Let us praise the venture capitalists

Posted by Adam Lashinsky, Senior Editor at Large
December 22, 2009 6:00 AM
Fortune Magazine

I had a small, Twitter-hosted dustup recently with Trevor Loy, a pleasant fellow who, when he is not Twittering, brings truth and justice to the world via the agency of venture capital. Loy was hot and bothered over some turn of events in Congress having to do with immigration policy. Many entrepreneurs are immigrants, you see. And because venture capital equals entrepreneurialism, the proposed congressional action might harm VCs, which, in turn, would grievously harm the U.S. economy. This, Loy, explained, is because fully 21% of the U.S. economy is attributed to revenue earned by "venture-backed" companies.

Where, I wondered, did this startlingly encouraging statistic come from? Loy was kind enough to supply me the link to a report paid for by the National Venture Capital Association. Thank goodness for the hard work the NVCA does to help us understand the good VCs spread throughout the land. NVCA President Mark Heesen, a savvy Washington hand I've been privileged to chat with over the years, prefaced the report with a few nice words about the industry that employs him. "The data," he wrote, "continues to confirm that venture capital matters deeply, not only to our economy but to everyday lives of Americans, who use venture-backed innovations, work at venture-backed companies and dare to bring new ideas to the market."

Do you feel as warm and tingly as I do after reading that?


But about that 21% figure. The data the NVCA bought basically is arguing that "venture-backed" companies power about a fifth of the economy. What's a venture-backed company? Examples include Intel (INTC), Microsoft (MSFT) and FedEx (FDX). Never mind that these companies haven't received a dime of venture money in decades. They have big revenues, and only a simpleton wouldn't be able to see that if some kindly venture capitalist hadn't been around to fund, guide, and help promote feeble souls like Bob Noyce, Bill Gates, and Fred Smith, why, the U.S. might not be the powerhouse that it is today.

There's a purpose to all of this, of course. Washington, from time to time, tries moving the goal post on venture capitalists, asking them, for instance, to pay taxes on their income the same way schoolteachers and nurses do. VCs prefer to pay taxes at the lower rates afforded to investors who risk their savings on their investments. These kinds of investors include the pension funds managing the retirement accounts for schoolteachers and nurses. But I digress. Should the VCs be forced into a higher tax bracket, the economy most assuredly would suffer. From deep in the report:

Tax differentials, such as favorable rates for capital gains and carried interest, serve as important tools for encouraging investment in emerging growth companies. In our current financial system, venture capital is the only source of long-term, institutional funding for such companies. When government increases the tax burden on venture capital, however, it inhibits the flow of dollars to innovative young start-ups.

In other words, should Congress ever change the tax treatment of VC income, or any other policy that governs how VCs get their important work done, it's not a bunch of second-career MBAs in gorgeous offices who'll be affected. No, it's "innovative young start-ups" that'll bear the brunt.

Now, more than ever, what this country really needs is a vibrant venture industry that can get about its business of company creation and stellar returns for its investors without a bunch of barriers thrown in its way by Washington.