activity. The following table shows the number of M&A in the United States, in 1997–2003. Figure 26: VC-Backed M&A Activity 1997–2003

YEAR TOTAL DEALS DEALS WITH DISCLOSED

VALUES

TOTAL PURCHASE

PRICE ($ MILLION)

AVERAGE DISCLOSED

VALUE DEAL SIZE ($

MILLION) 1997 164 115 7431 65 1998 209 132 9088 69 1999 239 161 37496 233 2000 314 202 68353 338 2001 350 165 17661 107 2002 314 150 7831 52 2003 289 122 7702 63

Source: Thomson Venture Economics/National Venture Capital Association

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The total number of deals, and deals with disclosed values showed only a moderate swing, the later falling 60% in 2000–03.

However, accounting for the average value of deals—down 81% in 2000–03—the total valuation of VC M&A deals fell 89%. We have no doubt the M&A exit market will continue to be an effective method of exiting a venture investment, and will likely re-accelerate in the next several years, as the U.S. economy recovers. Venture—a Small Share of Total Finance Venture funding is key to the birth and early development of new companies. However, as companies mature, they turn to other sources of funding for investment, and the investment cycle becomes more stable. The following chart shows total private equity, as compared with total equity funds raised by U.S. nonfinancial corporations.

Figure 27: Comparison of Private Equity and Total Equity Inflows in 1979–2003

0

100,000

200,000

300,000

400,000

500,000

600,000

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1979

1981

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1987

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1993

1995

1997

1999

2001

2003

Years

Am

ount

(in

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illion

)

Private Equity Inflow Total Equity Inflow

Source: Thomson Venture Economics/National Venture Capital Association and Global Insight Database

As indicated, even at its peak in 2000, total private equity only reached 19% of total equity raised. More recently, the total private equity share fell back to only 4.1% in 2003. This share will probably rise moderately the next several years. However, it is still small in share. Compared with total equity, plus debt funds raised, the venture contribution would be even smaller in size, though not in eventual effect.

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High-Tech Capex and Capital Stock Volatility As we move toward more mature companies, the investment cycle moderates. Separate venture data on Capex is beyond the scope of this study, but the IT sector is illustrative. A high proportion of IT producer companies, e.g., computers, software, chips, telcom equipment, etc., estimated at 90%, are venture-funded. The biggest exceptions are Lucent and IBM, and the latter stayed on the cutting edge by purchasing large numbers of ventured firms over the last 30 years.

Figure 28: Growth of Real High-Tech Spending and High-Tech Capital Stock

-15

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20

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1991 1993 1995 1997 1999 2001 2003

Perc

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High-Tech Capex High-Tech Capital Stock New high-tech Capex spending reached growth rates of about 25% in 1997 and again in 1999. It then fell to a maximum decline of -9.6% at the end of 2000, before recovering strongly. However, new spending is really just the “front end” of the investment picture—new spending adds to the capital stock in place. Depreciation and retirement subtracts from the capital stock. The net of new investment, less depreciation, equals the change of the total stock. As noted earlier, the trend of the high-tech capital stock growth is far steadier. Real growth there reached a maximum of 11% in 1999 and 2000, and then slowed only to a low of 4% in the 1991 recession. As the economy emerged from recession and slow growth, the need for new investment rose. This need for new capacity will continue to fuel growth of high-tech capital spending and capital stock at accelerating rates the next few years.

36

Capital Stock Trends and the High-Tech Contribution Similarly, total U.S. Capex shows substantial variation, with exceptional peaks of about 15% growth in 1992–97, and a maximum percentage downturn of -9.4% in 1991, only slightly less than the percentage downturn for high-tech.

Figure 29: Comparison of the Volatility of Total Capital Stock and Capex

-15

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1991 1993 1995 1997 1999 2001 2003

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Capital Stock Capex As in the above chart, new spending only tells part of the story. What really matters for capacity to grow and productivity is the total capital stock. Progress measured by the total U.S. business capital stock has been extremely steady. The capital stock growth rate rose to a peak 5–6% range during the maximum growth “boom” from 1996 through early 2001, and only slipped to a low of 2.2% in the recent recession—no decline at all! It also remained higher than the 1.7% rate seen in the 1991 recession. So, by this final and most comprehensive measure, the progress of U.S. investment and the high-tech contribution has been steady. The following figure looks at the beginning and the end: the variation in the volatility of VC at the beginning of the process, and the capital stock that ultimately drives our productive capacity.

