May 4, 1998

WHAT SEPARATES VENTURE-BACKED STARTUPS FROM THE PACK?

Edited by Douglas Harbrecht

Are venture-capital-backed enterprises really so special? Although they account for only a tiny percentage of all startups, they're habitually annointed as the "up-and comers," and they sure garner more than their share of media attention.

The attention may not be unjustified. For some reasons why, take a look at a report titled Economic Impact of Venture Capital, released Apr. 30 by accountants Coopers & Lybrand and VentureOne, an investment research firm. Throughout the study of nearly 400 young, VC-funded companies, are the signs of economic bloom far outpacing the typical small-business startup.

For example: Each company reported employing nearly 100 people by its fifth birthday, increasing its ranks over 40% each year. Eighteen percent of surveyed companies had already gone public, offering their shares, on average, in the fourth year of operation. According to a separate Coopers & Lybrand study, VC-backed companies are 70% more likely to stage an IPO than their non-VC counterparts.

Technology looms large in the venture world. Some 80% of sureyed companies were technology-based. And by the time the avearage company turned five-years-old, it had alreday invested $13.5 million in research and development -- three times the average of Fortune 500 corporations.

Not all of this growth translates into instant riches, a reality made clear by the fortunes of Netscape, Amazon.com, and a host of Net-related bretheren. While the average age of surveyed companies was just over 3.5 years, only 14% were profitable. Nearly two-fifths of the group classified its operations in the "development" stage, while a third claimed to be "shipping" -- selling products or services but not yet turning a profit.

The survey, however, makes the case for future payouts, citing government rankings that place technology-based industries in all 10 of the nation's fastest-growing sectors.

By Dennis Berman in New York