The Rise and Fall of Venture Capital

Small firms and new business creation have become potent forces of economic development in the United States. Prior to 1980, large firms created the majority of new jobs in the American economy. During the last decade, however, a major structural shift occurred. Fortune 500 companies lost 4 million jobs. At the same time, firms with fewer than 100 employees added 16 million new jobs [Birch, 1990]. This was the first time in the 20th century that the shift from large to small firms occurred and it represented a fundamental change in the nature of growth in the American economy. During the same ten year period, the rate of new firm incorporation rose dramatically. By the end of the decade, over 1.3 million new businesses were being started annually. Scherer [1991] demonstrated that during the 1980s, small firms were more innovative than large firms. He found that during the 1980s, firms with fewer than 500 employees created 322 innovations annually for each million employees while large companies contributed only 225 innovations per million employees.