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Figure 30: Comparison of the Volatility of VC and Capital Stock, 1980-2003

-100

-50

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1982

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1994

1996

1998

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Years

Perc

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Venture Capital Capital Stock

Source: Thomson Venture Economics/National Venture Capital Association and Global Insight database

Compared with VC-backed companies, capital stock has grown at a very steady pace. In 1983–2001, the change in capital stock, compared with the previous year, varied from 4% to 10%. Venture capital disbursements by contrast were highly volatile, with more than 100% gains in four and eight years, with declines of 15% or more. From volatile market-driven beginnings comes steady progress at the end.

Venture Capital, Stock Markets, and Economic Growth We have demonstrated how VC is now contributing to an efficient U.S. stock market by supplying it with 30–46% of the recent new company entries. We also estimate that venture-supported companies now also comprise about 15% of the total value of U.S.-listed stocks weighted by market cap. There is a reasonably strong correlation between an effective, efficient stock market by various metrics and economic growth. The following analyses this relation and the venture contribution for the United States at different periods, compared with other countries, and the theoretical underpinnings for this relation.

An effective stock market is not the only contributor to favourable economic growth, but it certainly helps.

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Figure 31: Relation of Normalized Stock Market Size and Long-Term Growth

South AfricaFinland

Hong Kong

SwedenBelgium

Australia

Netherlands

SpainCanada

Italy

FranceUK

Germany

Japan

United States

1.0

1.5

2.0

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3.5

4.0

4.5

0 50 100 150 200 250 300Stock Mkt Cap, % of GDP

Ann

ual A

vera

ge G

DP

grow

th ra

te (9

0-03

)

It is clear that there is a direct relationship between the performance of the stock market and the growth of the economy in most of the countries highlighted. This relation has also been documented by numerous academic studies, which look at the comparative performance of different countries and the United States over time. These connections are numerous, as outlined in the academic findings below. The World Bank4 studied the effect of stock market valuation on investments. They found that the role of the stock market is to value the firm as well as provide finance. Fluctuations in share prices alter the cost of capital to the firm. If firms respond to this, stock market valuation will enable more investment. However, if firms ignore share price changes in the short term, there will be an incomplete or delayed response. A University of Virginiai study finds that stock market liquidity has been a catalyst for long-term growth in the United States and elsewhere since the early 1980s. The lowering of international investment barriers significantly enhances the liquidity of stock markets. By facilitating long-term profitable investments, a liquid market can improve the allocation of capital, and enhance prospects for long-term economic growth. Greater access to equity markets further enhances the likelihood of better living conditions in the future. Stock market developments do not represent a financial elixir for economic growth, but liquid stock markets can be an important contributor to economic growth. A University of Minnesota-sponsored study iispecifically points to the role of financial intermediaries and markets as the financial link to a country’s economic growth. The liquidity of stock markets, as well as the size of the banking system are positively linked to economic growth. Better-functioning financial systems ease the external financing

4 Cherian Samuel, Stock Market and Investment: The Signaling Role of the Market, May 1996

(http://econ.worldbank.org/files/13472_wps1612.pdf)

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constraints that impede industrial and economic expansion. We will show later that the attractiveness of U.S. investments to foreigners has attracted their savings. Therefore, financial development helps in economic growth by increasing the ability of constrained industries and firms to access external capital and expand. A University of Western Sydney study highlights the key points as we see them: a well functioning stock market may help the development process and economic growth through the growth of savings, the efficient allocation of investment resources, and the better utilization of existing resources. When the stock market goes up, there is also an increase in wealth, which leads to increased spending and vice versa. A World Bank Policy Research Bulletin iiiputs it as follows: “stock markets boost productivity by stimulating the accumulation of capital. Therefore, a healthy and vibrant national stock market indicates that a developed banking system and robust stock exchange promotes economic growth. Various favorable aspects of stock markets, including capitalization, liquidity, or turnover, are also positively related to growth.”

