Do start-ups increase in proportion to the availability of venture capital? Nope.  Kaufman Foundation researchers Dane Stangler and Paul Kedrosky dispel that myth as well.  The authors note that the doubling of start-ups from the period 1960-1978 to the decades since may indeed have been due to the advent of the personal computer and the expansion of the venture capital sector.  (One wonders if the baby-boomers coming of age may not have contributed to this step-change as well.) However, the constancy of recent start-up data belies the influence of venture funding.  Start-up activity fluctuated by only 3% to 6% each year between 1977 and 2005; but the data shows that venture investment varied by as much as 500% during the same period.

Do tax or bankruptcy law changes, technological advances or entrepreneurship education affect the number of new ventures? No again!  The report, Exploring Firm Formation: Why is the Number of New Firms Constant? also finds no correlation between start-up activity and tax policy or any of these other factors; so much for the theories of our most vocal politicians.  Instead it documents the same steady half-million start-ups per year, give or take a 3 to6 percent.  The authors discuss a few possible explanations for the unexpected constancy, some rather arcane, but they do not seem to buy into any of them.

Common sense suggests that certain of the factors discussed in the Kaufman report must have at least some influence on the number of start-ups, even if they do not affect substantially the total for a given year.  For example, limited amounts of available venture investment must surely delay some particular start-up decisions.  I have been involved in a few such decisions.  Similarly, high interest rates and tight credit must also have an effect on many decisions, especially those involving sole proprietorships and mom-and-pop operations.  So perhaps a study with greater granularity would reveal that while the total number remains relatively constant, the mix of start-up types changes, maybe even substantially.  Perhaps in recessions when venture funding declines, a fall in interest rates turns entrepreneurs toward credit sources.  It could also be that more innovation-based entrepreneurs test their business innovations when the economy is booming, and that more laid-off workers start enterprises when unemployment is high during recessions.  I suspect that the “mix” of different kinds of start-ups changes a great deal even though the total number may not change much.

The Stangler and Kedrosky study does not encompass the current Great Recession, of course, it is too soon.  Yet surely this anomalous economic epoch will surely add some telling figures.  The investment portfolios of the wealthy individuals and institutions that comprise the limited partners of venture firms declined substantially since 2007 and venture investment has fallen by 40% or so since then.  At the same time, credit tightened historically and unemployment soared into double figures.  Will start-up totals for this period continue the constancy that Kaufman reports?  And if not, how will it vary?  Will the limitations on available capital drive start-up numbers down, or will necessity and cheap assets power them up?  Or will past constancy persist despite alterations in the mix?  Only a study based on more granular data could reveal that.  I doubt that such data is available or could be economically derived, though that information could prove useful to an economy so reliant on small businesses to create jobs.

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A panel discussion of prominent Boston VCs held on Boston’s Beacon Hill answer with a qualified “no.” The distinguished panel included Jonathon Seelig of Globespan Capital Partners, David Aronoff of Flybridge Capital Partners, and Larry Bohn of General Catalyst Partners with several other prominent venture capitalists and angel investors attending and participating in the discussion. They painted a somewhat more nuanced picture of the 2009 outlook. Here are some of the points I took away.

• CalPERS notwithstanding, the vast majority of venture limited partners (LPs) – the primary source of VC investment money – will continue step up to their contract commitments to fund future rounds. CalPERS is a special case with vast market power.
• Over the last decade, despite historically high levels of VC investment, returns have lagged. Most LPs, like the rest of us, are heavily invested in depressed equities and sitting on the venture sidelines for now.
• Whether a particular VC firm has capital to invest in A-rounds depends in large measure on when they raised their last fund from LPs. The situation varies considerably from firm to firm; some have substantial amounts remaining to invest, others have cancelled new fund-raising for now.
• Several VCs agreed that they are more likely to cut off funds to their under-performing portfolio companies, to avoid “putting good money after bad” than to stop investing in new opportunities entirely.
• Tight money means lower valuations, stricter scrutiny of risk and more smaller deals in the $1 million to $3 million range – with syndication of even these deals.
• The VCs in attendance continue to seek cleantech opportunities (though the precise definition remains elusive) as well as selected life sciences and communications ventures.

For Boston entrepreneurs, the message is mixed. Substantial venture capital remains available for initial funding of start-ups, though conditions are less than ideal. Start-ups must compete for initial funding and expect somewhat lower valuations and tougher terms. Competition for ongoing funding in later “go-to-market” rounds may be sharper too. The best startups with well-researched business plans, experienced managements and promising prospects still have a fighting chjance in 2009.  If you are one of those, look for VC funding with genuine value-added funding, such as connections to key customers, suppliers, advisors and experienced executive staffing. You may well need that help. Good hunting.