Technology, 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

See all articles by Javier Capapé

Javier Capapé

IE University

Paul Rose

Ohio State University - Moritz College of Law; Bocconi University - BAFFI Center on International Markets, Money, and Regulation; Tufts University - The Fletcher School of Law and Diplomacy; Fundación Instituto de Empresa, S.L. - IE Business School

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

Suggested Citation

Capapé Aguilar, Javier and Rose, Paul, Technology, Venture Capital, and SWFs: The Role of the Government in Forging Innovation and Change (April 1, 2020). IE Sovereign Wealth Lab – 2019 Annual Report, Available at SSRN: https://ssrn.com/abstract=3566039 or http://dx.doi.org/10.2139/ssrn.3566039

Javier Capapé Aguilar

IE University ( email )

Calle Maria de Molina 6
Madrid, Madrid 28006
Spain

Paul Rose (Contact Author)

Ohio State University - Moritz College of Law ( email )

55 West 12th Avenue
Columbus, OH 43210
United States

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
United States

Fundación Instituto de Empresa, S.L. - IE Business School ( email )

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

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