Part One of a Two Part Series

It’s been almost six years now since Arif Naqvi’s Abraaj Group provided £4 million to fund the first Master’s program in private equity in the world. It was a bold endeavor. In September 2010, when the MSc Finance & Private Equity program was launched at the London School of Economics and Political Science (LSE), Naqvi’s alma mater, the world was still in the grips of the Great Recession.

In a recent discussion Professor Ulf Axelson, the inaugural Chair of that MSc program, who is also Director of the LSE’s Financial Markets Group, mused on the state of the venture capital industry in Europe with four leading practitioners. The event was chaired by Felda Hardymon, a senior partner at Bessemer Venture Partners (BVP), the venerable VC firm founded in 1911 who, in his opening remarks, reminded the audience, consisting of practitioners, academics and students, of VC’s momentousness.  “In the U.S., eleven percent of all private sector jobs are in venture-backed companies. That’s an astonishing number. What’s more astonishing is that twenty-one percent of U.S. GDP comes from venture-backed companies… So the only job creating machine in our economy that has been reliable over the last forty years is venture capital dollars… a thriving innovation economy financed by venture capitalists makes a difference.”  Notably, some of BVP’s top exits include LinkedIn, Skype, Yelp, Veritas and Staples.

Prof Axelson followed up on Mr. Hardymon’s preamble, observing that the spillover effects of innovative firms is truly enormous. Every dollar that an innovative firm captures in profits results in five dollars to other firms. Groundbreaking enterprises must naturally spend to sustain their operations. In addition, other firms imitate the leader by either getting into the same business or applying the knowledge to another line of business. And most amplifying of all, is the economic ecosystem that develops around innovative firms as they become bigger.

There are three levels to a successful VC industry, opined Prof Axelson. There is, firstly, a need for entrepreneurs with good ideas who dare to act on those ideas and ‘start companies and actually know how to grow those companies’. Secondly, there is a need for VCs with expertise in measuring risk; that is, VCs who can pick winners and who can, in addition, provide effective monitoring to ensure fledgling companies get the nurturing to develop. Thirdly, there must be exit opportunities, either through the capital markets or by a trade sale to a larger company.

At all three levels, the European VC industry has been indicted. The first charge is an old and imputed one. By singling out the spirit of enterprise exhibited by Northeastern Americans in the 19th century, Alexis de Tocqueville in his seminal On Democracy in America was suggesting Europe’s dearth thereof. The reproach persists today. It has been suggested that the entrepreneurial spirit is lacking in Europe, that Europeans are more risk-averse than Americans, that in Europe there is more stigma attached to failure and, therefore, less tolerance for it.

However, part of this perception may stem from the tendency of European entrepreneurs to hold on to their businesses. They are less likely to sell and start again. Therefore, the ‘serial entrepreneur’ as a class has not emerged in Europe as it has in the Silicon Valley. This community of serial, or experienced entrepreneurs, in America forms a valuable resource into which VCs can tap for expertise and contacts. Just as importantly, serial entrepreneurs become heroes, role models and mentors to others. And as expected, any community of successful people emanates an aura of elitism which attracts aspirants and causes the community to multiply.

The battery of allegations is rounded out by the claim that European VCs are staffed by banking and finance types who lack the entrepreneurial mindset and are therefore unable to assess either the risks or the entrepreneurs.

…to be continued…

A podcast and video of the discussion is available here.


Friday’s employment report out of the Bureau of Labor Statistics (BLS) showed a white-hot American labor market.  June’s employment growth jumped +287K, a gigantic jump from the +38K of the prior month.

In looking at financial industry employment, the picture is certainly strengthening as well.  During June, financial industry employment gained 16,000; for the year so far, the industry is up about +90K jobs.  Healthy, but not “bubbling.”

Interestingly, employment in the sector is still about 120K away from its all-time high of about 8.4 million at the end of 2006.  It’s getting there, just perhaps too slowly for an industry used to fast ups and downs.

How do the data look by sectors?  This detailed look follows.

Financial Activities Source: Quandl, Bureau of Labor Statistics

The Four Broad Sectors the BLS Releases

The BLS reports four non-insurance, financial industry sub-sectors.  These sub-sectors are monetary authorities (i.e. central banks), depository credit intermediation (i.e. banks), commercial banks, and securities, commodity contracts, investments, and funds and trusts. We’ll take a look to see which of the four is performing the best.

Monetary Authorities

Beginning first with the devils, also known as the central bankers.

The picture of employment at central banks isn’t pretty.  Employment at America’s central banks peaked in mid-2003 at about 23K.  Since the post-technology bubble peak, employment at monetary authorities is down about 5K to just under 28K.

It also doesn’t look like employment at central banks is going to make a roaring comeback anytime soon, having been in a growth rut for the past couple of years.

Monetary Authorities Source: Quandl, BLS

Depository Credit Intermediation (Banks)

Shifting now to the entities most individuals think of as the definition of financial – banks.  Overall, the view over the past 16 years is pretty sobering.  The sector had a strong run-up prior to the housing market collapse, and since has had a difficult time recovering the jobs lost.  With that said, and acknowledging that the industry is still 140K jobs under water compared to its all-time peak, growth is beginning to come back.

Through the first half of 2016, banks have added jobs.  Not amazing, but moving in a growth direction.

Depository Credit Sources: Quandl, BLS


Commercial Banks

Moving to commercial banks, here’s how they look.

The picture is similar to the retail banking picture above.  Recently, there’s been some sign of life in the sector, but certainly not a strong pulse.

