Large Institutional Investors and Venture Capitalism: Un-Creative Destruction?

Robyn Klingler-Vidra, Juergen Braunstein

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The recipe behind the Silicon Valley success story is more complex that a Betty Crocker cake mix: you can’t just “add water” or, in start-up terms, “add money”. It was not simply American risk-taking, nor was it only the military industrial complex, or the availability of investors. Silicon Valley, which has become the posterchild of Schumpeterian innovation and entrepreneurship, is the confluence of a number of historical, cultural, industrial and governmental factors. Is it enough to throw huge sums of money into the VC industry to boost innovation and entrepreneurship?

As countries around the world strive to create a local Silicon Valley – now short-hand for a cluster of high-tech entrepreneurship that drives innovation and high-quality jobs, which in turns propels economic growth – there are a number of policies to consider. In The Venture Capital State: The Silicon Valley Model in East Asia, one of us (Robyn) explores how governments adapted regulations, tax incentives and funding mechanisms in order to support local venture capital. The countries around the world who have most successfully build their own “Valley”, tended to both the demand and supply of venture capital, and entrepreneurship. Governments, such as K.T. Li in Taiwan in the early 1980s, studied the various elements of the Silicon Valley cluster, and then encouraged local components, such as top technical universities, tax incentives, and risk-reducing legal structures.

Recent headlines about sovereign wealth funds – large state owned investment funds – investing billions in venture capital, and even in individual startups or publicly-listed technology firms like Tesla (and its electric car rival, Lucid), gives the impression that its just about adding money.

But money is only part of the story: industrial policy in a Schumpetarian sense is about encouraging startups – and embracing failures – in processes of creative destruction. Its the ecosystem that sees new entrants disrupt the comfortable position of large incumbents that Schumpeter saw as the engine of capitalism. With too much money around for startups, we can end up with “zombies” who don’t die, but also don’t disrupt markets.
Original languageEnglish
Specialist publicationGlobal Policy
Publication statusPublished - 17 Sept 2018


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