C --- VC investment key to technological innovation and underpins US competitiveness and economic growth

Venture capital in the U.S. is said to be society‘s essential technology gatekeeper, one that has helped to create waves of technological innovation that have transformed both industries and society at large. Prominent companies that VCs have supported include Google, E-bay, Amazon, Intel, Sun Microsystems, Microsoft, Medtronic, Home Depot, Starbucks, Federal Express, and Whole Foods. In particular it is argued that the high tech companies in which venture capitalists have invested such as semiconductors, personal computers, biotechnology, software, nanotechnology and artificial intelligence have created spillovers that have established new industries, revitalized economies, and benefited society as a whole (Florida and Kenney, 1988). Gompers and Lerner (1999, 2001a, 2001b) have argued that up to a third of the total market value of all public companies in the U.S. has been created by VCs. Their data show that a very high percentage of startups that have the aspiration to become major businesses do not attract VC funding and fail within three years.

VCs fund highly innovative ideas that may threaten established products and services. The ideas that they fund are outside the mold of the ideas that banks typically finance. If entrepreneurial firms fail banks do not have sufficient hard assets to hold as collateral and repossess. A lack of funding is generally viewed as a major barrier to the progress that entrepreneurial firms otherwise could make (Amit, Brander, & Zott, 1998; Bygrave, 2004). VCs are supposed to remove this barrier. Without their funding the entrepreneurial firms could fail. They would begin small and remain so or take far longer to become big, even if their businesses were based on innovations with high growth potential. Without VC funding, entrepreneurial firms would not have the wherewithal to grow their businesses and diffuse their technologies on a wide-scale enough basis to provide the full benefits of which they are capable of providing to themselves and society. They would lack the resources, for instance, to hire the staff they need and to do the product development that is necessary for them to achieve market growth. If their technologies and business models show enough promise, they cannot rely just on the capital of their founders and the founders‘ early backers and profits earned from early activities to expand rapidly and boost the scale of their operations.

VCs are supposed to provide the capital that high potential startup firms need to take-off. In doing so, VCs are held accountable by their investors to deliver sufficient return to justify continued support. Though the espoused aim of VCs is to fund disruptive technologies, these technologies must have broad global market appeal and be scalable in a reasonable time frame. In most cases, VC investments are likely to fail but these losses are more than made up for by their successes which earn very high returns. In contrast, banks are unable to tolerate such high volatility. In addition VC firms often provide startups with financial management and even technological advice that can play a crucial role in the struggling firms‘ successes.

Venture capital is a unique institution whose origin is mostly in the U.S. It provides the U.S. with a distinct advantage in global competition as it has attracted to the U.S. talented entrepreneurs and investors from throughout the world. The growth of this form of investing came about because of a variety of factors which coalesced in the second half the 20 th century including 1979 changes to the Employee Retirement Income Security Act (ERISA), which permitted pension funds to allocate up to 10 percent of their portfolios to riskier investments like venture capital (NVCA, 2003) and reductions in the capital gains tax rates. The establishment of the NASDAQ as a secondary stock market was another important development inasmuch as it provided the companies that venture capitalists funded with another profitable exit option. Moreover, the VC industry benefited from significant technological developments that took place, notably in microelectronics, which created market opportunities for the entrepreneurial firms they funded. As a result of these developments, VCs were able to raise money from large investors such as pension funds and endowments and to move this money to select startup firms that the venture capitalists had identified as having particularly high promise.