What part of the economy is still strong?

If you read the financial press or watch CNBC, you quickly come to the conclusion that the entire economy – and especially anything having to do with investment and finance – is going to hell in an hand-basket.  I say – not so fast!

If you step away from the hyperbole for a little while and look at actual data, a very interesting picture emerges.  The US is still a nation of entrepreneurs, and those entrepreneurs are still hard at work dreaming new dreams, starting new companies, raising new capital, and creating new jobs.

I am a venture capital investor.  I live in this world, and even I was a bit surprised this morning when I read an emailed newsletter from the peHUB Wire (peHUB.com is the web site, but the newsletter is only available by subscription).  As it turns out, the Venture Capital industry is very good about surveying itself every quarter, so information about the number of investment deals, money raised in each deal, the industry sector, which venture funds are investing, etc. is available going back well into the 80s.

After reading op-ed peices and editorials in news sources as respected (and as diverse) as the Wall Street Journal and the New York Times saying that venture capitalists were not making any investments and that entrepreneurs were not creating new companies, the editor of peHUB did a bit of data-diving into the numbers from 1995-2008 and see what the real story is.  The results were eye-opening.

  • “The number of seed-stage companies funded in 2008 was higher than in any year between 2001 and 2006.”  This hardly sounds like venture capitalists are paralyzed (as stated in the WSJ) or not making any investments (as stated in the NYT).
  • “The number of early-stage companies (non-seed) funded in 2008 was higher than in any year between 2002 and 2006.”  This is similar to the data about seed-stage companies.  And similarly, it does not support the statements by WSJ and NYT about the lack of VC investing.
  • “Overall VC investment [measured in dollars invested] did drop in Q4 2008, but the number of seed and early-stage deals (combined) done in Q4 was greater than in any quarter between 2002 and 2006.”  In other words, entrepreneurial activity is UP, not down.

The US has a long and strong history or entrepreneurship and inventiveness.  Further, here in Silicon Valley, we have a strong culture of building new technologies on the rubble of the old technologies.  When the original semiconductor companies that created and named Silicon Valley slowed, a crop of PC companies grew.  When the PC companies slowed, they were replaced by a crop of disk-drive companies.  When the disk-drive companies crashed in the mid-80s, suddenly a rash of telephony and voicemail companies rose.  On and on, new companies replace old ones, and new technologies add to what has been invented in the past.

Not only is this process good for the economy, it is  necessary for progress.  The scarce resource when it comes to invention and entrepreneurship is the combination of brains and fearlessness that allows people to give up a secure, highly-compensated position to pursue a dream to create something new out of nothing.  These people, the bulk of whom are destined to remain anonymous, are rare.  They often have multiple ideas, but leave all but one safely stored on the back of their minds while pursuing the one.  Only when the company created to pursue that current idea either succeeds (via IPO or acquisition) or fails (via bankruptcy or acquisition of the crumbs) is the core person freed to pursue the next idea.

Lets make sure that those “idea people” – the founders of entrepreneurial companies – are given as much opportunity as possible to pursue their dreams.  In doing so, they create jobs, make large companies more efficient and more productive (and thus more profitable), and sometimes create the new industries that can be the drivers of our economy for years to come.

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