These are interesting times characterized by economic and political uncertainty in the U.S and around the world and yet in the Venture capital (VC) community, the amount of interest and activities to create great companies remain unflappable. I think, there has been a wide agreement among policy makers that venture capital industry is a major contributor of the U.S. economic recovery in multiple aspects and its importance to the U.S. economy cannot be under looked. So who are Venture Capitalist? According to Investopedia, a Venture Capitalist is an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to public funding.

People familiar with VC industry probably understands that it’s an unique asset class with long term investment horizon (8-10 yrs) and high risk. When an investment is made by VCs in any venture backed company (irrespective of its stage), it is an equity investment (it can be debt sometimes but it converts into equity) whose value is essentially zero until the company matures over a period of time and becomes profitable, at which point the company is either looking for IPO or expects to get acquired by other companies. According to the National Venture Capital Association 2013 Yearbook, the number of VC firms in existence has increased from 358 in 1992 to 1,089 by 2002 but was down to 841 in 2012. According to them, the decrease in the VC firms from 2002 to 2012 was due to several shifts occurring in the VC industry such as consolidation of VC firms, leaving of principals, etc. Let’s take a look at how #of deals and amount invested has changed since 2004 in the VC industry. Per graph below, the amount of investments (total dollars) in any given year shows that the total investments has remained in the $20 billion to $30 billion range since 2004 (lowest investment in 2009) with average investment per deal in the range of $6.4 million to $7.4 million.

One of the other interesting graphs (graph #2) is the Silicon Valley Venture Capital Confidence Index (SVVCCI). The quarterly SVVCCI Index is based on an on-going survey of San Francisco Bay Area/Silicon Valley venture capitalists. The Index measures and reports the opinions of professional venture capitalists in their estimation of the high-growth venture entrepreneurial environment in the San Francisco Bay Area over the next 6 - 18 months. The Index is interpreted on a scale of 1 to 5, 1 being the lowest and 5 being the highest. The graph shows that overall confidence in the VC community dipped to a lowest level around financial crisis but has increased since then due to better financial market and better risk/return tradeoff. What’s even more encouraging is that the Index has increased for the past 4 quarters but continues to remain below pre-crisis levels as venture capitalists remain cautious about the global economy and somewhat pessimistic about government policies around investing.

Geographically, California continues to dominate the VC industry in the U.S. Graph #3 breaks down the total investments per year in different U.S. regions. 53% of the total investments made in 2012(highest since 2004) went into California while 12% and 9% went to New England and NY Metro regions, respectively. NY Metro has seen its share of VC investments increasing from 7% in 2004 to almost 10% in 2013 (Q1&Q2) indicating that a lot of VC firms are focusing in that region.

Last but not the least, according to VenImpact 2011 report, although the investment in venture-backed companies equates to approximately 0.1 percent to 0.2 percent of the U.S. GDP, VC backed companies employed approximately 11 percent of the total U.S. private sector workforce and generated revenue of approximately 21 percent of the U.S. GDP in 2010. The recession of 2008 saw employment losses nationally, but less so with venture-backed companies. From 2008 to 2010, as U.S. private sector employment fell 2.6 percent, venture-backed company employment fell by only 2.0 percent — 23 percent less than the overall decline. In terms of revenue compound annual growth rate, while total U.S. sales fell 1.4 percent, venture-backed company revenue grew at 1.5 percent and VC-backed companies outperformed their overall industries in 12 of 16 sectors from 2008 to 2010.  It’s quite evident that the VC industry drives U.S. job creation and spurs economic growth and if U.S. wants to get out of the financial crisis quickly, VC industry will have to play an increasingly important role going forward. That’s why we must continue to invest in companies to continue to drive U.S. economy toward a more prosperous and better tomorrow.