Report: Venture-backed startups own breed

BYLINE: By Barbara Grady, BUSINESS WRITER

They typically build "disruptive" technologies, which means their products turn conventional ways of doing things on their heads. They often don't make any money for years. But after they do get traction, these companies add jobs and grow revenue a lot faster than industry at large.

Venture-financed companies, or companies backed in their early days by venture capital financing, are a breed unto themselves, according to a report by the National Venture Capital Association to be released today.

Only 1 out of every 100 startups seeking venture capital money actually get financed because of the high degree of scrutiny in the venture process, the report said. But those that do outperform industry in general in contributing money and new technologies to the economy.

For instance, job growth among venture-backed companies was 4.1 percent in 2003 through 2005, while job growth across corporate America was only 1.3 percent.

And revenues of venture-backed companies grew 11 percent during those years while revenue from U.S. companies overall rose 8.5 percent.

Companies that got their start with VC financing or currently are financed by venture capital account for $2.1 trillion in revenue, or 17 percent of the U.S. gross national product, based on 2005 statistics. The report studied

23,500 companies that were or are venture backed.

Venture capital financing is money invested by institutions, typically pension funds, college endowment funds and the like, and put in the care of a venture fund manager who then looks for likely high return investments in startups.

"This money funds new ideas thatcould not be financed with traditional bank financing, that threaten established products and services in a corporation and that typically require five to eight years to be launched," said the report, written for the venture capital association by Global Insight.

The report, called "Venture Impact," aims to convince readers of a critical role played by venture capitalists in bolstering the U.S. economy. But do they need convincing? Not in Northern California, home to a concentration of venture-backed companies and to whole industries financed by venture capital. Indeed, 89 percent of employment in software industry and in computer industry are at companies that are or were once backed by venture capital, the report said.

Companies likely to get financing must prove themselves not only with a groundbreaking or "disruptive" concept, but with its management team, size of its market and what value it would add.

"A concept that promises a 10 to 20 percent improvement on something that already exists is not likely to get a close look," the report said.

What are examples of disruptive technologies? Santa Clara-based Intel Corp. was disruptive in its time. Before Intel put the microprocessor on the market, most computer brain power was handled by vacuum tube transistors. In time, the vast majority of personal computers worldwide held Intel microprocessors.

Redmond, Wash.-based Microsoft Corp. was disruptive with its Windows operating system, as was Cupertino-based Apple Inc. by producing a small personalized computer. Once tiny Google Inc. of Mountain View pushed the concept of a search engine that its founders claimed could help "organize all the world's information." It practically has.

So what might be disruptive in 2007?

At the WebVentures conference held in San Mateo this week by Dow Jones/VentureWire, dozens of small companies are talking to investors.

Seattle-based Document Command Inc., which has developed a system to "Webify" paper-based postal mail, created a lot of buzz. Its Remote Control Mail service scans postal mail envelopes for people who travel a lot and sends them images via the Web. They can then choose to have the content scanned, forward the envelope to another address, store it or recycle it.

Blurb Inc., based in San Francisco, allows on-demand book publishing by the creator, complete with an online book store for distribution. Yes, that could disrupt traditional book publishing.