Download This PaperTechnology, Venture Capital, and SWFs: The Role of the Government in Forging Innovation and Change
IE Sovereign Wealth Lab – 2019 Annual Report
17 Pages Posted: 4 May 2020 Last revised: 5 Apr 2021
Date Written: April 1, 2020
Abstract
SWFs have pursued VC investments for a variety of reasons, that can be summarized in three main motivations: 1) Strong returns from innovative technologies (disrupting incumbents); 2) Asset class diversification; 3) Diversification of local economies and other positive economic spillovers
The focus on returns is perhaps most obvious, but also one of the more difficult to achieve. While VC has enjoyed historically high returns, a flood of investors into the space, often driven by a need to overcome low returns in debt assets, risks making the asset class a victim of its own success. While SWFs are eager to invest in venture capital, many SWFs are also recognizing that they must be careful in selecting when and how to invest. The search of stable and durable returns may include hedging against incumbent leaders. When they invest in a unicorn, they also aim to be part of the new economy that will lead the corporate world in the coming decades and back those companies that will amass the industry profits and market share. For example, it is reasonable for a SWF with a strong portfolio exposition to the banking industry to invest also in fintech companies that may disrupt the whole financial sector in the near future. The same logic applies to sectors such as retail, logistics, healthcare, hotel management, or transportation, that are being already disrupted by startups using new technologies, procedures and solutions. SWFs’ interest in VC is not drive solely by returns, however. Venture investing is also part of a broad strategy of diversification. SWFs want to diversify their portfolios to balance and smooth their exposure
to different asset-classes.
There is a third reason for SWF interest in VC that is specific to government-owned funds such as SWFs: economic development and the logic of learning how to foster innovation ecosystems. When a pension fund invests in tech-based startups it pursues the first two objectives mentioned above: returns and diversification. Yet, in the case of SWFs, implementing a VC investment program may have a third motivation and benefit: the economic spillovers.
SWFs can use these new technologies developed in their portfolio companies to foster economic
development, enhance change, and diversify their economies beyond natural resources into stronger value-added economic sectors. In this way, getting access to the latest technologies would allow developing economies with established SWFs (recall that most of SWFs are located in developing economies) to leapfrog in terms of economic development. SWFs can help to transfer the most advanced technologies used by innovative startups in their portfolios to the rest of the economy, looking for efficiency gains in traditional and new sectors.
Keywords: sovereign wealth, SWF, sustainable development, venture capital, economic development, sustainable finance, strategic investment funds, sovereign development funds
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Paul Rose (Contact Author)
Case Western Reserve University School of Law ( email )
11075 East Boulevard
Cleveland, OH 44106-7148
United States