July 27, 2022

bugs bunny
silicon valley

Entrepreneurship is the job creation engine of America

On this day in 1789, a year after ratification of the U.S. Constitution, George Washington signed legislation to create the first federal agency of this new government, and he appointed Thomas Jefferson as the nation’s first Secretary of State to run this agency with a total staff of 6.  Today, the State Department employs over 77,000, the vast majority stationed in one of the 191 countries with whom we maintain diplomatic relations.

So vital is this agency’s mission of advancing our objectives and interests around the world, that the Secretary of State remains the first cabinet member in our presidential order of succession. In recent years, the State Department has fallen on difficult times, along with the notion of global diplomacy itself as the primary tool for foreign affairs. But let us not forget the words of the former Secretary of Defense, James Mattis, when his military budget was being escalated at the expense of the State Department’s. Mattis, a former four-star general, forewarned that if State Department funding were cut, then he would need to buy more ammunition.

Today, we will discuss a proposal to establish a state venture capital program. While venture style investments go back a long time via wealthy families providing capital to risky enterprises, such as JP Morgan’s investment in Thomas Edison’s startup electric company, or the Medici’s taking stakes in the prospective cargo of merchant trade ships in the middle-ages, the venture capital industry with institutional investment firms is relatively new.

The first institutional venture capital funds are generally believed to be Georges Doriot’s American Research and Development Corporation and J. H. Whitney & Company, both established in 1946.  However, it would be two government actions that would largely transform the growth of the industry.  The Small Business Investment Act of 1958 enabled the Small Business Association to provide incentives to support entrepreneurship. In 1978, the “prudent man” revision to the Employee Retirement Income Security Act (ERISA), allowed corporate pension funds to invest in the asset class, which would become the industry’s leading source of capital.

The first venture firm on the West Coast was formed by an industry legend, Bill Draper, around 1960. He not only studied under Professor Doriot at Harvard Business School, but he later became head of the U.N. Development Programme and traveled to over 100 countries providing development assistance. I was fortunate to speak with Bill on his early involvement in spearheading the venture industry and was surprised by how much attribution he gave to government support for his success, crediting an SBIC loan for enabling him to launch his first fund.

It was also in the 1960’s that the standard venture fund structure still widely used today was established, that of a Limited Partnership with a 2% management fee and 20% carried interest on profits. Sand Hill Road became ground zero for venture capitalists for its proximity to Stanford and the region’s resources and with the launch of firms such as Kleiner Perkins and Sequoia Capital.

The rise of the venture industry coincides with the rise of Silicon Valley. The entire region, once dominated by fruit orchards but also home of the defense industry, gave rise to the preeminence of the area as the global headquarters of technology innovation. Along with heavy military spending, a network of prominent universities and numerous research labs, the public sector has fingerprints all across the creation Silicon Valley and the success of the industry. Over the past several years, California has been home to approximately half of the nation’s venture capital activity, the vast majority of which is concentrated in the Bay Area.

Despite the recent market downturn, the growth of the industry continues at an astounding rate.  Midway through this year, we are about to exceed all capital raised for U.S. venture funds in 2021, which was the biggest funding year in venture capital history.

We know that entrepreneurship is the job creation engine of America. The Bay Area venture capital ecosystem remains unmatched and the envy of the world – with its rags-to-riches stories and risk-embracing culture that has resulted in world changing innovations, high paying jobs, unprecedented wealth creation, and globally dominant corporations that emerged from recent start-ups in a matter of years.

This has been a recipe to serve as a magnet for the world’s best talent further fueling our economy. Recent reports have stated that immigrants both comprise nearly 50% of Fortune 500 CEO’s and over 50% of founders of startups valued at over $1 Billion. This week’s report from the National Foundation for American Policy also mentioned how this is noteworthy, given there is generally no reliable way for foreign nationals to start a business and remain in the country after founding a company.

Moreover, numerous reports are also glaring that the industry is far from diverse or representative, shutting significant categories of entrepreneurs out from access to such pathways to success. Even after a concerted industry effort to diversify in recent years, 78% of venture capital partners are white and 85% are male.

Venture funded companies founded by female, black or Latinx entrepreneurs each remain stagnant in the single digits. Female founders represent less than 7% of venture funded startups, while Latinx founders represented 2% and black founders came in under 2%. Additionally, in the most recent quarter, 80% of California’s venture activity happened in the Bay Area, with 17% occurring in Los Angeles, leaving only 3% to the entire remainder of the state.

We intend to do something about this with our actions today.

And on a final note, a nod to Chair Myer’s former employer.  On this day in 1940, Warner Bros released the Oscar nominated film, The Wild Hare, and introduced to the world a beloved character that would go on to star in hundreds of films and earn a star on the Hollywood Walk of Fame. Happy birthday to Bugs Bunny.

That’s all folks!

Scott Wu

S. Wu Signature