Venture Capital Doesn't Need Government Help

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Finally, the venture capital industry overstates the impact of venture investors on entrepreneurs' success. My team at Duke University just completed a survey of 549 entrepreneurs who had started successful companies in high-growth industries. We found that only 8% of first-time entrepreneurs took venture funding. For those on their fourth startup, the percentage was 22%. That still means nearly four out of five seasoned entrepreneurs didn't need VCs' money or advice to be successful.

An Impediment to Innovation?

The findings matched those in Kedrosky's paper. He analyzed Inc. magazine's list of the fastest-growing U.S. companies and found that only 16% of the 900 firms on the list took venture capital during the past decade.

Other research implies that venture funding isn't only unnecessary much of the time but also has a negative correlation to innovation. Last August, Masako Ueda, a professor at the University of Wisconsin at Madison's business school, and Masayuki Hirukawa, a professor in the economics department at Northern Illinois University, examined the correlation between venture capital investments and productivity growth.

Professors Ueda and Hirukawa analyzed "total factor productivity" (TFP), a measure of innovation, as it applies to U.S. manufacturing industries including pharmaceuticals, computers, communications, electronics, and instruments. They found that VC investment lagged behind TFP growth by two years and that later rounds of VC investments actually caused a decline in TFP. In other words, venture capital slowed the innovation process.

The findings imply that VCs are far from indispensable in creating growing companies. Rather, they play a small role at best with fast-growing companies.

Many VCs I talk to also say few of their peers provide real value to the U.S. economy. They lament how their industry has become a haven for MBAs with no substantive operational experience in business but plenty of taste for IPOs. VCs say rapid growth in their industry has led to a less attractive pool of companies to invest in, and lower returns on those investments. While some top-tier VCs do provide real benefits to companies in their portfolios and thus create wealth, many are merely middlemen.

Washington needs to say no to the NVCA's entreaties. Rewarding rich VCs with tax and oversight breaks would be harmful to the economy, and an affront to self-made entrepreneurs. Instead, U.S. government and industry should examine ways to provide more direct support to the entrepreneurs who are the real forces behind economic growth.

Wadhwa is senior research associate at the Labor & Worklife Program at Harvard Law School and executive in residence at Duke University. He is an entrepreneur who founded two technology companies. His research can be found at www.globalizationresearch.com.

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