The latest report of the American Venture Capital Association (NVCA) shows that in 2021, the total transaction volume of American venture capital (VC) not only reached a record US $330 billion, but also the total financing exceeded US $100 billion for the first time, reaching a new high of US $128.3 billion. It is worth noting that since the date of the birth of American Research and Develop-ment Corporation (ARD), venture capital in the United States has been 76 years old. In addition to the shrinking volume of the Internet bubble and the financial crisis, the rest of the year has continued to expand, and the amount of investment and financing has remained the number one in the world. Behind its continuous leap forward, it is indeed worth an in-depth interpretation.
In terms of nature, venture capital is a kind of private equity investment. The investment targets are generally high-tech start-ups or unlisted enterprises with clear business prospects. These enterprises not only lack capital, but also lack the necessary management experience. However, in addition to having strong financing and investment energy, venture capitalists also possess strong technical background and professional operation and management knowledge, and they are definitely not opportunists, but sustainable operators who can help entrepreneurs effectively improve enterprise operation and management, and finally help enterprises from immature to stable and even mature. Therefore, venture capital is often the favorite of technology start-ups in the United States. According to the Research Report of Stanford University, up to 43% of the more than 1500 enterprises listed in recent 50 years originated from venture capital investment, while the latest statistics of NVCA is that nearly 10000 enterprises in the United States received venture capital injection in 2021, and on average, more than 30 start-ups received venture capital injection every day.
Due to the coexistence and progress with the investment object, from the perspective of investment mode, venture capital belongs to value-added investment. It can even be said that focusing on value-added management is the main standard configuration that distinguishes venture capital from other investments. Normally, after choosing the ideal target, venture capital often abides by and follows the principle of gradual investment, rather than running out of bullets in the early seed round and angel round investment stages, and VC will mostly carry out capital increment layout of different scales in the medium-term acceleration round stage of investment enterprises and the super round entering the expansion period. Such a step-by-step arrangement can not only constantly arouse the appetite of the founders and force them to continuously improve their cooperative relationship with venture capitalists, but also leave enough room for VC to dynamically adjust the investment rhythm and minimize the investment risk. Based on the investment stability and continuity of VC, even if venture capital is an expensive resource in the eyes of all investment enterprises (VC generally needs to obtain more than 30% equity of the bidding enterprise), they are still willing to form a pair with the principal of venture capital. According to the statistics of NVCA, the cooperation between VC and start-ups usually lasts for 10 to 15 years, and the time from investment to exit is much longer than that of any other asset class.
In fact, the love between capital and technology may be based on their own instinctive needs to some extent in the short term, but the law of love over time will also be verified between the two. In essence, in the long-term coexistence and cooperation, venture capital and the target enterprise form not only a business utilization relationship, but also a close partnership of mutual trust and high dependence. In the end, many originally young and fragile technology companies have obtained sustainable supplies, and successfully crossed and avoided risk obstacles to grow into Big Mac enterprises.
According to the report from NVCA, in 2021, the volume of venture capital’s transaction bets on biotechnology, healthcare and fintech industries reached 17054, a record high; It is the powerful empowerment based on VC that the United States has always ranked first in the number distribution of global Unicorn enterprises in the past five years. According to the 2021 global Unicorn list released by Hurun Research Institute, there are 1058 Unicorn companies worldwide, and the number of Unicorn companies in the United States is 487.
Inadvertently inserting willows into the shade. The significant contribution of venture capital to the U.S. economy does not just stop at cultivating and raising Unicorn enterprises. The Research Report of Stanford University reveals that 85% of the R & D investment of start-ups supported by venture capital comes from VC. A Kaufman foundation study also shows that over the past 30 years, venture capital ventures have created an average of 1.5 million jobs a year; The latest statistics of NVCA is that in 2021, the top five Unicorn enterprises in the United States provided more than 6500 jobs in China.
In particular, according to the latest research report released by the Kennan Institute of private enterprises at the University of North Carolina, the total employment in the high-tech field in the United States has increased by about 20% in the past 10 years, including the financial crisis and the spread of covid-19 pneumonia, no matter which state in the United States, Compared with other jobs, the median wage level of these jobs is significantly higher, and the growth rate of the number of jobs is also significantly faster.
