Venture capital companies key to innovation, but low now

[Josh, Ramana, 2020, “Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn,” Journal of Economic PerspectivesJstor, p.237, vol.34, No.3, acc. 7-18-24, GDI-LI]

Venture capital is associated with some of the most high-growth and influential firms in the world. For example, among publicly traded firms worldwide, seven of the top eight firms by market capitalization in May 2020 had been backed by venture capital prior to their initial public offerings: Alphabet, Apple, Amazon, Facebook, and Microsoft in the United States, and Alibaba and Tencent in China. More generally, although firms backed by venture capital comprise less than 0.5 percent of firms that are born each year in the United States, they represent nearly half of entrepreneurial companies that graduate to the public marketplace.

Academics and practitioners have effectively articulated the strengths of the venture model. These include its strong emphasis on governance by venture capital investors through staged financing, contractual provisions, and active involvement with their portfolio companies. Indeed, Kenneth Arrow (1995) once opined that “venture capital has done much more, I think, to improve efficiency than anything.”

In many respects, the venture capital industry appears to be a bright spot in an increasingly troubled global innovation landscape (Bloom et al. 2020). Over the last decade, the amount of capital deployed worldwide by venture capital investors and the number of startups receiving funding have grown substantially. Entirely new financial intermediaries such as accelerators, crowdfunding platforms, and “super angels” have emerged at the early stage of new venture finance. Meanwhile, mutual funds, hedge funds, corporations, and sovereign wealth funds have deployed large sums of capital into more mature, but still private, venture capital-backed firms.