New jobs vs. VC funding

July 1, 2006

New jobs vs. VC funding

It's been awhile since we wrote about VC funding in Silicon Valley and the hype surrounding it. The issue seemed clear back in January, 2004 when "VC funding soars-- into Glut," found even the VCs admitting there was more money than good opportunities and April, 2004 when "VC funding hype, Chapter 2," showed Silicon Valley's share of global VC funding was flat, even declining.

When "New VC funding vs. jobs," ran the jobs numbers against the VC figures in November, 2004 and found no correlation, we felt VC funding was closed as an issue relevant to the large majority of Silicon Valley residents and watchers.

Judging by the recent re-emergence of VC hype, maybe we should review the numbers again. Even with the dismal performance of a couple tech-related IPOs in recent months (Vonage (VNG) trading 50%(!) below it's $17.25 IPO price), a "buzz" seems to be building again.

First, let's all take a deep breath and review:

US VC Investment ($M, Source: Dow Jones VentureOne/Ernst & Young)

Dollars Deals $/Deal

1996 $9.2B 1912 $4.81M

1997 $13.1B 2211 $5.92M

1998 $17.9B 2547 $7.03M

1999 $49.5B 4590 $10.78M

2000 $94.7B 6322 $14.98M

2001 $36.3B 3274 $11.09M

2002 $22,0B 2395 $9.19M

2003 $19.4B 2177 $8.91M

2004 $22.0B 2273 $9.68M

2005 $22.8B 2315 $9.85M

2006/1Q $6.0B 564 $10.64M

Interestingly, despite all the "buzz" and hoopla, US VC funding is essentially flat over the three-plus years since 2002. If the 2006 run-rate holds up, we might get a 9% increase, which works out to a ~1.74% compound annual growth rate.

We have less than a 2% CAGR in US VC funding since 2002!

Nobody is surprised to see current VC funding far short of the 2000 peak. It is interesting to note dollars per deal in 1Q06 is the highest since 1999, even while total dollars are less than half the 1999 total. VentureOne describes this as a "recovery in valuations." Looked at differently, this indicates over-valuations by VCs matching the over-valuations (aka, lack of return, or lack of "alpha") blanketing the investment universe as a while (most notably real estate). VC cheerleaders might claim we're in a "recovery" or a "new era" but the most accurate term may turn out to be "mini bubble."

Focusing on just the last six years, how has the percentage of VC dollars going into IT tracked?

IT $-Tot % IT #-Rounds %

2000 $59.8B 63% 3665 58%

2001 $23.6B 65% 1940 59%

2002 $13.4B 61% 1401 58%

2003 $10.9B 56% 1303 60%

2004 $12.6B 57% 1394 61%

2005 $12.2B 54% 1315 57%

2006* $13.5B 56% 1308 58%

*- run rate

VentureOne shows total number of IT VC deals is holding share but IT is down 7 share points (11%) in dollars. This may be worrisome but does not stand out as symptomatic of a looming catastrophe.

How is Silicon Valley's share of VC investment holding up?

>---- Silicon Valley ----<

Tot US Dollars Deals Dollars % Deals %

2000 $94.7B 6322 $33.6B 35.5% 1931 30.5%

2001 $36.3B 3274 $11.8B 32.5% 871 26.6%

2002 $22.0B 2395 $7.5B 34.1% 679 28.4%

2003 $19.4B 2177 $6.8B 35.1% 692 31.8%

2004 $22.0B 2273 $8.2B 37.3% 767 33.7%

2005 $22.8B 2315 $8.1B 35.5% 779 34.1%

2006/1Q $6.0B 564 $1.9B 31.7% 172 30.5%

Silicon Valley's share of total US VC dollars was down in 1Q06 but this is not yet obviously significant. Our local share of the number of US deals is exactly unchanged. In other words, Silicon Valley is still getting a lot of, and a large percentage of, VC dollars.

At the end of the day, the only reason any of this matters to the average person is if VC funding increases local employment? Just like Sacramento politicians rushing to spend up the recent spike in tax revenues in favor of their chosen speciual interests, what's in it for me? If VCs are spending more money, and Silicon Valley is holding share, shouldn't we be gaining jobs?

Conveniently, we have 10-year data on both figures:

Tot US Dollars SV Jobs *

1996 $9.2B 859.6K

1997 $13.1B 901.2K

1998 $17.9B 922.3K

1999 $49.5B 929.3K

2000 $94.7B 910.3K

2001 $36.3B 891.5K

2002 $22.0B 815.8K

2003 $19.4B 779.1K

2004 $22.0B 774.1K

2005 $22.8B 778.7K

2006/1Q $6.0B 773.0K**

*- "annual average" as tracked by CALMIS (.xls)

**- through May, 2006

A couple points stand out:

1) Total jobs are down -10% from 1996, while VC funds are at 2.6x 1996 levels.

2) Total jobs are down -15% from 2000, while VC funds are 0.25x the 2000 rate.

The lack of correlation of local VC spending with local jobs is a combination of:

1) VC funding mainly induces people to leave their current jobs to work at VC-funded jobs, and

2) VC-funded start-ups are partially offsetting on-going off-shore outsourcing and general lay-offs plaguing Silicon Valley tech workers.

Conclusion:

There is nothing new in VC funding.

Is VC funding up? yes, but only at a ~1.74% CAGR since 2002.

Is Silicon Valley's share of VC funding holding up? yes, our share of total US VC deals and dollars is reasonably steady

Is VC funding important to the valley? yes, of course!

Is VC funding relevant to the average Silicon Valley resident? surprisingly, the data says, "No!"

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The above is not intended as advice to buy, sell or hold any stock, bond, real estate nor any other financial product or service. Invest at your own risk.