Here’s the thesis of Robert Samuelson’s Washington post column this morning:
Globalization strikes again. The latest target is entrepreneurship.
For decades, promoting start-up firms through venture capital and other methods of business investment seemed a peculiarly American strength. It has nurtured countless tech firms, including titans such as Facebook, Google and Apple. Americans have been duly proud. It reinforced a sense of national exceptionalism, because other countries couldn’t easily duplicate it, if at all.
No more.
He goes on to provide a bit of evidence. I don’t disagree with his thesis but I don’t think he has the right concerns. For one thing I think he’s looking at a snapshot rather than at a moving picture. What have the trends in capital investment and venture capital in particular been over the last thirty years rather than just the last couple of years?
I have the following questions for Mr. Samuelson.
- Has the U. S. changed, other countries changed, or both? I think it’s both but the most significant change is slowing capital investment in the United States.
- Why is global venture capital investment so concentrated in just ten cities? Does that itself suggest a problem?
- What is the role of government in the ten centers of venture capital investment you cite? My gut level instinct is that it’s substantial and that also explains the concentration.
- Of the 62% of total global capital investment concentrated in those ten cities, 36% is in the United States. Do we really have a problem?
I’d also like him to relate his observations to the nearly trillion dollars worth of capital flight from China over the last few years but I guess that’s fodder for a later post.
As an introduction:
The origins of VC are what would now be called “family offices,” investment arms of wealthy (industrialist) families desiring to invest their large cash flows into more than public stocks and bonds. (The first firm is generally recognized to be the Whitney family which later, when formalized, became the JH Whitney Fund in Stamford, CT. I used to call on them.) The formalization of a number of pools of capital (in the 60’s and 70’s) followed the acceptance and adoption by endowments and pensions of “alternative” investments, primarily VC, late stage VC (LBO’s) and natural resources. Allocations in these went from zero to 2-4%. Now:
1. Why this didn’t become institutionalized in Europe or Asia until later is probably do more to public vs private pension structures. My customers are the pensions and endowments, and for years they were primarily here. (no longer) I would have to leave it to Dave or others with more experience in Europe to advise if their are cultural underpinnings. I can say that the European based LP’s we have had are decidedly more conservative.
Later, almost certainly the mobility of capital I speak about incessantly drove globalization of the industry. That’s why I find policies penalizing capital shortsighted.
2. Far from the volume of capital allocated by pensions and endowments declining, it is at record levels. This is due wholly to chasing returns by underfunded pensions. Allocations routinely now reach 10%, sometimes 12%. This has created much consternation, in my opinion deservedly so.
3. As for the 10 cities issue, I’m not sure one can say definitively. The origins of the business were where the money was. And in the case of Silicon Valley, operating talent. There are late stage firms everywhere. Well, not Kankakee. But VC, which invests overwhelmingly in tech (including internet), medical devices and new retail concepts (all home run potential) tends to be bi-coastal in the US. Make of that what you will. BTW – just a little factoid. A prototypical VC fund comprised of 10 investments will have 2-3 return of capital, 6-7 busts, and one home run which will make the fund. Who can I sign up?
I know there is this ongoing effort to declare that entrepreneurs have gone limp. Again, I just don’t see it. Where there is opportunity (returns) capital and talent will flow.
Re # 2:
The whole point of cities is investment and startups. Even Jane Jacobs got that right.
I really don’t think so, Bob. Only to the extent that a city has access to and the potential for retaining operating talent, access to academic institutions or perhaps for logistics reasons. Kankakee isn’t a hotbed of start ups for obvious reasons. But Purdue University has the number one biomed engineering program in the land, and the thriving metropolis of W Lafayette has a better chance of attracting a start-up than the south side of Chicago.
I forgot to address Daves observation about government yesterday. I think one would have to look through (primarily) academic institutions to government funding of them to see how that plays a role. National Labs are another obvious source.