Orange County has a big problem—if not the biggest—we are not creating enough high-paying jobs to enable more people to afford our soaring housing costs.
One result of this is an out-migration of talent from the area, according to “Orange County Focus: Forging Our Common Future,” a research paper I wrote along with Joel Kotkin.
In searching for solutions to the problem, I asked myself: How are good-paying jobs created in the private sector?
There are three ways:
• Established companies grow and invest in more people;
• Early-stage companies are created which bring initial payrolls and, if they survive, add more people relatively quickly;
• Entrepreneurs move here from other areas.
As a general trend, larger, more established companies are not adding to their higher salary payrolls. They are more focused on using technology to scale without adding people. Because of competition, they are usually trying to optimize their cost structures and are more likely to be reducing their workforces than expanding them. And, if they are expanding, they are more likely to do so in lower-cost, more business-friendly areas of the country or overseas.
However, smaller, early-stage companies are more likely to expand their OC payrolls because they typically do not yet have the scale to afford a more geographically-dispersed infrastructure. Their management teams need the proximity to each other to effectively run the company.
In our research, we heard from OC entrepreneurs that early-stage venture capital is critical for making that local expansion happen. We interviewed chief executives who bemoaned the lack of early-stage capital in OC.
Is that perception borne out in the data? I decided to compare Orange County to Austin, Texas, a market where a lot of high-paying jobs have been created to see if early-stage venture capital availability played a role in job creation.
Why Austin?
Because it, like Orange County, has a longtime reputation for technology innovation. While Austin has about a million more people than the OC, both areas have strong cultural and educational amenities.
With the help of Ted Wilm of PricewaterhouseCoopers LLP and his firm’s PwC/CB Insights MoneyTree Report, I found each market has seen about $1 billion a year invested in total venture capital deals for the past 11 years.
However, Chart 1 shows Austin funded twice as many companies as OC. Moreover, Chart 2 demonstrates that the mix of VC investment is tilted more heavily toward early-stage deals in Austin versus OC. We define an early-stage investment as where the business model isn’t fully established while a later-stage investment is in a business that has an established model and capital is used to expand.
The result of this skew toward early-stage VC funding, using Bureau of Labor Statistics data, is that Chart 3 shows how Austin has created three times as many companies and four times as many high-paying business and professional services jobs, which includes software development, than OC.
What makes Austin so successful in building early-stage capital? In addition to the favorable business climate in Texas, there are three reasons why Austin is succeeding in this arena:
• First, the wealth created among the employees of large, Austin-area tech companies, notably Dell, is being recycled into new ventures;
• Second, homegrown early-stage VC funds, spinning out of the highly successful Austin Ventures, have created a winning culture of venture investing;
• Third, a strong public-private coordinated effort to promote Austin as one of the most entrepreneurial places in the nation is creating awareness for the region.
The obvious question is if OC devoted more of its VC funding to early-stage ventures, would it see the creation of high-paying jobs like Austin does? Could it fund more indigenous business ideas and bring more early-stage ventures to the county?
Based on the experience of OCTANe and its LaunchPad accelerator, the answer seems to be yes.
LaunchPad has been funding early-stage deals for a decade with 86% of the 491 companies in its program receiving investments. From 2010 to 2017, those companies have created 10,203 high-paying jobs, a number audited by Deloitte. OCTANe’s Chief Executive Bill Carpou believes an additional 50,000 to 75,000 high-paying jobs could be created by 2030 if $1 billion in locally-based diversified venture funding could be raised here.
OCTANe’s Visionary Ventures fund has shown promising returns that outpace those of OC’s traditional asset class of choice: real estate.
Comparing venture returns to real estate returns is important because as we noted in the Orange County Focus report, most of the wealth created in Orange County has come from real estate investing.
Venture capital investments are seen as riskier. To raise a $1 billion fund—suggested by OCTANe—would require OC investors to change their investment behavior. Financially, it appears the returns are there. And, certainly, the wealth is here. However, beyond returns to investors, returns to the county’s economy and positive impact on the future appear to be even greater.
Becoming a serious player in early-stage venture capital will not only create high-paying jobs we need, but will provide a platform for Orange County to compete successfully in the future. If we do not provide our own innovators with capital, they will be forced to locate their companies elsewhere and we, as a county, will miss out on the economic growth.
Editor’s Note: Marshall Toplansky, a research fellow at Chapman University’s Center for Demographics and Policy, co-founded Wise Window, an analysis company acquired by KPMG where he was a managing director.
