The Economic Impact of Venture Capital
Business Options 
Manila Bulletin

July 18, 2002

        A study commissioned by the National Venture Capital Association (NVCA) in the USA has confirmed that the venture capital industry has played an essential role in nourishing the U.S. economy both in good times and bad. Following are some of the important findings of the study:

Venture capital backed companies contributed nearly $1.1 trillion to the U.S. gross domestic product, and employed 12.5 million people, corresponding to 11% of U.S. GDP and employment in 2000.
Venture capital backed companies generate more sales, pay more taxes, generate more exports, and invests more in research and development (R & D) than other public companies.
Venture capital disbursements are concentrated in some states. The study shows a strong correlation between venture capital activity and high gross state product per capita, high wages, productivity growth, and patents granted.
Venture capital requires a knowledge-intensive, educated, skilled workforce that can readily shift from declining industries to those in emerging ones.

        The reason this study is being quoted is to emphasize the importance of being attuned to the best global practices that may be replicated, not blindly, of course, in support of local small and medium enterprises. Truly we have lagged behind in this area and it is high time some serious effort goes into planting the seeds of a Philippine venture capital industry.

        What is involved in venture capital? The NVCA lists some of its key characteristics:

Venture capital addresses the funding needs of entrepreneurial companies that do not generally have the size, assets, and operating histories necessary to obtain capital from traditional sources such as capital markets and banks.
Venture capitalists are not passive financiers. They exercise hands-on involvement in management, strategic marketing and planning. They invest in management and employees through equity financing with stock options as a motivating tool. The are entrepreneurs first, and financiers second.
When an investment is made, a percentage ownership in the company is given to the venture fund in exchange for the capital invested. The expectation is that some of the investments will prove to be extremely profitable even if others might fail.
Many venture capitalists point out that a number of successful companies ended up with a business or product model different from the original business plan. This morphing of a business from a fledgling start-up to a successful company is a key role of the venture capitalist.

        Small business enterprises are typically risky. Statistics worldwide have shown that as entrepreneurs start new companies, not many will pass the test of time and of the marketplace. Over time, even the more successful companies find it hard to sustain its top positions. It is in this light that small business finance, especially of the start-up variety, meet stiff resistance from traditional fund sources.

        A market economy needs fund sources willing to invest in innovation. This is where venture capital becomes key. For the business of venture capital is high risk, high return. Venture capitalists mitigate the risk of venture investing by developing a portfolio of young companies in a simple venture fund. By handling a portfolio, the few successes will answer for the many failures. The fact that the venture capitalists share in residual income, i.e., profits, which can be boundless, account for the upside returns out of the investments.

        So the key question is – what will it take for a developing country like the Philippines to spur the growth of venture capitalists? We will try to answer this in future columns. In the meantime, we need to agree unanimously that such an industry deserves to be developed in the first place. And one can only look at the progress of states like California, Massachusetts, New York, Texas, Colorado and such companies as Federal Express,, Yahoo!, AOL Time Warner and Starbucks to proclaim we need venture capitalists in our country.


(Mr. Benel Lagua is the President of the new Small Business Guarantee and
Finance Corporation. He is likewise active in the FINEX led Foundation for
Filipino Entrepreneurs. Feedback and comments are welcome at


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