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VC Investment: Then and Now

by ATinNM Sat Apr 27th, 2013 at 02:43:33 PM EST

Been shown fifty ways from Sunday, one of the necessaries for a vibrant economy is the creation of new businesses.  Venture Capital and Angel investors have become the primary way new business ventures are funded.  

I was watching a YouTube talk last night on the early history of Silicon Valley and the lecturer mentioned in passing the top investment for a start-up in the Valley in 1955 was $300,000.

Which piqued my interest and I decided to delve into it a wee bit using wage rates and VC investment as the analytical tool.  (Without a great deal of thought, granted.)

Notice: all data is from US sources.

In 1955 the average yearly salary was $3,851 and the minimum salary was $2,000/yr ($1.00 hour x 2,000 hrs.)  The top VC investment was $300,000.

In 2012 the average yearly salary was $42,980 and the minimum wage was $14,500 ($7.50 x 2,000 hrs.)  In 2012 total VC investment was ~$32 billion spread out over ~3,500 companies for an estimated average (mean) of $9.1 million.

In 1955 the top investment of $300,000 was 77 average yearly salary and 150 minimum salary "wage equivalent" investment.

In 2012 the average investment of $9.1 million was 212 average yearly salary and 1,255 minimum "wage equivalent" investment.


I expected a difference.  I wasn't expecting that big of a difference.

Possible, tentative, conclusions, based on not much, is this could either indicate a steep decline in the relative bargaining positions between Labor and Finance since 1955 or workers in 2012 were willing to trade off immediate return in salary against the expectation (hope) of much greater return down the road, or even a bit of both.  Or it could be a willingness on the part of workers to accept a lower salary for better working conditions - where "better" includes all sorts of intangibles and externalities, e.g., working on the leading edge of a particular technology.  Even given all that, I submit a fairly firm conclusion based on the above can be made: a sharp decline of the bargaining position of unskilled US workers versus their skilled counterparts has taken place since 1955.  

This becomes important since there a lot more hamburger flippers than Computational Bio-informatic Neuro-linguists and an economy based on mass production for mass consumption requires the hamburger flippers to have enough consumer discretionary income to consume, massively.  If the situation is such that overall consumption is dropping we can predict VCs will begin to pullback from investing in new businesses due to the higher risks involved by increasing product availability in a declining product-purchase environment.

Which is exactly what is happening.

"The decline in funding for Seed/Early stage companies is firmly in place - we've seen a drop in dollars and deals both quarter-over-quarter and year-over-year," remarked Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US.  "We're seeing fewer new venture funds being raised which means less capital is available for new investments.  And, we're seeing venture capitalists be very cautious with the capital that is available due to the lack of a significant number of liquidity events.  Instead, venture capitalists are continuing to support the companies already in their portfolio."

Given all this, it seems to me the policy implications are clear.  IF vibrant economy requires VCs to invest and and VCs will only invest if they see a risk-worthy economic environment then:

  1.  Knock it off with the stupid, intellectually vapid, Austerity that removes purchasing power from the hamburger flippers

  2.  Put programs in place that puts purchasing power into the hands of the hamburger flippers

And I have chores to do so I will respond to any comments later.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sat Apr 27th, 2013 at 02:44:35 PM EST
I recall a comment by Montereyan which summarized the sentiments of some California Venture Capitalist circa 1988-90 to the effect that the USA was no longer a place in which to build an industry, and that the best strategy from that time forward was to accept this and simply try go accumulate as much as possible for your family while the decline moved towards some denouement.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Apr 27th, 2013 at 11:41:20 PM EST
If the sentiments Montereyan described are representative of the present situation in the USA then the problem is more basic. We cannot count on traditional capitalism. The USA exited that model sometime in the late 70s to late 80s and now we are in a process of wealth extraction through financialization on behalf of large wealth holders. Worse, the extracted wealth is effectively 'expatriated' via 'globalization' so that it is beyond the reach of national governments and 'the people' they supposedly represent in a manner such that the wealth holders can even remain in the USA if they so desire, while enjoying impunity for almost any of what might, in simpler times, have been considered financial crimes.

But the supposed wealth doesn't really matter. What matters is the mental representations possessed by the majority of national citizens in various countries that legitimate this state of affairs. If enough people come to see just how blatantly we all are being milked and looted by the minions of great wealth there is at least a chance things might change.

We are no longer in a world where venture capitalists play a significant role in positive developments for developed nations. These days VC has to finance more refined wealth extraction. It is thus perverted from its traditional role and, until the current political economy is radically reformed, it will likely stay that way.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 28th, 2013 at 12:03:14 AM EST
[ Parent ]
Absolutely accurate.  We've been busily dismantling our ability to actually produce things for four decades and replacing it with a FIRE economy that can not maintain a necessary level of employment and income.  Forget the burger-flippers, we've even destroyed the skilled trades.  We're on our second, full generation of profound shortages of folks like machinists and pattern makers, and at best we're a generation away from being able to recover.  Our education system isn't built to accomplish it and would have to be completely overhauled.
by rifek on Fri May 10th, 2013 at 12:34:32 PM EST
[ Parent ]
Back in 55, I imagine  lot of investment was in expensive manufacturing plant for which the value was recoverable.

Now, nobody builds anything like that and so the investment is simply for premises, fitting out and computer h/w-s/w. Start ups like that are a lot cheaper

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Mon Apr 29th, 2013 at 11:37:41 AM EST

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