For any quantum algorithm operating on pure states, we prove that the presence of multi‐partite entanglement, with a number of parties that increases unboundedly with input size, is necessary if the quantum algorithm is to offer an exponential speed‐up over classical computation. Furthermore, we prove that the algorithm can be efficiently simulated classically to within a prescribed tolerance η even if a suitably small amount of global entanglement is present. We explicitly identify the occurrence of increasing multi‐partite entanglement in Shor's algorithm. Our results do not apply to quantum algorithms operating on mixed states in general and we discuss the suggestion that an exponential computational speed‐up might be possible with mixed states in the total absence of entanglement. Finally, despite the essential role of entanglement for pure‐state algorithms, we argue that it is nevertheless misleading to view entanglement as a key resource for quantum‐computational power.