CHAPEL HILL – Employment grows at a much faster rate at venture capital-backed startup companies than other private-sector firms—roughly eight times faster, a new report finds.
The analysis of employment data examines “employment dynamics” of more than 67,000 U.S. companies that received venture capital (VC) investment during the period between 1970 and 2020. It was conducted by researchers at the Kenan Institute of Private Enterprise and the National Venture Capital Association (NVCA).
“The annualized growth rate of employment at VC-backed companies in our dataset between 1990 and 2020 is 8.2%,” the report’s executive summary reads. “For total private sector employment, the growth rate between January 1990 and February 2020 is just 1.1%.
Put another way, the report finds that employment growth was 960% at venture-backed companies between January 1990 and February 2020, whereas in non-venture-backed firms, employment growth was 40%.
“Despite anecdotal evidence that VC-backed companies generate substantial employment, data limitations have prevented a detailed analysis,” said Greg Brown, executive director of the Kenan Institute for Private Enterprise, in a statement. “With our new data, we are finally able to show that VC-backed companies create millions of jobs throughout the U.S., with a large proportion outside of the traditional VC hubs.”
Employee growth isn’t just in Silicon Valley
Employment growth isn’t just occurring in venture-backed companies that are based in Silicon Valley, New York City, or Boston, the report’s authors note in the report.
“We find that 62.5% of employment at VC-backed companies in 2020 was in states other than California, Massachusetts, or New York,” the report reads. “This pattern stands in contrast to the geographic dispersion of VC investment in the U.S., which is more heavily concentrated in those three hub states.”
According to the report, in 2020, 73% of all venture capital funding invested in U.S.-based companies went to firms headquartered in one of those three states.
Resiliency and public policy
There is another important aspect of the study, said Bobby Franklin, president and CEO of NVCA, during a virtual press event highlighting the report on Tuesday afternoon. “When you look at this study, coupled with some of the other things that have been put out in recent years,” said Franklin. “The resiliency of venture-backed company jobs, through downturns, through the Great Recession, through times when the rest of private employment is receding, you start to paint a really interesting picture about venture-backed jobs and the outsized role they play in the economy and in job creation.”
The study prompts policymakers to ask a question, said Franklin. “What is going to help these young, high-growth companies?”
Franklin noted that this is the largest area on which NVCA spends time.
“Policymakers are only thinking about the established large companies, or they’re thinking about these small mom and pop businesses,” said Franklin. But, said Franklin, that doesn’t paint an accurate picture of the nation’s startups.
“Public policy can make a significant difference,” said Franklin, suggesting on the virtual event that the United States consider passing a so-called “startup visa” and formalizing this category in the nation’s immigration policies.
“As the U.S., we’ve lost market share over the last few years,” said Franklin, about the nation’s competitiveness in attracting venture capital to U.S.-based firms. “Doesn’t mean that we have shrunk … But the overall pie has gotten much, much bigger.”
“Bulk of the jobs is going to come from a relatively small fraction of the largest, most successful, long-run companies,” said Brown, answering a question posed by a reporter during a virtual press event. Brown suggested that at companies like Meta, which started as Facebook, may actually be better thought of now as a conglomeration of many successful startups, as the company has acquired other companies while it’s grown its workforce.
“Most early-stage investments go to zero,” said Franklin. “But that’s the beauty and the value of the entrepreneurial ecosystem.”
But it is true that the companies that are most likely to become venture-backed companies are also going to be companies that hire employees, noted Brown.
“Without a doubt, a subset of new firm formations,” said Brown, will go on to raise venture capital.
How North Carolina stacks up
According to the analysis, North Carolina-based venture-backed startups employed 76,716 workers in 2020. That’s 2% of all U.S. employees who worked for a venture-backed startup in 2020. In total, the report found there were some 3.8 million workers who are employed by a U.S.-based, venture-backed company in 2020.
“We see this in North Carolina, here in the Research Triangle,” said Brown, during the virtual event. “Just over the last couple of years, we’ve had major job announcements from venture-backed companies.”
