Fernway DiarySM

Mar 16, 2022

A new study from the National Venture Capital Association, Venture Forward, and the University of North Carolina Kenan Institute of Private Enterprise studying the impact of startups on job creation in the US has helped to quantify the effect of venture capital–backed companies on employment, supporting the contention that such companies contribute disproportionately to domestic employment. Further, the study has given new insight into the resilience and geographic distribution of such jobs. As a result, the study’s authors conclude that encouraging VC activity should be a priority for policymakers interested in benefiting the US labor market and economy overall.

The study looked at employment in VC-backed companies in two ways, using a dataset of over 67,000 US companies that received VC funding between 1970 and 2020. First the authors estimated the geographic distribution of jobs created by venture-backed companies by mapping the location of 3.8 million employees working at the companies in their dataset in 2020. They then analyzed the employment dynamics at those companies from 1990 to 2020.

Among the most striking findings of the report was that employment at the VC-backed companies studied grew 960{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} from 1990 to 2020, compared to an increase of only 40{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} in total private sector employment in the same period. The annualized growth rate of the companies in the dataset for the study period was 8.2{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}, while it was just 1.1{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} for total private sector employment.

This fast growth rate was accompanied by resilience, with employment at VC-backed companies increasing even during periods of economic stress. During the Great Recession, the study notes, “annual job growth at VC-backed firms exceeded 4.0{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}. Total private sector employment, by comparison, shrank by 4.3{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} in 2009, contributing to a decrease of 7.4 million private sector jobs.” The concluding remarks of their study note that “[t]he much quicker growth rates in employment and the resilience of such growth at VC-backed companies…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.”

Even more interesting is the degree to which employment distribution is not dependent on where venture capital is typically deployed. California, Massachusetts, and New York accounted for 73{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} of venture capital dollars in 2020, but the report found that 62.5{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} of employment at VC-backed companies in that year was located outside of those three states. The report notes “VC-backed jobs are located not only in all 50 states, but also all 435 congressional districts with voting members as well as Washington, DC and Puerto Rico.”

Building and Supporting Emerging Ecosystems

In light of the report’s findings, the NVCA has called on elected officials in Washington, DC, to help promote venture-backed entrepreneurial activity through policy change. The organization voiced support for Representative Zoe Lofgren’s Let Immigrants Kickstart Employment Act, which would establish a new class of nonimmigrant visas for foreign-born entrepreneurs and essential employees affiliated with startup entities. Their letter to Capitol Hill stated, “Immigrants are critical to U.S. economic success and innovation. Foreign-born entrepreneurs play a key role in the creation of high-growth startups. Research shows that immigrants are twice as likely as native-born Americans to start a new business. Though just 14 percent of the population, immigrants account for a quarter of all business owners—with even higher rates among high-tech startups.”

The NVCA has also urged lawmakers to pass US competitiveness legislation and to examine the potentially negative impact of regulatory burdens on emerging startup ecosystems. With other countries around the world vying to take the lead in the global technology sector, they contend that the current environment can make it unnecessarily difficult for talented foreign-born entrepreneurs to bring their enterprises to the US.

Creating Opportunity

Foreign startups and founders looking to establish or expand their business into the US market often require expert advice on their overall corporate structure, compliance requirements, and tax planning strategies. Fernway Solutions offers a full range of advisory and tax compliance/planning services to ensure your business has what it needs at each stage of its growth.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

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