Economic Growth and Capital Expenditure (Capex) This brings us to the link between capital expenditure, meaning all business investment in plant and equipment, and growth. Capex can include everything from airplanes, the electric power grid, industrial machinery, all computers and software, to a doctor’s X-ray and medical equipment. This relationship of capital expenditure to growth is even stronger than the less-direct stock market link to growth. As noted in many of the above studies, the key payoff of an efficient stock market is more Capex and more efficient Capex. Most economic models assume a strong linkage between the amount of Capex and subsequent growth. Early simple economic models, including those of Harrod-Domar and Nicolas Kaldor, assumed a fixed capital stock/output ratio and an economy that could not produce output higher than in a fixed relation to the capital stock K/O. More recent large-scale models, including Global Insight’s own, show a strong relation between Capex, adding to the capital stock and growth, but only if the mix of capital and labor is right. If there were too much capital investment relative to labor (without new technology), the returns to extra capital stock would go down, putting a limit on growth, based on the neoclassical and Solow economic growth models, which assume slowing returns to excess capital investment. In the United States, real investment grew by less than 6% every year in the 1970s and 1980s, even when overall growth was high. In the 1990s, the pace of business investment accelerated, and was central to the unusually high rates of economic growth, low rates of unemployment, and rapid productivity growth. In 1995–2000, the growth in real investment averaged close to 10% every year, and the share of business investment in the total real GDP, that is, the entire economy, continued to grow. High-Tech—the Driver of the 1990s Investment Growth Earlier in this report, we described how there was still some volatility in high-tech and total Capex, but much less than early-stage input. This section documents how most of the business Capex spending gains in the 1990s were a ramp-up of new high-tech

40

investment. This includes business management software, the entire Internet revolution, and massive improvements in telecommunications. This is dryly labeled in government statistics as the information processing sector. This new form of investment allowed “capital deepening” for the United States without large declining returns to capital. High-tech’s increasing share in business spending on equipment, including software, in the United States is shown below.

Figure 32: U.S. High-Tech and Total Equipment Capital Expenditure

0

200

400

600

800

1000

1200

1959 1964 1969 1974 1979 1984 1989 1994 1999 2004

Bill

ions

of 2

000

dolla

rs

Total equipment and software spending

High-Tech Spending

The availability of high-tech investment applications for user industries enabled total capital investment spending to grow, while still providing productive returns. By 2000, it was clear that investment had gotten ahead of itself. Does this suggest that the investment boom was all an excess, or a mistake? The more recent trend clearly says no. There was a two-year downturn in both high-tech and even more strongly in other equipment investment. However, as noted earlier, the United States has never stopped adding to the high-tech equipment stock even during the spending downturn. More importantly, the United States has returned to a period of rapid growth in both high-tech and low-tech new spending on equipment. This shows that both forms of investment are still yielding favorable returns, and enabling a return to a high overall GDP growth rate. The Global Insight forecasts above represent a real growth of 12.1% for 2003–04 estimated in information processing and a still strong 6.8% projected in 2005–06. By the end of 2006, we project information processing in real terms to have reached a record 60.8% of total real equipment spending.

This forecast is in line with most other analysts. According to Morgan Stanleyiv, there is a significant revival in Capex, particularly Information Processing Capex, in the United States, in beginning in 2004 and early 2005. They point to an improved stock market as cutting the cost of risk capital, and cost-cutting measures resulting in improvements in profitability. This has helped cash-constrained sectors, such as technology and telecommunications, raise money in stock markets. This and renewed demand for

41

business investment of all kinds is resulting in a significant total Capex recovery that will likely be sustained. According to Ben S. Bernankev, Governor of the Federal Reserve System (US), the high-tech sector has become the most critical sector in fixed business investment because of its strongly expanding share of total business investment, as described above in our analysis. He cites, in particular, the strong decline in prices of high-tech goods (mostly due to technological advance, more chip power, and memory, for example) as a key driver of the tech sector’s increasing value to all business.

Can a Wealthy Country Still Grow Fast? Economic theory finds that without further innovation, once a country has moved to an advanced level, it will be difficult to grow rapidly. If investment by business has reached a saturation point and the population has reached high skill levels, the prospects for further improvement are reduced. It stands to reason that from where they stand now, China has a lot more room to grow than Switzerland. However, higher investment enabled the United States to maintain a higher rate of economic growth than otherwise. We largely escaped the trap of rich, fully invested countries not having much room to grow further because the new high-tech investments gave us room to grow further. The following chart plots GDP per capita levels against long-term GDP grow rates for the major advanced countries of the OECD.

