There is a good question asked by academics, Ilya Strebulaev and Will Gornall: “How Much Does Venture Capital Drive the US Economy?”
The answer has been “a lot”: as of December 2013, their sample of public companies showed 710 with total market capitalisation of $4.3 trillion had received venture capital backing, out of 4,063 firms with total market capitalisation of $21.3 trillion.
But the impact of VCs has been even starker when the academics factored in the fact that the VC industry exploded after a regulatory change in 1979 fuelled the number and size of funds raised.
Taking VC-backed companies as a percentage of public US companies founded since 1979, they found 574, or 43% of the 1,330 identified in the sample, were founded between 1979 and 2013, although more than 2,600 VC-backed companies had their initial public offerings in this period.
These VC-backed ‘new’ companies comprise 57% of the market capitalisation of the 1979-2013 cohort, 38% of the employees and $115bn (82%) of the total research and development in 2013.
Interestingly, their data implies 136 public firms in their sample were founded before 1979 and had VC backing, and have remained large and relevant long after the VCs’ influence would have assumedly departed.
The obvious next question is whether the VCs’ role as impactful investors has now been completed. I will be having brunch with Stanford University’s Strebulaev in the Valley on Saturday so please send me your thoughts and questions, but VC Jerry Neumann, in his blog post The Deployment Age, said it could be:
“Financial capital’s job is done. Financial capital in this cycle is none other than yours truly, the venture capitalist.”
Neumann’s concern was to try and understand where we might be in the current technological wave, using the theories of Carlota Perez and how innovation capital might be provided and by whom, in an era of deployment rather than radical innovation.
In a subsequent post, he clarified: “I said that if the ICT revolution is moving into a calmer, less radically innovative phase then we, the innovation economy, have an existential problem: the need for the roles we have played has disappeared…I didn’t write about Perez because I want her theory to succeed. I wrote about Perez because I want her theory to fail. But this doesn’t mean I think she is wrong.”
And by “the innovation economy” Neumann looks at corporate venture capital (CVC) becoming “passé” as well as potentially traditional VCs becoming less important as financiers in favour of production capital.
But if, just as Neumann said, software eats the world and is ignored, so innovation has to spread to all, rather than taking place in a top-down structure with silos of corporate venturing or skunkwork units.
It might be this happens longer-term, but there could be a considerable period where the CVC/external innovation function grows increasingly important and more integrated into an overall innovation strategy (M&A, joint ventures and R&D), until a cultural change in internal organisation culture and management has happened.
It is noteworthy that even relatively new businesses, such as Airware and DJI, have set up venture funds to help make sure they stay ahead of competition and build out a market.
Structurally, companies are rethinking how they are organised in order to better deploy innovation and ICT. The issue of siloed open innovation/CVC, or fully integrated in each team member, will be a discussion point, just as whether their goals are more or less financial versus strategic on a continuum.
If, as Neumann said: “Corporate venture capital, whose point is not to make money but to provide a view into the direction and speed of entrepreneurial innovation, will become passé. When innovation is easier to predict, companies won’t need this view.”
Neumann also adds that change is the constant; the 1950s became the 1970s and then 1990s, and new shocks emerged, even separating from wanting a toolkit that helps identify the partners and innovations that might help.
The desire for predictability will increase if we are in an age of deployment and part of a likely improvement in outcomes will come from the iteration through effectively crowdsourcing ideas and testing that a good open innovation/CVC function can bring.
In this vein, Perez and fellow Sussex University academic Mariana Mazzucato wrote last year about how the venture function should effectively be broadening through government direction.
CVC might become passé in the long-term but only when it is fully incorporated and enacted by all groups, large and small. Our research at Global Corporate Venturing, conducted for our annual report, indicated only about half of the Fortune 500 have even started their programmes.
If we have begun the age of deployment, and incremental rather than radical improvement, there are also those investors, such as Neumann and Peter Thiel through his Founders Fund, who aim to disrupt the future. Recent history has been on their side so far.