GROWTH OF VENTURE-BACKED COMPANIES... GOOD INDICATOR

A plug for blocking laws that will force companies to deduct the cost of issuing employee stock options, which I'm against. Making companies expense stock options would hurt high-tech startups and innovation in America. The incentives for entrepreneurs would be less and the risk/reward ratio would be greater, which would eventually hurt economic growth. Of course people like Warren Buffett are against it since he doesn't make money off private entities and small companies. And what does Fool.com's Bill Mann know about economic growth and our future? His vision and wallet limits him to his back-pocket and backyard. Some more background on this issue here and here. And my old post on why technological growth is essential for economic development.

Venture-Backed Companies Expanding

By MICHAEL LIEDTKE
The Associated Press

July 19, 2004

SAN FRANCISCO (AP) - While venture capitalists retrenched, many of the companies they helped create continued to expand during the past three years of economic turmoil, according to a study released Tuesday.

Venture-backed firms created 600,000 jobs nationwide from January 2001 through December 2003, a net gain of 6.5 percent, said Global Insights, a research firm that conducted the study for the National Venture Capital Association, an industry trade group.

Revenue among the venture-backed companies climbed $212 billion, or 11.6 percent, during those three years, the study found.

The venture-backed growth contrasted with a 2.3 percent payroll decline that wiped out 2.6 million jobs during the same period. Meanwhile, total sales at all U.S. companies surged by $1.14 trillion, or 6.5 percent.

At the end of 2003, venture-backed companies employed 10.1 million workers and generated combined revenue of $1.8 trillion - just under 10 percent of the national total in the private sector.

The study drew upon a database of nearly 26,500 companies financed by venture capitalists since 1970.

The broad scope included many corporate powerhouses that graduated from the ranks of startups decades ago. The employment count included the payrolls of Microsoft Corp., FedEx Corp., Apple Computer Inc., Intel Corp., Starbucks Corp. and The Home Depot Inc. - all of whom received venture capital in their formative years.

Relatively young companies like eBay Inc., JetBlue Airways Corp. and Google also contributed to the job growth.

The study suggests venture-backed companies often mature into market-leading companies that are better positioned to withstand economic downturns, said Andrew Hodge, a managing director for Global Insights.

But the long-term success of the companies doesn't necessarily help venture capitalists, who generally cash out of their investments in five to 10 years.

Burned by all the startups that failed in the dot-com bust, venture capitalists only recently have begun to emerge from the worst slump in the industry's history. As their losses piled up, venture capitalists throttled back on new investments and curtailed efforts to raise money to help finance future entrepreneurs.

The recent troubles overshadowed all the success stories spawned by venture capitalists, said Mark Heeson, National Venture Capital Association's president. "Maybe we haven't been doing a very good public relations job," he said.

The industry hopes to use the study's findings as a lobbying tool to persuade lawmakers that venture capital plants the seed for economic growth.

Venture capitalists currently are hoping to block a plan that would require companies to deduct the cost of issuing employee stock options. The industry believes the accounting change would make it more difficult for startups to distribute stock options and ultimately diminish growth by stifling the incentive to innovate.