AGILEVC My idle thoughts on tech startups

September 23, 2009

UPDATED: Some corrections below courtesy of my friend and former colleague Keith Rabois. Apple received funding from Venrock, Sequoia, and Arthur Rock. Dell and Oracle got funding from VC Bobby Ray Inman who served on both companies’ boards through IPO, though it’s not clear whether this was a personal investment or from a fund. Also made the Google spreadsheet an embed rather than link for readability.

My post yesterday in rebuttal to criticism of venture capital’s role in building great tech companies was highlighted in Dan Primack’s PEHub First Read. Thanks to those of you who emailed me to share your thoughts, though it seems like at least some folks didn’t actually read the blog entry to realize that I don’t actually think VCs are the scourge of the earth.

I wanted to follow-up as promised on one of the points I made which is that a disproportionate number of what are the fastest growing and ultimately largest tech companies received VC funding somewhere during their company life cycle. While the capital requirements for launching software-based companies have certainly declined in the last decade, to tens or hundreds of thousands of dollars, comparatively few large ones get built without venture capital. In some sectors, like biotech or cleantech, the capital requirements to launch businesses remains rather high.
The best embodiment of this I could think of is the NASDAQ 100, which contains the vast majority of the US’s largest tech companies as well as a handful of global tech leaders. There are some companies in the index from other industries (more on that below), and of course some big US tech companies trade on the NYSE including several big VC-backed ones (E*TRADE, Red Hat). But it’s a pretty decent proxy. Here’s the chart I put together:

As you can see, I exclude some companies which are decidedly non-tech… these include retail, transportation & distribution, energy, manufacturing, and a handful of other sectors. A couple companies in these sectors actually were VC-backed originally (Staples, Starbucks) but they’re not common sectors of VC investment. These non-tech exclusions account for less than 25% of the NASDAQ 100. Also it’s worth noting that I did count tech companies like Expedia and DirecTV even though they weren’t “founded” by independent entrepreneurs, but rather spun out of large corporations (Microsoft, GM/Hughes respectively). The market caps are intra-day values from 9/22/09 – 9/23/09 and I’ve sorted the table in descending order by capitalization.
The bottom line is as follows… 61% of this NASDAQ 100 group received VC backing at some point prior to becoming publicly traded companies. It actually stratifies slightly as you go up the table by market cap. So 75% of the 20 largest tech companies were VC funded, and 9 of the 10 largest. Actually if you were to count Comcast then it’d be 100% of the top 10. Strictly speaking Comcast wasn’t a VC-backed startup, but the founders launched the company and acquired their first small cable system at the recommendation of VC Pete Musser (founder/Chairman of VC firm Safeguard Scientifics). And somewhat ironically, today Comcast is actually a very active player in venture capital through various entities like Comcast Interactive Capital, Genacast, etc.
Put another way, none of the world’s 10 biggest tech companies were built without VC involvement and the overwhelming majority of the NASDAQ 100 companies were VC-backed. Again, I’m not suggesting that the VC investors in all these companies should receive the credit for their creation or that these companies wouldn’t exist had they never raised VC funding. But clearly venture capital has been an enabler of the world’s largest, innovative, and successful technology companies.
I’ll work on the other follow-up, on the scope & nature of the value VCs can add to startup, for another day…

5,499 Responses to “VC Funding of NASDAQ 100”

  1. avatar October 1, 2009 at 10:22 PM

    One conclusion from your data is clear: VC funding is necessary to become a top 100 tech company.

    However, I think the wider issues raised by the TechCrunch article are whether VC funding is necessary for innovation and whether VCs generate positive returns.

    On the latter point, the Kauffman study says no.

    "the venture industry lags the small-cap Russell 2000 Index by 10 percent on a 10-year timeframe, despite the fact that those 10 years include the dot-com period, which materially inflates venture industry performance."

    I'd like to see a lot more transparency into overall VC performance, the performance of specific funds and which types of investments at what quantities deliver the best outcomes.

    Since entrepreneurs only can't "spread" themselves like investors can spread their dollars, another metric entrepreneurs might like to see: characteristics of failure rates as a function of funding levels.

    Jordan Frank


  2. avatar October 2, 2009 at 3:01 AM

    Great post Lee – thanks for doing the leg work. Interesting stuff.

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