Commercial Banking Source: Quandl, BLS

Securities, Commodity Contracts, Investments, and Funds and Trusts

Lastly, to the investment universe.

Interestingly, of the four sectors addressed here, the strongest of the four is securities, commodities contracts, investments, and funds and trust.  Employment in the industry has already past its peak employment peak, and the sector is showing no signal that growth is going to slow down.

Securities Sources: Quandl, BLS


Overall, although growth is certainly not even across the financial industry, employment of financial professionals is coming back.

Of the four “detailed” sectors the BLS releases data on, the strongest is the securities, commodities contracts, investments, and funds and trusts, with the sector already past its prior business cycle peak. It is the only sector that can boast such an accomplishment.


The venture capital industry is connected with many edges of the global economy. One area that’s experienced a shift in venture capital’s importance is banking.

Question: Would you guess that revenue from venture capital investments is growing or declining in relevance on banks’ balance sheets?  Here’s the look.

Savings Institutions

Savings institutions are entities that simply take deposits, invest the deposited money, and pay interest to depositors. Interestingly (and perhaps a little sad), venture capital investments as a source of non-interest income for savings institutions has virtually evaporated over the past 3 years.

Venture capital income to savings institutions peaked in the fourth quarter of 2008 at about $79 million. Since that 2008 peak, venture capital income collapsed, bottoming at -$27 million in the third quarter of 2009.

Venture capital income experienced a minor resurgence in the subsequent economic recovery, peaking in the fourth quarter of 2010 at about $53 million. Since that 2010 peak, savings institutions have shown virtually no profit from venture capital investments.

Savings Institutios' Connection to Venture Capital Source: FDIC

Commercial Banks

Now, shifting to commercial banks.  Before looking, would you guess a similar trend would emerge for commercial banks?  Or, perhaps commercial banks are  less risk-adverse and such, risk taking might show up as increased income from venture capital investments.

Interestingly, a different picture emerges.

Contrary to savings institutions, income to commercial banks from venture capital investments peaked 3 years earlier in the fourth quarter of 2005 at $729 million (perhaps commercial banks foresaw the housing bubble sooner than the savings institutions).

Revenue from venture capital investments precipitously declined following the housing bubble bursting, bottoming in the fourth quarter of 2009 at a loss of $109 million. Since that bottom, venture capital income to commercial banks has very gingerly regained some ground.

The most recent measure puts the venture capital income to commercial banks at $106 million.  A long way away from the hay-days of 2005.

One clear observation seems reasonable.  There’s a long way to go for commercial banks to make money on venture capital before anyone can mention a venture capital bubble.

Commercial Banks' Connection to Venture Capital Source: FDIC


In the past few years, we’ve seen a shift in the importance of venture capital to banks’ revenue streams.

When looking at commercial banks, venture capital is slowly reviving its importance as a non-interest revenue source.  They are still a long way from the technology bubble of the early years of the century, but moving in that direction.

The picture is quite different for saving institutions.  Venture capital’s importance as a non-interest revenue source has practically disappeared.


Which President Was the Best for Venture Capital?

June 14, 2016

It’s presidential election season.  What better time than now to ask which president since 1985 has seen the strongest venture capital performance during his administration? (Note: the choice of 1985 is based purely on availability of reliable data.  If further historical were readily available, it would have been included in this article.) Within this period are […]

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Can You Guess the Top 10 Venture Investors and Accelerators?

May 30, 2016

If there’s anything the venture capital and private equity world is for sure, it’s that at the sectors are competitive, uber competitive. Can you guess which entities come out as the most active?  Here’s a look. Accelerators First, a look at the top accelerators.  The first graph is a look at the top 10 accelerators since […]

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What Does the Recent IPO Weakness Mean for 2016 Bonus Pay?

May 16, 2016

Last year was a relatively rough year for IPOs.  According to Renaissance Capital, IPOs in 2015 were down over 30% from their 2014 level. The start of 2016 doesn’t appear to be offering any sort of relief anytime soon.  The IPO market is in a deep freeze. The question here is – what does the […]

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Looking at the Private Equity Compensation Picture

May 3, 2016

Every now and then (perhaps more often if you work in the financial industry), one should take a look at the compensation picture and compare how one is doing to others working in the same universe. Each year, Job Search Digest conducts a comprehensive survey of private equity and venture capital professionals to reveal insights into […]

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SEC Thinks Its Valuations Are Better than Private Equity Professionals’

April 25, 2016

If you pay fairly close attention to financial regulation news, one topic showed up frequently last week.  The topic – private equity and venture capital valuations and the SEC’s chair Mary Joe White’s belief that valuations may be approaching bubble territory. Her comment, while speaking at Stanford University: “In the unicorn context, there is a […]

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CEO Pay: Does the Financial Industry Win?

March 21, 2016

There is perhaps no more contentious issue that compensation.  The contentiousness becomes even more heated when discussing CEO pay. Question – which industry has the highest paid CEOs? Here’s a look at average CEO pay and CEO pay growth by industry according to recently released figures by Pitchbook. Before looking, which industry would you guess wins?  Finance?  […]

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Was 2015 the Bonus Peak or Will 2016 Surpass It?

March 7, 2016

In the private equity and venture capital world, as with most any other industries, money talks.  More so than in most other industries, in the private equity and venture capital industries, money not only talks, but often controls the conversation. The current discussion point here is – can 2016 bonus pay beat what appears to […]

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