Brown referenced decisions from Google and Apple, both of which are considered venture-backed companies and as such, are included in the study’s figures. A company such as Amazon has also recently expanded its workforce in North Carolina, as well as nationally, Brown noted, and that data is captured in the data set.
“A significant impact here in North Carolina, in terms of what we see with venture-backed employment growth,” said Brown.
And, a table contained within the report notes the annualized rate of change for employment growth at venture-backed companies in North Carolina was 4.5% between 2010 and 2020. Between 2015 and 2020, the annualized rate of change was 4.1%, the report notes.
Between 2016 and 2020, total venture capital invested in North Carolina grew by 410%, with firms in the state bringing in $4.1 billion in 2020, a 2021 report from Crunchbase found. But more than $2 billion of that capital went to two firms, AvidXchange (now public) and Epic Games.
The trend toward so called ‘mega deals’ continued in 2021, when North Carolina firms raised $3.6 billion in capital, with nearly 70% going to two firms: $1.7 billion raised by Epic Games and insightsoftware, which landed $800 million from a single investor.
New business formations at record levels in NC
2020 was a record year for North Carolina in another measure: the number of newly formed businesses.
According to the North Carolina Secretary of State’s office, the number of new business formations in 2020 surpassed previous records.
Nearly 127,000 businesses were launched in 2020, according to the Secretary of State’s office, outpacing the prior high, set in 2019, by 27,000 startup firms.
Yet business formations accelerated in 2021 in North Carolina, and a new record was set, with some 178,000 new companies formed during the year.
Not all new businesses will attract venture capital or hire workers, said Brown.
“Looking at new firm formation data is hard because there’s such a large number of new business formations,” said Brown. “Millions each year in the U.S.”
“Very few of those are going to be high-growth companies, let alone high-growth, venture-backed companies,” said Brown.
Still, the number of newly formed businesses is an indicator of a strong economic climate, North Carolina Secretary of Commerce Machelle Baker Sanders said at an event in early 2021.
“Innovation and new ideas are the rocket fuel of the North Carolina economy,” Sanders said at the time. “As a biotechnology executive, I’ve witnessed the significant impact that entrepreneurial innovation has on our state. We must welcome everyone to contribute and then act with deliberate intention to nurture and support those ideas, especially those high-impact companies that solve global issues.”
Based on 2020 data, North Carolina was one of only nine states that surpassed 40,000 “high-propensity” firms created, Thom Ruhe, president and CEO of NC IDEA, told WRAL TechWire in March 2021. The U.S. Census Bureau defines a high-propensity business as one that completes an application for an Employer Identification Number (EIN) and, according to the agency, “have a high propensity of turning into businesses with payroll.”
According to the data that Ruhe and NC IDEA tracks, each high-propensity firm creates an average of 4.89 jobs in their first year of operating, said Ruhe in that March 2021 interview.
“The economic impact to the state is massive but we don’t have incentives, support and attention span commensurate with that impact,” Thom Ruhe, president and CEO of NC IDEA, told WRAL TechWire earlier this year.
The conclusions of the new report
Because venture-backed companies drive quicker employment growth, the report authors argue that “encouraging greater VC investment may be a boon to overall U.S. employment and ought to be of interest to policymakers interested not only in creating jobs in general, but in creating durable jobs that can weather the vicissitudes of economic cycles.”
Put another way, the authors say their findings suggest that policies that would encourage further venture capital activity in the United States “will benefit the U.S. labor market and economy.”
Early trends in North Carolina business formation indicate that 2022 may be yet another record year for the number of new firms created in the state, North Carolina Secretary of State Elaine Marshall told WRAL TechWire last month.
“We’re into a new era of entrepreneurship, just from the historical data from the last two years, but I think it’s going to continue, because there will be so many opportunities,” said Marshall.
And if those firms become high-propensity firms at the same rate as those formed in 2020 and in 2021, the state could continue to see job and employment growth occur at the state’s newest companies.