In my post on the case for technology I cited a 2011 paper that found that an increase in venture capital funding in a city was associated with higher income, higher employment, and more new firms in that place.
In this post, I want to clip together a few resources on what we know about VC’s economic and social impact.
Here’s the conclusion of that paper linked above, on VCs and geography:
We find that increases in the supply of venture capital in an MSA stimulate the production of new firms in the region. This effect appears consistent with either of two mechanisms. First, would-be entrepreneurs in need of capital may incorporate the availability of such capital into their calculations when trying to decide whether to start their firms. Second, the firms that VC firms finance may serve as inspiration and training grounds for future entrepreneurs. We further find that an expanded supply of venture capital raises employment and aggregate income in a region. At least some of these employment and income effects probably stem from venture capital allowing entrepreneurs to create value by pursuing ideas that they otherwise could not have. Table 10 summarizes the magnitudes of these estimated effects across our various specifications.
Here’s a bit from a 2000 paper in the Journal of Economic Perspectives:
After addressing these causality concerns, the results suggest that venture funding does have a strong positive impact on innovation. The estimated coefficients vary according to the techniques employed, but on average, a dollar of venture capital appears to be three to four times more potent in stimulating patenting than a dollar of traditional corporate R&D. The estimates therefore suggest that venture capital, even though it averaged less than 3 percent of corporate R&D from 1983 to 1992, is responsible for perhaps 10 percent of U.S. industrial innovations in this decade
And here are several snippets from a 2011 NBER literature review:
Overall we believe that the body of empirical evidence is consistent with the notion that VCs select more innovative companies, and then help them with the commercialization process. The results suggest that VC plays a greater role for commercialization (as measured by bringing products to market, and forging strategic alliances) than for the generation of further innovation (as measured by patents and TFP)…
Company-level studies typically confirm this positive relationship between VC and measures of economic growth. Puri and Zarutskie (2011), using US Census data, find that only 0.11% of new companies created over a 25 year sample period from 1981-2005 are funded by VC, yet these companies account for 4% to 5.5% of employment. They show that VC-backed companies grow faster at every stage of the investment cycle, i.e., both before and after the receipt of VC. Chemmanur et al. (2011a) find a positive effect of VC on company productivity. Davila et al. (2003) and Engel and Keilbach (2007) also find a positive effect of VC on employment.
Overall the literature consistently finds a positive relationship between VC funding and other measures of economic value creation. While the literature seems to identify social value creation, there remains an open question on the social costs of VC.
Update: a newer paper:
Differences between the majority of mediocre firms and the exceptional, innovative ones range from the founders’ backgrounds to their paths of innovation. This column assesses the impact of venture capital funding on the growth trajectories firms take. Employment and patenting data show venture capital-backed firms are likely to achieve greater success and contribute more significantly to the aggregate economy. The absence of venture capital funding would lower aggregate growth by 28%.