Venture-backed Firms Outperform Companies That Don't Receive Funding, Study Shows

Posted by Jacob Serebrin

Companies that receive venture capital outperform firms that don’t, according a new report from Canada’s Venture Capital and Private Equity Association (CVCA) and Industry Canada.

The report, released on Oct. 30, found that venture capital-backed firms had higher survival rates after five years, higher levels of research and development intensity and higher average wages.

“I believe that this study is clear, strong evidence that a venture capital investment is one of the keys for strong growth,” says Peter van der Velden, president of the CVCA.

Unlike previous reports on the state of VC in Canada, which have mostly been survey-based, this report was based on data from both industry sources and government agencies.

“We’ve known for a long time that there is a lot of good anecdotal data,” says van der Velden, but until this study, he says there weren’t empirical numbers. “What we didn’t know is whether the venture capital investment in those companies made a difference,” he says.

Using data from research and media firm Thomson Reuters and Statistics Canada, the study found that VC-backed firms also had a higher survival rate, with 76 per cent of them still in business after five years, compared to an average of 61 per cent for all small and medium sized businesses with over $30,000 in revenue and 62 per cent of all professional, scientific and technical companies.

The study also found that, on average VC-backed companies spent three times more on R&D than other firms.

For firms with less than $1 million in revenue, the difference was even more pronounced. VC-backed companies in that category spent an average of 148 per cent of revenue on R&D. That’s compared to an average, among all companies investing in R&D, of 33 per cent of revenue.

According the study, in 2009, the average VC-backed firm spent $2.1 million on R&D, compared with an average of $629,000 for all companies investing in R&D.

“We always believed that venture backed firms out-preformed non-venture backed firms, but we have our own biases, I think this confirms it,” says Tom Hayes, president and CEO of the venture fund GrowthWorks Atlantic.

The study also compared 544 venture-backed companies to a control group of similar firms that didn’t receive venture funding. For each of the 544 “matched pairs” there was no statistical difference between the two companies “at the time of first financing.”

The study found that the venture-backed companies had much stronger cumulative revenue growth than the non-venture backed companies, with companies receiving VC having cumulative revenue growth of 53 per cent after one year, compared to 29 per cent for the control group. This grew to 107 per cent after five years, for the VC-backed companies, compared to 40 per cent for the control group.

It also found that the venture-backed companies also had more employee growth, with the size of their workforce growing by 51 per cent after five years, compared to four per cent for the control group.

Average wages also grew faster. VC-backed companies saw wage growth of 29 per cent, after five years, compared to 19 per cent for the control group. Overall, the average wage for an employee at a VC backed firm in 2009 was $66,000, compared to the average of across $43,000 all companies.

“This study is tangible, concrete evidence that there is substantial reason for what we do,” says Neil Hill, vice president of fund investments at the Business Development Bank of Canada.

Company:
Canada's Venture Capital & Private Equity Association
Website:
http://www.cvca.ca
Location:
Toronto, Ontario, Canada

The CVCA – Canada’s Venture Capital & Private Equity Association – represents the majority of private equity companies in Canada, with over 1500 members. CVCA members have over $65 billion in capital under management, in three distinct market segments: ♦ Buyout is characterized chiefly by risk investment in established private or publicly listed firms that are undergoing a fundamental change in operations or... more


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Jacob Serebrin

Jacob Serebrin

Jacob Serebrin is a freelance reporter based in Montreal. He specializes in covering small business and the business of tech. His work has appeared in publications including The Globe and Mail and The Toronto Star. Having previously covered higher education and politics, he started covering business almost by accident, but talking to passionate people about interesting things soon had him... more




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