Wednesday, June 24, 2015

Scalable Innovation and the future of American jobs

Manju Puri and Rebecca Zarutskie, economics researchers from Duke University and Federal Reserve Board, used data over 25 years to understand the difference between VC- and non-VC-financed US firms.* They discovered that VC-financed firms had a disproportionately large positive impact on job creation in the country. For example, in the period between 2001 and 2005 VC-financed firms represented just 0.16% of all firms in existence. At the same time, they employed %7.3 of all workers, which is about 50 times greater than "normal." Also, VC- and non-VC-financed firms differed dramatically in sales (see the chart below).

On the Life Cycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms. THE JOURNAL OF FINANCE VOL. LXVII, NO. 6 DECEMBER 2012 
Another important finding from the paper:
...the key firm characteristic on which VC focuses is scale or potential for scale, rather than short-term profitability.

Although the common wisdom in Silicon Valley is that VCs select for the best team, the data tells us that potential scale of the startup matters the most. This finding strengthens the argument we put forward in Scalable Innovation: scalability of the target innovation space is the fundamental differentiator between successful and unsuccessful innovation attempts.

* Source: Puri, Manju and Zarutskie, Rebecca, On the Lifecycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms (June 13, 2010). EFA 2007 Ljubljana Meetings Paper; US Census Bureau Center for Economic Studies Paper No. CES-WP-08-13. Available at SSRN: or

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