By James Pethokoukis
What are America’s greatest economic assets? Certainly our democratic capitalist system — democracy, rule of law, property rights, the price system — would be at the top of that list. But then what? Lots of candidates, from our vast natural resources to our world-leading university system to our ability to attract the very best of global talent. And, of course, the existence of some assets affects others. Our largest technology companies are the economy’s crown jewels, but they wouldn’t exist if not for some of the above factors, among others (immigration + universities + property rights + California weather).
Here’s another asset: the American venture capital industry. Looking at total funding and funding per capita, it’s clear America is the global leader:
Evidence of the deep impact of all those billions comes from “The Economic Impact of Venture Capital: Evidence from Public Companies” byWill Gornall (Sauder School of Business, University of British Columbia) and Ilya A. Strebulaev (Graduate School of Business, Stanford University and National Bureau of Economic Research). From their updated 2021 working paper:
Venture capital-backed companies account for 41% of total US market capitalization and 62% of US public companies’ R&D spending. Among public companies founded within the last fifty years, VC-backed companies account for half in number, three quarters by value, and more than 92% of R&D spending and patent value. The US did not spawn top public companies at a higher rate than other large, developed countries prior to 1970s ERISA reforms, but produced twice as many after it. Using those reforms as a natural experiment suggests that the US VC industry is causally responsible for the rise of one-fifth of the current largest 300 US public companies and that three quarters of the largest US VC-backed companies would not have existed or achieved their current scale without an active VC industry.
Gornall and Strebulaev highlight a key pivot point in that abstract: a 1979 regulatory clarification by the US Department of Labor of the meaning of the “prudent person” statutory standard for pension funds. The trickle of pension fund doubt into VC funds became a flood. The following finding is pretty remarkable:
Both the US and the other G7 countries saw a dozen or so current top companies founded in each decade from the 1900s to the 1970s. The US had more companies in the 1930s and fewer in the 1950s, but differences were transitory. … After the enaction of ERISA in 1974 and then the 1979 prudent person rule clarification, there was a dramatic divergence. The US had two to three times as many current top companies founded in the 1980s, 1990s, and 2000s. While European company formation decreased to about one per year in the 1990s and 2000s, US company formation surged. In total, 105 US companies in the top 300 were founded after 1968, compared with just 49 in other G7 countries, a difference of 56 companies.
That divergence can be seen clearly in this chart of VC-backed companies in the US and non-US G7 economies over time.
Bottom line: The dramatic surge in the US company creation “strongly suggests” that the ERISA reforms and the VC industry have impacted long-term macroeconomic growth.
