The collateral benefits of venture capital

Canadian venture capitalists don’t always get the credit they deserve.

Their job is not an easy one. The task of investing in technology entrepreneurs and growing start-ups, painstaking and fraught with risk at the best of times, gets harder when the market hits a rough patch. For the past decade, a punishing fund-raising climate has made it even more challenging.

Yet no matter how tough things get, the deal-making goes on and VCs somehow continue to create value. What’s more, the companies they back are evidently quite successful at creating collateral benefits, such as economic innovation and high-value jobs.

That’s the key finding of a new research report published by Canada’s Venture Capital and Private Equity Association (CVCA) in partnership with Industry Canada and Statistics Canada.

Using a data set provided by Thomson Reuters (publisher of peHUB Canada), Statistics Canada and the National Research Council of Canada, an independent team of government and industry researchers looked at the operations of Canadian start-ups financed by venture capital in the period from 1990 to 2009, and compared them with the rest of the business population. Their analysis found:

  • VC-backed enterprises showed higher R&D expenditures, relative to revenues, than other businesses that conducted R&D programs;
  • VC-backed enterprises showed higher average wages – particularly those residing in communications and other IT sectors;
  • VC-backed firms had higher survival rates than those set up without VC investment. By their fifth year of operation, they had better overall survival rates than businesses in professional, scientific, and technical sectors, SMEs earning over $30,000, and manufacturing concerns.

An econometric analysis of growth rates produced equally impressive results. Venture-backed companies showed “notably superior” growth rates over time than a sample of businesses without a history of VC financing. And stronger performance was recorded across all key measures:

  • Stronger revenue growth, sales growth, growth in the number of employees, and growth in assets – cumulatively over periods of one, three and five years;
  • Higher cumulative wage growth over time – indicating that VC-backed companies create more high-paying jobs than others;
  • Generally higher growth in R&D expenditures.

“VC-backed firms perform better than non-VC-backed firms in growing their businesses, at least over the one-year, three-year, and five-year timeframes subsequent to their initial VC investment,” the report concluded.

The report attributed the stronger performance to the “active management style” of venture capitalists and their timely provision of funding. That gives start-ups the tools they need to get their business off the ground, commercialize new products and rapidly scale up operations, so that young companies can eventually enter the big leagues.

Unlike earlier studies, the report was created using a new research methodology and a unique combination of data from a range of different sources, according to CVCA executive director Richard Rémillard.

“For the first time, study of VC’s economic impact has married long-term Canadian market information from Thomson Reuters with the hard data of Statscan,” Rémillard told peHUB Canada. “The numbers don’t lie.”

The research shows the benefits of directing more venture capital to qualified start-ups and should encourage those governments who are currently implementing measures to address the challenges pressuring the domestic VC industry, he said.

Examples include the Canadian government’s $400 million Venture Capital Action Plan, which focuses on bolstering VC supply, and Start-Up Visa, a program that aims to attract more foreign entrepreneurs to Canada – both launched in early 2013.

“Governments have largely been on the right track in expressing a commitment to Canada’s VC industry and its capacity to invest in emerging technologies,” Rémillard said. This latest report attesting to the collateral economic benefits of venture capital gives them “proof positive of the value of this effort.”

For a copy of The Performance of Canadian Firms that Received Venture Capital Financing (2013), please visit the CVCA’s website.

Photo courtesy of Shutterstock.