Nothing Ventured, Nothing Gained

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August 15, 2017

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In recent years and in various venues, we’ve observed an attempt by some to dismantle values traditionally perceived as central to the advancement of American society. It concerns us that principles like innovation, the American entrepreneurial spirit and capitalism have been called into question. Through this post, we will explore the importance of these principles and the possible ramifications of a loss of faith in their power to positively impact all Americans.

For more than a century, the US has been the world’s largest economy. A productivity and innovation powerhouse, the US inspires other countries to embrace entrepreneurial and capitalistic achievement, helping lift 1 billion people out of poverty in the last 20 years. But America’s position as the driver of global growth is under threat. A public perception that automation could displace certain American jobs, declining investment in R&D and an education system that’s not preparing students for a tech-driven society are stymieing growth. Meanwhile, other countries are ramping up investment in R&D, automation and STEM education. The US is still the biggest economy – accounting for nearly a quarter of global GDP in 2016, according to the World Bank – but it will soon be overtaken by China. Smaller countries, like South Korea, Germany and Australia, may never have economies as large as the US or China, yet they’re embracing innovation at a much faster pace in order to remain competitive.

How did US dominance erode with respect to innovation? The answer is, of course, multifaceted, but a lack of R&D investment is a major culprit. Federal R&D funding reached an all-time low of 0.63% of GDP in 2015 (the most recent year evaluated by the National Science Foundation). Public companies aren’t devoting resources to innovation either. R&D expense as a percent of revenue was just 7.1% for NASDAQ 100 companies at the end of 2016, down from about 34% in 2001. This statistic is particularly alarming when noting that the NASDAQ 100 index is comprised of the 100 largest non-financial companies listed on the exchange, many of which operate within technology and healthcare sectors.

Shrinking R&D investment is not the only reason that the US is falling behind in economic growth. Many Americans share a pervasive concern that technology could widen the income gap and displace human workers. That fear is not unfounded, as the World Economic Forum does predict automation will result in a net loss of more than 5 million jobs across 15 developed nations by 2020, but it’s shortsighted. Taking the long view, technological innovation creates far more jobs than it eliminates. A 2015 study from Deloitte supports that, over the course of the last few centuries, technological advancement of all kinds – from the weaving loom to the smartphone – has created more jobs that it has destroyed, boosting disposable income and increasing overall quality of life.

In fact, the innovation economy is already serving as an engine for job creation. The US Department of labor estimates that there are over half a million open jobs in various technology fields (Wired, 2017). Unfortunately, the current educational system in the US is not preparing students with the requisite skills to fill these high-paying roles. The tech sector on the other hand is helping to plug this educational gap. Companies and non-profits, like Code Academy and Girls Who Code, are allowing people of all walks of life to learn advanced computer engineering skills. With additional investment and innovation from venture-backed companies, preparing the US workforce for an ever-evolving economy is a goal within our grasp.

There is no silver bullet to jumpstart the massive US economy, but the venture capital industry can play a pivotal role in spurring innovation, encouraging company creation and driving job growth. By the numbers, American venture capital is a cottage industry. According to ThompsonOne, US venture capital firms invested about $41 billion last year. To put this in perspective, a single leveraged buyout fund managed by Apollo Global recently raised $23.5 billion dollars and intends to invest this capital into about 20 companies. This fund’s size is 57% of what our entire industry put to work across 5,000 companies in 2016. Despite its size relative to other alternative investment categories, venture capital’s economic impact cannot be understated. According to a study conducted by the Stanford Graduate School of Business, venture capital investment averaged just 0.28% of US GDP between 1979 and 2014, yet 43% of public companies during that period were venture-backed, representing 57% of overall market capitalization and 38% of total employees. The same study found that 25% of overall net job growth for publicly listed companies has come from those that received venture funding. Clearly, this “cottage industry” is a massive driver of innovation and, more broadly, the economy.

Americans have historically valued entrepreneurship, whether it's an individual starting a local cupcake shop or an engineer building a new algorithm. Betting on innovation and encouraging individual success is critical to our continued collective well-being. It pains us as pragmatic optimists to know that 56% of Americans believe that their kids will be worse off than they are. At the same time, we acknowledge that the idea of a bright future for many Americans, especially those in former industrial centers, may seem like a fairytale. To this, we say: let technology make the world a better place. Let’s demand schools that teach kids coding and engineering and strive for a future of high-skilled and high-paying jobs for as many Americans as possible. Let’s fund autonomous cars and advanced robots so we remain on the frontier of innovation and entrepreneurship. As a society, let’s celebrate and embrace the revitalized and rejuvenated American dream.

As VCs, we don’t pretend to have all the answers to America’s macroeconomic challenges, including a widening income divide, lower growth expectations and an aging population. However, we do feel fortunate to align ourselves with talented founders through the investment of time and capital, doing our part to encourage company creation, job growth and new technologies. In a nutshell, we view ourselves as artisans. Just as highly-skilled craftspeople bring a host of intangibles to their final product – like sourcing great raw material, overlaying a unique aesthetic and honing in on the smallest details – venture investors bring to bear “human capital” that goes way beyond actual dollars and cents. We advise companies on product/market fit, build go-to-market plans, facilitate strategic introductions, establish good governance and recruit key employees.  It is our belief that, if venture capital thrives, there is a good chance the majority of Americans will again believe that the future will be brighter than the past.

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