Adventure capitalism | The Economist

VLADIMIR LENIN believed that a small vanguard could, by force of will, harness historical forces to transform the workings of world capitalism. He was right. However, the revolutionaries were not bearded Bolsheviks but a few thousand investors, mostly based in Silicon Valley, managing less than 2% of global institutional assets. Over the past five decades, venture capital (CV) industry funded entrepreneurial ideas that transformed world trade and the global economy. Seven of the ten largest companies in the world were CV-supported. CV the money funded the companies behind search engines, iPhones, electric cars and mRNA vaccines.

Today, the dream machine of capitalism is itself enlarged and transformed, as an unprecedented $ 450 billion in new money flows into the CV scene. This overfeeding of the venture capital world comes with significant risks, from self-serving founders torching money to squandered pension funds in overvalued startups. But in the long run, he also promises to make the industry more global, to channel venture capital into a wider range of industries and to make CV more accessible to ordinary investors. A larger pool of capital chasing a larger universe of ideas will stimulate competition and is likely to stimulate innovation, leading to a more dynamic form of capitalism.

The CV The scene has its roots in the 1960s and has been unsuited to the financial world. Unlike the Wall Street costumes, sophistication and mansions of the Hamptons, he prefers fleeces, nerds, and California villas. Its distinctiveness is also a matter of intellectual emphasis. As traditional finance has become larger, more quantitative, and more concerned with slicing and slicing the cash flows of companies and mature assets, CV has remained a cottage industry that goes against the grain, seeking to find and fund entrepreneurs too skinny or too strange to sit in a room with stilted bankers, and ideas too new to MBAs to be entered in the financial models.

The results have been striking. Despite relatively modest investments over the decades, the United States CV the funds have created companies that are now worth at least $ 18 billion of the total public market. This record reflects the dizzying rise of major technology platforms like Google. More recently CVThe Backed Unicorns (private start-ups worth over $ 1 billion) have come of age in a bonanza of public listings, ranging from the spectacular (Rivian) to the everyday (Slack). Over the past golden decade, an index of CV fund has achieved annual compound returns of 17%. A few have done much better than that.

This success is now being reflected in the entire financial sector. As CV-list of supported companies, the resulting windfall is redeployed in new funds. Meanwhile, with interest rates still low, pension plans, sovereign wealth funds and corporations have received a feverish dose of CV– envy, and scramble to allocate more money to dedicated funds or create their own CV arms. So far this year, nearly $ 600 billion has been deployed in transactions, ten times the level of ten years ago.

As the money rolls in CV permeates the economy more deeply and broadly. What was once an American affair is now a global affair, with 51% of transactions by value in 2021 taking place outside the United States. from China CV The scene has run out of steam recently due to a crackdown on consumer technology by Xi Jinping, the country’s president. However, the industry is booming in the rest of Asia, and after decades of sluggishness, innovation is waking up in Europe, with 65 cities hosting unicorns.

The CV boom has so far focused on a narrow cohort of consumer tech companies, such as Airbnb and Deliveroo. Now, more liquidity can fund areas where disruption is less advanced. This year, investments in clean energy, space and biotechnology have been double that of 2019. And the industry is becoming more open. While once a comfortable fund elite had unusual power, now traditional financial firms are involved and there are vehicles that allow ordinary investors to gain exposure at a lower cost. Competition forces CVs of all kinds to experiment with new strategies, including career tracking of individual creators.

Obviously, there are dangers. One is that money corrupts. Soaring valuations and abundant capital can make companies and their lenders complacent. Of the top 100 companies listed in 2021, 54 are in the red, with $ 71 billion in cumulative losses. Governance can be catastrophic. SoftBank’s $ 100 billion Vision Fund, which was the first to write sweeping checks to startups and push them to grow faster, has been plagued by conflicts of interest. The founders derail. Adam Neumann of WeWork built a personality cult fueled by beer.

Another danger is that, as with any asset class, the returns are diluted as the money flows. Traditional funds can find this, in addition to having to deal with CVnotorious booms and recessions, long-term returns are lower than expected.

Yet what is trivial for investors can still be good for the economy. Better a marginal dollar to go to fledgling companies than to bloated housing or a flooded bond market. A CV The crash triggered by the rise in interest rates would not destabilize the financial system, because startups are low in debt. Even if CV-supported businesses burn money recklessly, much of which will go to consumers: think of all those subsidized car trips and home-delivered meals. At a minimum, the boom will increase competition. CV the investments this year will exceed the total capital and research and development spending of the five biggest tech companies, which are also discouraged from buying potential competitors by the threat of stricter antitrust rules.

The bigger prize would be more innovation. It is true that no amount of money can create raw shine. And governments often fund fundamental scientific breakthroughs. Yet the global supply of entrepreneurs is barely frozen and many ideas remain under-exploited. The previous CV boom has seen investors expand the horizon of risk taking into more difficult and adventurous areas. As venture capital investment spreads around the world, entrepreneurs outside of the United States will have a better chance of joining us. And the barriers to starting new businesses are falling, thanks to cheap cloud computing and remote working. Venture capital is all about taking good ideas and making them bigger and better: it is only fair to apply this logic to the industry itself. â– 

This article appeared in the Leaders section of the print edition under the title “Adventure Capital”