Slide 1

Venture Capital and U.S. Trade Competitiveness Karen G. Mills kmills@mmpgroupinc.com April 4, 2005 Council on Foreign Relations How Does Innovation Translate Into American Jobs?

Slide 2

2 DISCOVERY How does innovation translate into American jobs? Basic Research Invention Innovation CommercializationGrowth BUSINESS FORMATIONJOB CREATION Growth Capital and Expertise Small Business Entrepreneurship

Slide 3

3 Each quarter the U.S. economy creates over 7 million jobs Source: Bureau of Labor Statistics, U.S. Department of Labor Millions

Slide 4

4 New jobs come from business expansions and from newly formed firms Source: Bureau of Labor Statistics, U.S. Department of Labor Millions

Slide 5

5 The United States is losing manufacturing jobs Source: U.S. Department of Labor, Bureau of Labor Statistics Year Millions

Slide 6

6 Job losses and job creation are influenced by different forces Job Creation New business openings Business expansions Small business Venture backed businesses Job Losses Business Closures Productivity Offshore transfers

Slide 7

7 New firms and the expansion of small businesses create most of the jobs Source: Small Business Administration; MMP Analysis Percent of Total New Jobs Created by Firm Type 1991-2001 New FirmsSmall Firm Expansion

Slide 8

8 Entrepreneurs launch over 500,000 new firms annually Source: U.S. Department of Labor, Bureau of Labor Statistics

Slide 9

9 Successful Venture Capital backed businesses have a large economic impact 1970-2003 Venture Capitalists invested: -$340 billion invested -21,600 companies VC backed companies represent 9% of total U.S. jobs and revenues -10.1 million jobs -1.8 trillion in revenues

Slide 10

10 Private Equity Bank Debt Personal Savings Corporate Profits DISCOVERY Growth capital transforms innovation into commercial enterprises and jobs R&D Funding University Support Government Public Equity Public Debt Company Profits Reinvested Basic Research Invention Innovation CommercializationGrowth BUSINESS FORMATIONJOB CREATION

Slide 11

11 Over $250 billion is currently in the hands of U.S. Venture funds Capital Commitments to U.S. Venture Funds ($ Billions) Source: NVCA Yearbook Capital Under Management U.S. Venture Funds ($ Billions)

Slide 12

12 Venture Backed Growth 2000-2003 Percentage Change 12% 7% -2% 7% 5 pp 9 pp Sales Growth Job Growth Venture Capital backed companies grow faster and create more jobs Source: National Venture Capital Association; Global Insights study Venture Backed Total U.S.Venture Backed Total U.S.

Slide 13

13 This growth occurred in a number of important industries Source: National Venture Capital Association; Global Insights study Semiconductors Computer Hardware and Services Industrial/Energy Business/Financial Communications Healthcare Services Retailing and Media Healthcare Products Computer Software Biotechnology Employment Growth at Venture Capital Backed Companies vs. Total by Industry Sector (2000-2003)

Slide 14

14 Venture capital funding spurs innovation more powerfully than R&D * Innovation is measured by patent production Source: Samuel Kortum and Josh Lerner, RAND Journal of Economics, Winter 2000 VC Spending as a percent of R&D (1983-1992) Percent of Industrial Innovation* accounted for by VC Backed Firms (1983-1992) Percent accounted for in 1999

Slide 15

15 The Small Business Innovation Research (SBIR) Program had similar results Source: J. Lerner, Harvard University and National Bureau of Economic Research Note: The SBIR program provided $7 billion to small high technology firms between 1983 and 1997

Slide 16

16 Venture intensive industries had higher wage growth Wage Growth 2000-2003 Venture Intensive IndustriesNon-Venture Intensive Industries

Slide 17

17 Start up/Seed Early Stage Later Stage Growth Capital Mid Market Buyout Large Buyout $3-10 mil$500+ mil$100-500 mil$50-100 mil$10-50 mil Average Investment $0-3 mil Venture Capital Private equity now funds the growth of private companies at all sizes and stages Buyout/Mezzanine

Slide 18

18 Last year $57 billion was invested in Private Equity Source: 2004 NVCA Year Book

Slide 19

19 Buyouts and Mezzanine Capital is also being used to grow businesses Source: 2004 NVCA Year Book Other Private Equity Capital Buyouts and Mezzanine Capital Venture Capital

Slide 20

20 Institutions not individuals provide most of the funds Source: 2004 NVCA Year Book

Slide 21

21 Conclusion: Venture Capital and U.S. Trade Competitiveness Americas spirit of entrepreneurship, entrepreneurial capital and expertise are important competitive assets Private equity is a major new source of growth capital and expertise that did not exist in this fashion 20 years ago This risk capital plays a disproportionately important role in driving economic growth

Slide 22

22 Karen Gordon Mills Karen Gordon Mills was a Founder and Managing Director of Solera Capital, a private equity fund based in New York City. She has been in the industry since 1983 and is an expert in investing and growing companies in traditional U.S. based industries such as food, textiles, media and industrial components. Some of these companies and brands include Telex Communications, Mrs. Fields Cookies, Bruce Hardwood Floors and Annies Macaroni and Cheese. Her background also includes consulting for McKinsey & Co. and product management at General Foods. Ms. Mills received her A.B. from Harvard University in Economics in 1975 and her MBA from Harvard Business School in 1977, where she was a Baker Scholar. She currently serves on the Boards of the Scotts Company and Arrow Electronics and is Vice-Chair of the Harvard Overseers.