Figure 33: Relation of Economic Growth and Income per Capita in Advanced Countries

Austria

Belgium

Denmark

FinlandFrance Germany

Iceland

Italy

Netherlands

Norway

Portugal

Spain

Sweden

Switzerland

UK

United States

Canada Australia

Japan

New Zealand

0

10000

20000

30000

40000

50000

60000

1.0 1.5 2.0 2.5 3.0 3.5

Average annual growth rate, 90-03

2003

Per

Cap

ita G

DP

42

As indicated, there is a broad relation of higher output per capita limiting the growth rate. Switzerland ranks as the second highest in GDP per capita, and has the lowest long-term growth rate. Portugal, Spain, New Zealand, and Australia have relatively low levels of output and above-average growth. Among exceptions to this relation, the United States and Norway stand out as having unusually high growth recently, as well as high per capita GDP. Norway has the benefit of massive oil operations per capita. The good U.S. performance, in line with all our earlier findings, is in major part due to U.S. dominance in the high-tech-producing industries and high-tech investment in other industries—it should be clear by now the major role VC has played in these leading industries. The stage seems set for a continuation of the United States riding the wave of technological advance and reaping the benefits.

International Comparisons of Venture Capital, and Stock Markets The United States, as we will see, leads all the major countries of the world in VC and all countries except Israel in share adjusted for size. The UN Global Competitiveness Report studies the availability of VC and local equity in low-, middle-, and high-income group countries. This is depicted in the following figure.

Figure 34: Comparison of “Access to VC Funds and Local Equity” by Stage of Development

2.513.03

4.244.08 4.33

5.53

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Mean of VC Availability Mean of local equity market accessAverage Mean (VC availability) Average Mean (local equity market)

UN Global Competitiveness Report, http://www.weforum.org/site/homepublic.nsf/Content/Global+Competitiveness+Programme%5CGlobal+Competitiveness+

Report%5CGlobal+Competitiveness+Report+2003-2004

High-income countries score higher on VC and equity availability in comparison with middle- and low-income countries due to easier access to these funds.

43

In the figure above, the average mean calculated for VC availability across all countries is 3.24, and the high-income countries exceeds this mean, significantly. Similarly, the average mean of access to local equity market is 4.61, and the middle- and high-income countries exceeds this, which shows the easy availability of equity capital in these countries. To the extent venture firms and equity markets develop in lower- and middle-income countries, the availability of these funds will help develop desirable high-tech industries. This is not an easy task, however. It is only in the United States and a limited number of advanced countries that the mix of policy, entrepreneurship, and skilled research resources had permitted large venture operations. Small business innovation finance programs, particularly in the United States and Israel, facilitated the flow of high quality projects to private funds, with an early-stage technology focus.

The United States has a dominant share of the entire world’s total VC at an estimated 72%. However, when adjusted for the size of the economy, Israel ranks highest, and the United Kingdom and Sweden roughly equal the United States. It is notable that the U.S. VC is now supporting over 40% of the companies entering the publicly traded arena via IPO. While we do not have comparable data for other countries, we can compare the relation between VC-placed and health of the stock market measured as market capitalization, both normalized for size of the country.

Figure 35: Global Relation of Venture Capital to Stock Market Size

Israel

South AfricaFinland

Hong Kong

Indonesia

SwedenBelgium Australia

Netherlands

India KoreaSpain Canada

Italy

FranceUK

ChinaGermany

Japan

United States

0

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0 0.2 0.4 0.6 0.8 1Total Venture Capital, % GDP

Stoc

k M

kt C

ap, %

GD

P

Source: http://www.pwcmoneytree.com/exhibits/VCglobalpapJACFfinfeb034.pdf, GII Database As indicated, there is a strong correlation between VC and the normalized size of the stock market. The two major outliers are Hong Kong, with a larger stock market than expected; and Israel, with a smaller stock market than suggested by its large VC effort,

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adjusted for size. The relation is otherwise quite strong. While a strong venture effort must be a benefit for a strong stock market of mature companies, the causation can also run the other way. A good stock market provides an efficient way for venture investors to realize returns and recycle their capital through the IPO process.

Not all the VC of these countries is high-tech as will be seen later. Other advanced countries have industrial structures for traditional manufacturing industries, in which a large share of equity capital is invested. This is particularly true for the United Kingdom, where over two-thirds of VC outlays are in the non-high tech areas. This pushed the U.K. total VC outlays to a slightly higher percent of GDP than the United States. Findings from the OECD Venture Capital Database The Organization for Economic Co-operation and Development maintains a database for its mostly advanced country members. As with the data above, it shows the United States as one of the largest VC markets, along with Israel even adjusted for size. In a recent analysis of 1999–2002, they found that the United States and Canada invested heavily in early-stage financing, with an average of 0.15% of GDP. However, in other OECD countries, such as the Netherlands and the United Kingdom, early-stage financing constituted a lower share of the total funds invested, accounting for only 0.06% of their GDP.

