Venture capital (VC) has financed a fifth of US companies currently listed on US stock exchanges. As VC investing is generally associated with innovation, and innovation with economic growth, the common conclusion is that VC investing is a determinant of economic growth and employment. Along these lines, public policies have been adopted to support VC investing. The results were rather mixed, notably because innovation does not happen in isolation: it is the result of the combination of multiple economic, political, cultural and financial factors. VC funds are only one factor, among many others, leading to the successful aggregation of these factors into innovation clusters (of which Silicon Valley is the most emblematic).

The impact of VC investing on employment and economic growth is difficult to measure. The “creative destruction” associated with technological innovation and economic growth also implies that innovative products and services destroy and replace existing ones. Therefore, VC investing, through the financing of innovation, contributes to both creation and destruction of economic activities. Moreover, the relationship between innovation and VC investing is complex. In particular, innovation (regardless of the way it is financed) generates spillover effects, which are difficult to identify, measure and attribute, as they tend to be diffuse.

Assessing scientifically if and how VC investing influences GDP growth is also difficult because the analysis would span multiple decades. The hypothesis, according to which, “VC investing is a determinant of GDP growth”, can only be observed and tested when initial investments have matured, some of them becoming in the process major economic players. This triggers a different question: what is the relationship between VC investing and GDP growth in the short term? Said differently, knowing that VC investing could influence GDP growth only over the long term, does GDP growth have an influence on VC investments over the lifespan of funds (usually 10 years)?

This question is of particular importance for investors in VC funds (limited partners, or LPs).
Indeed, when macro-economic conditions are favorable, each active fund benefits from them. Thanks to high quality data provided by Pevara, it is possible to try to assess if VC fund performance is affected by GDP growth. By doing so, this issue could contribute to the debate about the value creation of VC fund managers (general partners or GPs).

Table 1 – Aggregated benchmark pooled return metrics of early-, later- and balanced-stage American VC funds (1992-2011)

Table 1 – Aggregated benchmark pooled return metrics of early-, later- and balanced-stage American VC funds (1992-2011)

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