Why Private Capital Backed Companies
Topics In This Section:
- Industry Sector and Upstate Market Agnostic
- UVC’s Focus is Private Capital Backed Companies
- Private Capital Backed Firms Are Job Generators
- Private Capital Backed Firms Create New Industries And Highly Sought After Jobs
- Private Capital Filter Is An Efficient Screening Mechanism
- Private Capital Backed Firms Create A Whole New Generation of Entrepreneurs
- Private Capital Investing Is The Fundamental Building Block for the Entire Ecosystem
- Additional resources on private capital investing in emerging companies
New York has some burgeoning opportunities in emerging sectors like nanotechnology, clean tech, software, telecom/networking, health sciences, defense and data security to name just a few. Activities and assets for these various industry sectors are spread across the Upstate region and aren’t isolated to any single geographic market.
Contrary to the approach taken by most economic development organizations, UVC purposely avoids aligning with any defined combination of industry sectors or geographic locations. Rather, the very foundation of what UVC aims to address is to leverage the discrete efforts going on inside the industry and geographic clusters, and instead looks to foster collaboration between the various programs so that the most promising opportunities can access resources that extend beyond visibility of a specific industry cluster or local geographic market Upstate.
This collaborative model concept also allows other resources such as educational institutions, capital sources, service providers, mentors, and a host of other contributors who have an interest in helping emerging tech companies get connected to opportunities through UVC’s Vconnect platform and process.
Our view of Private Capital backed companies is intended to target firms that have received, or are on a path to qualify for an equity investment from a private capital source – specifically angel investors and professional venture capital firms.
Private capital investors do not lend funds to startups. They buy shares of an emerging company’s ownership with the expectation of getting a return only when the new company grows large enough to be sold to someone else through either a private or public transaction. Attaining such a liquidity event requires patience (3-5 years or longer) and an understanding that the entire investment is at risk – if the emerging company fails, they typically have no assets providing security for investors.
To offset such risks, by definition private capital investments will go into firms having high growth potential and a corresponding high potential return on investment for this risk. Typically, this means investing in new industries, unproven business models and technologies that are not yet mature in the marketplace. (By contrast, if a new company is operating in a mature industry, or is using a proven business model or known technology, they are more likely a candidate for traditional debt financing).
Private capital thus becomes the essential fuel to help an emerging company cross the “Valley of Death” from ground breaking concept through pre-revenue to capital sufficiency phases. As detailed in sources noted below, it is Upstate’s dearth of private capital investment that puts us so far behind other states notwithstanding our tremendous intellectual assets that should put this region somewhere closer to the top for new company creation.
Critically important for the overall Upstate economy are the specific attributes of job creation that comes from smaller entrepreneurial firms backed by private capital financing.
The most tracked segment of private capital backed companies are those that received professional Venture Capital (VC) financing. Statistics from the U.S. National Venture Capital Association (NVCA) indicate that venture capital-backed firms:
- Encompass 12.1 million private sector jobs or about 11% of the total private sector jobs in the country
- These firms collectively generate $2.9 trillion in revenue or about 21% of U.S. GDP
- Over the period 2006-2008 Venture-backed company jobs grew by 1.6%,compared with only .2% growth for the rest of the private sector
- For every dollar of VC invested from 1970-2008, a total of $6.36 of revenue was produced in 2008
- In 2008, one U.S. job existed for every $37,702 of VC investment from 1970-2008
The willingness of private investors to take the risks in funding disruptive technologies and new business models is responsible for creating entire new industries that today employ millions in high paying jobs in the very industries now sought after by our graduates. NVCA statistics indicate the following levels of 2008 employment inside these industries:
|Industry||Venture-backed jobs||Total jobs in this industry||VC backed jobs as a share of industry|
|Networking & Equipment||329,505||668,058||58.75%|
No matter how well the intentions, government and non-profit institutions have not proven to be capable of predicting which companies or approaches are the right ones to invest in. The very nature of risks and rewards assumed by private capital investors puts some serious “skin in the game” that guides investor actions and individual behaviors until the startup either fails or reaches an investor liquidity event. Additional attributes contributing to the effectiveness of private investing as a filter include:
- Private capital investors, including individual angel investors, get personally involved in performing due diligence to assess the risks and opportunities involved in the investment
- Since one round of investment is rarely enough to take a new firm from concept to capital sufficiency, even the earliest stage investments are made with an eye for attracting later stage investors (such as professional venture capital firms).
- The bar to receive a private capital investment is high. Vision, market opportunity, proprietary competitive advantage and entrepreneur resourcefulness and commitment all have to be demonstrated in order to qualify for investment.