Despite the significant growth in VC activities in the 1990s, the share of start-up and other early-stage investments was insignificant in many OECD countries due to the lack of equity investment culture, information, and market volatility. In 2000, the global downturn in the technology and financial markets resulted in an additional cash constraint among small companies, particularly in the seed and start-up phases. Also for many OECD countries, the number of venture capitalists with the required financial and technical expertise is limited, resulting in an uneven growth in risk capital supply. Some countries, including Canada, Sweden, and Israel, fill this experience gap by attracting venture investors from abroad, often U.S.-based.

The United States has a continuum of capital providers, such as business angels and public and private venture funds, which helps in diversifying risk and ensures a steady flow of quality deals. The United States offers easy entry and exit opportunities in stock markets for small firms.

High-Tech VC Investment in the OECD Countries The following figure shows VC investment in the high-technology sector, as a percentage of GDP in various countries in 1999–2002. Their definition of high-tech health-related sectors, including biotechnology, as well as the information and communication technologies was earlier defined as high-tech.

45

Figure 36: VC Investment in High-Tech Sectors as a Percentage of GDP, 1999–2002

0

0.1

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0.3

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% o

f GD

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Communications Information Technology Health / Biotechnology

OECD Venture Capital Database http://www.oecd.org/dataoecd/4/11/28881195.pdf

(European Union is Pre-expansion. Individual EU countries also shown)

In 1999–2002, investment in the high-tech sector was the highest in Israel, reaching over 0.6% of GDP. Investments in these sectors constituted over 0.3% of GDP in the United States and Canada, followed by Sweden and the United Kingdom, at 0.25% and 0.20% of GDP, respectively. Also of note, Korea, one of the least developed of the OECD countries and a recent OECD entrant, has an exceptional VC effort high-tech and health-related sectors. However, the share of high-tech sectors in VC funding continues to be small in many EU countries, Japan, and Australia. In Spain and Portugal, equity investments are targeted mostly at textiles, food products, and metals, and in Norway, it belongs to the resource-based industry segments; therefore, these countries rank higher in the earlier total VC analysis.

i. Cherian Samuel, Stock Market and Investment: The Signaling Role of the Market, May 1996 (http://econ.worldbank.org/files/13472_wps1612.pdf) ii. Ross Levine, Stock Markets, Economic Development, and Capital Control Liberalization, Vol. 3 / No. 5, December 1997 (http://www.ici.org/pdf/per03-05.pdf)

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iii. Ross Levine, More on Finance and Growth: More Finance, More Growth?, November 25, 2002 (<http://research.stlouisfed.org/conferences/policyconf/papers/levine.pdf>) iv. World Bank Policy Research Bulletin, Stock markets and economic growth, March--April 1995 (http://www.worldbank.org/html/dec/Publications/Bulletins/prb6,2.html) v. Morgan Stanley, The Party Features Capex, August 20, 2003 http://www.morganstanley.com/GEFdata/digests/20030820-wed.html vi. Remarks by Governor Ben S. Bernanke Before the Forecasters Club, New York, April 24, 2003 (http://www.federalreserve.gov/boarddocs/speeches/2003/200304242/)

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Appendix A Global Insight, Inc. Venture Capital Database On behalf of the NVCA, Global Insight Inc. updated the results of its 2000 company database, merged the results from the prior two databases, and added 10,635 of additional new firms to the database. This new Global Insight database is principally composed of seven data sources. Old Companies from the 2000 Survey—Databases 1, 2, 3 The primary source is the “Public and Private Standing” 12,430 company list from the 2000 survey that employment, sales, and industry data were provided from Dun & Bradstreet. These companies were updated for current employment and sales data, and several hundred companies dropped out as they were merged or IPO’ed in the last three years. The resulting list was 12,026 firms. The secondary dataset was the “Merger” database from the 2000 database. These firms had various missing employment, sales, and industry data, which did not allow for the combination with larger “Public and Private” dataset. In this 2003 update, all of the missing data were acquired, allowing for a seamless integration of the two databases. Of these subsidiary firms that had merged with another firm, 3,774 companies were included from the old “Merger” database. Another 50 companies from these 2 databases, and an additional 9 companies from the 4 other sources were picked as our largest firms either ranked by sales or employment, and in addition to the Dun & Bradstreet and Global Insight, Inc. Industry Sales and Employment data for 2003. Each of these companies were individually checked to their annual reports to ensure the data were as up to date as possible—these company-by-company lookups were also performed for the hundreds of IPO and Merged firms as well. Companies Changing Status—Databases 4,5 Hundreds of firms from the old dataset had morphed in the three years since the old study was commissioned: 394 firms had been merged into other larger organizations and 186 firms had changed from private companies to public companies in IPO transactions. New Companies added in 2003—Databases 6, 7 In the height of the stock market activity, thousands of new companies were given VC money, within the update period of 2000–03, and an additional 9,924 companies were identified as receiving VC funds and added to the Global Insight database. Furthermore, VC in the state of Texas gleaned through their records of firms they had funded, and discovered 131 firms that Dun & Bradstreet had no record of, and were, therefore, included back into the database.