Indeed, “where does the money come from” is the primary practical problem that all venture capital companies must face. For this, we must admit that the loose monetary policy implemented by the Federal Reserve in recent years, especially the zero interest rate of the US dollar, not only enables venture capital to obtain cheap indirect financing, but also greatly reduces the direct financing cost of venture capital companies. However, the objective fact is that large-scale “water release” can make the capital in the hands of venture capital companies abundant for a time, but it is absolutely impossible to make them surplus for a lifetime. The strength that really enables venture capital to travel steadily and quickly on the two-way runway of investment and financing mainly lies in a complete set of sound venture capital compensation mechanism.
Venture capital almost covers the whole life cycle of the ecosystem of start-ups. The cost of investment in growth related activities such as research and development and personnel salary is very large, and it pursues long-term value. Before exiting, VC usually suffers from years of losses, The characteristics of high risk and long-term limit of its shareholding are highly sensitive to tax policy, especially long-term capital gains tax policy. In this regard, on the one hand, the U.S. government promulgated the “tax reform act” to reduce the capital gains tax from the highest 49% to the current 0. At the same time, different tax rates are implemented for the years of capital holding, that is, the longer the holding time is, the lower the profits tax is paid, and the tax scope is continuously subdivided to adjust the original four tax rates to the current seven tax rates. The United States Congress also passed legislation to exempt 100% of income from investing in small business shares. On the other hand, U.S. state governments also implement local tax credit policies to escort many types of investment, such as emerging small businesses and women’s start-ups.
While providing tax support, the government finance also provides all-round countermeasures for VC in terms of credit guarantee and channel expansion. For example, the U.S. government established the small business administration, and established the White House Small Business Committee and the Congressional Small Business Committee to provide support for small business operations. Among them, the small business administration directly operates the national small business credit guarantee system to provide loan guarantees of up to US $5 million for venture capital enterprises; At the same time, the small business administration has specially established the small business investment company plan, which aims to provide financing for small enterprises through long-term loans, bonds, equity investment and other means. Due to the government’s clear support for small businesses and venture capital, social capital including pension funds, insurance companies, commercial banks, investment banks, university endowment funds and rich families also enhanced their business trust and future profit confidence in venture capital institutions. The sample survey results of NVCA show that the investment delivered to risk institutions accounts for an average of 10% of the total investment of high net worth households in the United States, which shows the strong attraction of venture capital to capital.
As described by professionals, venture capital is born for innovative start-ups, but one of the difficulties faced by VC in practice is whether there is an ideal target that can enter the investment selection matrix, and the more optional targets, the more conducive it is to gold in the sand. In this regard, the U.S. government directly promoted the establishment of Coleman foundation to support entrepreneurship education. Now there are not only many training institutions supporting entrepreneurship talents, such as small business administration, young entrepreneurs in Kansas, Kaufman entrepreneurship center, but also many university entrepreneurship institutions, such as entrepreneurship education center, Entrepreneurs Association, entrepreneurship research Association, etc. The U.S. government also strongly advocates and supports innovation and entrepreneurship activities. In addition to many schools carrying out entrepreneurship plan competitions, the U.S. government also displays American entrepreneurship stories through theme activities such as “White House maker’s Day” and “White House demonstration day”. Today, the United States is still one of the most active countries in Entrepreneurship in the world, and the continuous supply of resources at the entrepreneurial end undoubtedly provides sufficient materials for the selection and combination of venture capital targets.
Yes, venture capital and start-ups finally have to say goodbye. Therefore, whether the exit channel is unblocked has become an important symbol to measure whether a country’s venture capital market is healthy and active. On the whole, successful IPO and M & A are the two major channels for venture capital to withdraw from the invested companies. It should also be faced with that the spiral and stable rise of the US stock market has indeed opened a wide channel for venture capital to realize strategic investment returns, and the median time for venture capital to withdraw through IPO in 2021 has been greatly reduced by 3.2 months compared with the average of the previous five years, It reflects that the exit efficiency of venture capital in IPO channels has been significantly improved. In addition, in 2021, the volume of business M & A transactions between the United States and China reached a record $2.61 trillion, and continued to rise for six consecutive years. In particular, the popularity of Special Purpose Acquisition Enterprises (SPAC) in the United States last year has enabled VC to find a new shortcut to success and retreat.
(the author is a director of China Marketing Society and a professor of economics at Guangdong University of Foreign Studies)
