26 January 2016

Venture Capital Spending Up 16% in 2015 - And That's Great News for Wages

In 2015, $58 billion of venture capital was invested in the US. [All of these numbers come from the Price Waterhouse Coopers / National Venture Capital Association found here.] This is the highest dollar amount since 2000, and up about $8 billion or 16% from 2014. 2015 VC investments ran nearly double the rate they had run from 2002 to 2013.

Early stage financing rose at a similar rate, suggesting that the pipeline of new businesses is strong. (The companies in this early or seed stage are rarely expanding quickly. Yet. The flurry of hiring and wealth creation - if it happens at all - will typically happen one to four years later.)

Silicon Valley - home of Sand Hill Road, which is to VCs what Wall Street is to brokerage firms - still dominates as a recipient of venture capital. In 2015, Silicon Valley attracted $27.3 billion in VC, far more than LA / Orange County's $5.1 billion and San Diego's $1.2 billion, and nearly half the nation's total VC investment.

Wages nationally in the fourth quarter of 2015 were up 3.3% (inflation was 0.5%), a healthy gain compared to early in the decade. What does this have to do with venture capital? You could argue that the more VC invested, the more upwards pressure there is on wages.

Here, we can look at the latest data by county (which is through the second quarter of 2015), to see if there is any link between the amount of VC investment and wage growth. 

Silicon Valley includes San Francisco, Santa Clara, San Mateo, Marin, and Alameda counties. Among the 343 largest counties in the US, wage growth for these counties was ranked as follows:

Santa Clara, ranked 2nd w/ wage growth of 11.3%,
San Francisco, ranked  5th, w/ 8.6% wage growth,
Marin ranked 9th, w/ 6.6%,
San Mateo, ranked 10th, w/ 6.5%, and
Alameda ranked 19th, w/ 5% wage growth

Silicon Valley, the place where nearly half of VC money was invested, had 4 counties in the nation's top 10 and 5 in the top 20. Again, this is out of 343 counties.

By contrast, 
Orange County was ranked 21st w/ 4.9% wage growth and
LA was ranked 69th w/ 3.6%.

San Diego, a place with considerably less VC money than Silicon Valley and LA / Orange County, was ranked only 105th w/ wage growth of 3.1%. (Although it's worth noting that 105th still puts even laggard San Diego County in the top 30% nationwide for year over year wage growth in that 2nd quarter of 2015.)

This suggests that the more venture capital pouring into a region, the more likely wages are to be pushed up. If so, it's great news for the country that VC spending is on the rise. As this continues, it suggests that - as previously forecast here at R World - the first half of this decade will be known for a big reduction in unemployment rate and the second half of this decade will be known for strong wage growth. This seems further proof that we've entered a Fourth Economy in which the new limit to progress is entrepreneurship. It's not enough to nurture education or capital markets (although that is certainly critical): communities have to nurture entrepreneurship in order to move into the next economy.

Addendum 1:. I think the news is even better than this. I'm currently working with a startup funded by - not traditional VCs but - a couple of Fortune 10 companies. As far as I know, the money they're investing into this particular venture is not actually counted as part of this PWC/NVCA report. In other words, there is more going on than reflected here and as more companies become more entrepreneurial, we'll see even more job and wealth creation.

Addendum 2: While I argue here that venture capital helps to drive wage growth, it's worth noting that the number one ranked county for the most recent quarter is Ventura County, on the California coast just north of LA and south of Santa Barbara. So, maybe I should revise my claim from "venture capital funding drives wage growth" to "venture capital funding - or the name Ventura - drives wage growth." Presumably, if you were really serious about wage growth you'd just name your county Venture Capital County.

No comments: