Abstract
A look at the history of large inflows into specific asset classes does not bode well for the venture capital (VC) industry: when petrodollars were funnelled into the Eurodollar market, it drove asset spikes and then resets. Japanese investment in American real estate fuelled a spectacular bubble—and then crash—in the 1980s. US investment bank lending in Latin American debt ultimately culminated in a “decade of lost growth”.
A typical refrain is that “this time it’s different”. It is never different. We argue that the global rise of SWF inflows into VC—both in equity and debt forms—is driving a similar cycle of asset inflation that will end in tears. The reason that SWF money could prove destabilising for VC comes from the nature of the way VC works. Traditionally, nimble investment firms, led by experienced partners with technical and operational expertise, would identify potentially disruptive technologies and then work with the fledgeling firms on strategy, hiring and product. This “smart money” is said to have catapulted Silicon Valley technology firms into global powerhouses. For its part in the magic of Silicon Valley, VC became a darling of policymakers keen on supporting Schumpeterian cycles of creative destruction, which are meant to drive the innovation central to elusive economic growth in the post-global financial crisis context, around the world.
A typical refrain is that “this time it’s different”. It is never different. We argue that the global rise of SWF inflows into VC—both in equity and debt forms—is driving a similar cycle of asset inflation that will end in tears. The reason that SWF money could prove destabilising for VC comes from the nature of the way VC works. Traditionally, nimble investment firms, led by experienced partners with technical and operational expertise, would identify potentially disruptive technologies and then work with the fledgeling firms on strategy, hiring and product. This “smart money” is said to have catapulted Silicon Valley technology firms into global powerhouses. For its part in the magic of Silicon Valley, VC became a darling of policymakers keen on supporting Schumpeterian cycles of creative destruction, which are meant to drive the innovation central to elusive economic growth in the post-global financial crisis context, around the world.
| Original language | English |
|---|---|
| Specialist publication | The Economist Intelligence Unit Perspectives |
| Publication status | Published - 3 Oct 2018 |
Keywords
- venture capital
- sovereign wealth fund
- Silicon Valley
- Innovation