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June 29, 2020

Venture Capital as an employment generator

Andy Areitio

Venture capital investment as an activator for next-generation employment

Venture capital (VC) is a form of private equity financing that provides funds to companies with extraordinary growth potential in their early stages. This industry, relatively new in Spain, has been operating in the United States since the late 1940s. A Frenchman, the extraordinary George Doriot, a Harvard professor and founder of INSEAD, was the pioneer who created the first investment firm with such features.Since then, the impact of this industry on the American economy has been extraordinary. Since 1975, 40% of the jobs and 60% of the taxes of companies listed on the American stock exchange came from companies that had received venture capital financing. And, even more striking, 85% of the funds for research and development of listed companies were from companies with such investment.

Companies on the American stock exchange that have had VC investment since 1975

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Source: “The Economic Impact of Venture Capital”, Gornall & Strebulaev, Working Paper, 2015[/caption]In Europe, the sector has developed strongly in the past decade, especially in Northern Europe. In Spain, venture capital is in good health compared to five years ago. However, if we look at the per capita venture capital investment of European partners such as the UK, Germany, France, the Netherlands and the Nordic countries, the picture is discouraging.

Investment in Venture Capital per Capita in Europe 2019

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Source: Dealroom, Sifted[/caption]Some readers may think that perhaps in Spain there is less investment by venture capital because there is not enough ambition or entrepreneurial talent in these geographies. Let's look for the answer in the numbers ̶ let's measure Spanish entrepreneurial talent and ambition as the number of unicorns (startups with a value of more than 1 billion euros) that our country is capable of generating with the current investment per capita, and let's compare that number with that of the Netherlands, Sweden or France.In 2019, Spain had a total of 7 unicorns, the same number as the Netherlands. However, Spain has one third (⅓) more venture capital investment per capita than the Netherlands. Let's look at Sweden, higher up in the ranking. This country has nine (9) times more venture capital investment per capita than Spain but only 11 unicorns, 4 more than Spain.It seems that Spanish entrepreneurs do more with less. It is no surprise to me that, with more than 3,000 startups in Spain by 2019, the European private equity analysis firm, Dealroom, is betting that Madrid and Barcelona will have twice as many unicorns as Amsterdam and Stockholm.Therefore, Spain has the potential to create more successful venture capital businesses, thus creating more high-value employment. But in order to do so, it is first necessary to bring the level of investment to the average levels of Europe.Such high-value employment will not come only from successful startups that become unicorns. Those thousands of startups that fail also generate employment during their lifetimes, and many of those failures generate huge new successes. The European Commission has already understood the long-term importance of this sector which, in 2019 alone, generated 2 million quality jobs. Hopefully the Spanish government, whatever color it is, will soon understand this too.

Startup jobs in Europe by city in 2019

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Fuente: Dealroom, Sifted[/caption]If anything characterizes entrepreneurs, it is their ability to achieve goals with very limited resources. But a determined plan like the one set forth by the UK or France to support their startups can have an impact on quality employment for the next generation of Spaniards. Why should we be left behind when we have talent and ambition?

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