- Support from investors doesn’t end once investment is made, but in fact just begins. Private capital investors are highly motivated to use the full range of their knowledge and relationships to help the emerging company succeed.
- Individual angels can pool their financial and expertise resources into an organized group – both increasing the efficiency of their time and being able to spread investments over several firms using a portfolio approach. (See our section on Private Investors for more information).
To attract top talent into these emerging firms, private capital backed companies typically offer stock options as part of the overall compensation package. And since a private capital backed company goes through much more rapid change than a traditional business, the experience gained by participating team members is in stark contrast to the slower pace of larger, more bureaucratic organizations.
The combination of these factors results in fostering a whole new generation of entrepreneurs from team members who took part in growing a private capital backed company. Whether the venture succeeds and senior team members walk away with large equity gains, or even if it fails – some portion of the early team gets the taste for startup life and with lessons learned from the experience, will seek out the next startup opportunity instead of retreating to a slower pace corporate role.
Fueled by the incentives created by private capital, it is this rapid cycle of company creation, growth and end, that is the essence of Silicon Valley culture driving tech company incubation and growth – a cycle that is not sufficiently understood or appreciated Upstate.
UVC’s exclusive focus on private capital backed companies is the filter that drives our strategy and decision making. We are committed to the long term vision of fostering the creation of new economy companies and jobs as a direct outcome of this focus.
Register now to keep informed of developments as the Vconnect process comes on line.
Links to the following reports provide additional background and context on venture capital, job creation, and specific issues for New York State.
The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy. Report developed by National Venture Capital Association
Why we like this: Professionally researched and presented, this easy to read report brings clarity to the impact private capital backed companies have on the overall economy.
Note: Free site registration on the Excell Partners site is required to obtain the two reports listed below.
Why we like this: These reports provide thoughtful insight into the trends of private capital investing in New York State. An important outcome from the May 2009 report shows the vast disparity between New York metro private capital disbursements and that of the Upstate region. Without understanding that disparity, it is too easy for the casual observer to conclude that New York State is a leading recipient of venture capital, when in fact the Upstate region receives less venture capital than nearly all other regions of the entire country – just barely inching out the bottom regions of Hawaii/Alaska/Puerto Rico and the South Central region of Arkansas/Mississippi/ Alabama/Louisiana.
"Venture Capital & Seed Activity in NYS: Statistics for Upstate and Downstate, Part II of a Two-Part Series".
In this sequel report, we again address the important issue of venture capital (VC) investing in NYS. However, here we take a deep dive into one primary data source, i.e., the raw data on www.pwcmoneytree.com for both the Upstate and Downstate regions. We have created a data base for every venture deal reported to the National Venture Capital Association (NVCA) for a four-year period from January 2005 through and including December 2008 (2005-2008). We take a close look at the distribution of capital among the metro regions from Buffalo to Long Island and how capital is invested by development stage. Data on the number of deals by development stage paints a picture of the level of VC activity in each region.
"Venture Capital & Seed Activity in NYS: Perception, Reality, and Unrealized Potential, Part 1 of a Two-Part Series". This report tells a story about venture capital activity in New York State, particularly at the seed stage, and the unrealized potential in leveraging the incredible amount of research and development that is being generated at pre-eminent universities across the region. There are many misperceptions and misunderstandings about these matters among our state, regional, and local community stakeholders. Rather than discuss these issues anecdotally, we have elected to provide a significant amount of data in this white paper to paint the picture of what is really happening here in NYS.
Higher Education: Upstate’s Core Asset In the Quest For New Economy Growth
Task Force on Diversifying the New York State Economy through Industry-Higher Education Partnerships Report prepared for Gov. David A. Paterson
Why we like this: Our educational institutions are undoubtedly the key asset Upstate has to help drive transformational change in the direction of the innovation economy. This report takes a comprehensive look at the resources, capabilities and potential for higher education to step up their involvement and partner with state and private sector resources. The report includes links to a number of useful reports and sources relevant to the issues surrounding private capital and job creation.
Emerging Firms Create Job Growth Powering the Economy
Kauffman Foundation Research Series: Firm Formation and Economic Growth. Where Will The Jobs Come From? November 2009
Why we like this: This report analyzes net job creation based on firm age (as opposed to just firm size), and provides compelling evidence that it is the new firms that are responsible for the net new job creation in the U.S. in particular with emerging firms having an employee count of between 20-499 employees – the very segment private capital backed firms will evolve to if they succeed in navigating through the initial survival stage of their early existence.