Venture Capital Takes On Foreign Flavor

Finding the next Google may mean looking overseas.
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Every investor dreams of getting in early on the next

Google

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-- the start-up that takes the world by storm and delivers returns a hundred times over.

Increasingly, it's looking like they should start their search overseas.

That's the message that lurks between the lines of a report commissioned by the National Venture Capital Association. The study illustrates the role that immigrants have played in building the engine of innovation that has powered the U.S. tech industry and delivered bounteous fortunes to the investors who backed them.

The report, using data from Thomson Financial that looked at birth countries of venture-backed founders whose companies went public in U.S. markets, received scant press attention when it was released earlier this month.

That's probably because the report is clearly aimed at convincing Washington to increase the number of H-1B visas, which are issued to foreign-born residents with the equivalent of a U.S. bachelor's degree or higher. And also because, anecdotally, it's not exactly news that some of Silicon Valley's biggest successes -- from

eBay

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to Google to

Intel

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-- were born overseas.

But the authors of the report have done their homework with great care and produced data showing that not only is the number of venture-backed start-ups founded by immigrants larger than one would expect, that number seems to be increasing quickly over time. At least, until now.

Before 1980, only 7% of the venture-backed companies that made it public were founded by immigrants. That ratio jumped to 20% in the 1980s and then to 25% in the 1990s. Those companies have in turn created 400,000 jobs and a half-trillion dollars in market value.

A survey of private, venture-backed start-ups in business today showed that nearly half -- 47% -- had immigrant founders, the report said. By contrast, legal immigrants account for 9% of the U.S. population.

Successful entrepreneurs are a one-in-a-million mix of several traits: technical expertise, strategic thinking, bullheadedness, risk-loving and the passion to stick with a vision until it succeeds. They are born in every country, but thanks to the risk-friendly culture of U.S.-style venture capital, they have been gravitating for years to the U.S. in general and Silicon Valley in particular.

But that's starting to change for a few reasons. Venture capital is taking root abroad -- notably in the U.K., Israel and China. Education in those countries and elsewhere is starting to rival that of U.S. universities.

And then there is what some consider to be the scarcity of work visas for highly skilled foreigners.

The NVCA is pushing for a bill that would increase the number of H-1B visas by 20% a year until it reaches a proposed maximum of 125,000, up from the current ceiling of 65,000. The visas are controversial not simply because they're caught up in the broader debate on immigration policy but because, as critics charge, they take jobs away from trained U.S. engineers.

The report issued a few counter-arguments to H-1B critics. Two-thirds of companies surveyed that use H-1B visas said "current U.S.immigration laws affecting skilled professionals harm American competitiveness." One-third of private, venture-backed companies said a shortage of visas had helped prompt them to hire more workers abroad.

The study also cites data from the National Science Foundation that first-time enrollment in U.S. science and engineering graduate programs has declined by 20% to 27,486 in 2004 from 34,179 in 2001. That would suggest that the universities that have served as incubators for start-up founders are attracting less talent.

But most compelling is the scenario that is only implied by the report's data and findings: If immigration barriers prevent young entrepreneurs from building a start-up in Silicon Valley, they'll find a way to do it overseas. U.S. venture dollars will likely find them there, as will the customers who take to their products and services and-- ultimately -- the jobs that will be created.

In that case, the U.S. will be exporting one of its most precious resources -- the start-up that can churn out high-paying jobs while creating technology that lowers prices for consumers.

And that will make spotting the next Google a lot harder than it would have been had it planted its seeds in Silicon Valley.