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Data Highlights of the 2003 GII Database Table 1: By Industry

2003 2003Firms Employment Sales

Biotechnology 1355 295,920 62,085,295,216 Business/Financial 1488 693,296 111,835,511,726 Communications 2890 698,358 166,112,781,198 Comp. Hardware & Srvs. 5140 955,935 232,042,543,142 Computer Software 4463 882,104 169,692,522,338 Healthcare Products 1487 476,613 83,197,207,137 Heathcare Services 494 555,225 69,547,071,505 Industrial Energy 2697 1,526,608 265,125,271,244 Retailing and Media 2008 2,024,203 271,928,176,026 Semiconductors 1277 457,092 110,417,471,368 Not Classifed 3195 1,566,453 226,836,340,674

Total 26494 10,131,807 1,768,820,191,574

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Table 2: By State

Firms 2003 Employment 2003 SalesAlabama 117 77,256 13,302,588,218 Alaska 5 5,069 1,227,697,405 Arizona 247 68,191 11,685,352,727 Arkansas 28 9,406 1,722,602,714 California 8419 2,470,557 437,791,466,160 Colorado 767 153,275 26,320,904,240 Connecticut 578 189,692 48,936,184,052 Delaware 27 11,186 1,126,039,587 District of Columbia 109 12,644 1,758,905,023 Florida 641 309,717 60,598,137,538 Georgia 725 551,439 91,460,589,070 Hawaii 23 4,688 1,008,888,380 Idaho 28 79,954 12,543,515,274 Illinois 760 235,941 34,430,468,498 Indiana 152 95,381 20,267,090,551 Iowa 68 29,966 5,200,411,830 Kansas 79 57,459 8,180,083,515 Kentucky 86 37,761 5,116,118,351 Louisiana 95 55,308 6,413,582,640 Maine 59 14,480 1,934,686,671 Maryland 510 104,260 19,291,349,795 Massachusetts 2638 712,329 107,385,945,498 Michigan 276 111,891 12,591,133,370 Minnesota 562 287,984 56,873,938,845 Mississippi 45 60,808 19,826,094,186 Missouri 204 90,084 15,024,882,261 Montana 21 2,681 366,746,571 Nebraska 40 19,393 2,210,679,006 Nevada 39 6,902 1,102,198,396 New Hampshire 194 61,417 12,313,388,611 New Jersey 785 310,925 49,624,216,162 New Mexico 52 8,933 1,247,587,131 New York 1745 470,527 80,159,856,476 North Carolina 492 169,984 26,947,737,854 North Dakota 8 4,909 406,244,971 Ohio 437 195,180 22,811,127,246 Oklahoma 76 15,298 3,093,975,834 Oregon 271 60,337 9,478,216,601 Pennsylvania 937 604,045 94,438,140,400 Rhode Island 67 13,626 1,369,453,701 South Carolina 66 21,993 3,514,174,408 South Dakota 10 971 152,416,195 Tennessee 260 543,018 60,291,502,806 Texas 1901 899,173 188,105,852,366 Utah 191 49,233 8,827,901,994 Vermont 25 3,328 507,550,513 Virginia 668 333,199 63,936,654,826 Washington 671 399,863 101,530,478,442 West Virginia 22 3,573 588,535,701 Wisconsin 175 69,787 10,109,349,805

Wyoming 4 280 42,895,935 Not Classified 87 26,509 3,624,653,223

Total 26492 10,131,807 1,768,820,191,574

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