🔮 Sunday commentary: If venture capital is so good, why is there so little of it?

Earlier this week I was talking at a breakfast at the House of Lords. Not my usual venue, but I was invited by EV reader John Romeo to discuss some of the ideas in my book, Exponential, with a group of bigwigs from business and politics. John is super-thoughtful and a great convener—and the historic view over the Thames is hard to beat.

The view from the House of Lords on a summer's day

One of the questions that came up was from a very experienced fund manager, who asked why there was so little appetite for venture capital in the UK. It is something I have puzzled over for a while, and is actually part of a broader question: why is there so little venture capital in general?

To unpack that, I guess we need to answer the following questions:

• Is there really not much venture capital?

• Is there really “not enough”?

• Why isn’t there more?

Let’s tackle them one at a time.

Is there really not much venture capital?

According to the consultancy PwC, investors, ranging from sovereign wealth funds to rich families to the middle class and pension funds, held assets totalling about $279 trillion in 2020. Of these, $111 trillion were “assets under management”, that is, under the purview of the asset management industry, of which venture capital is a part. That is trillion with a TR: the four commas club.

By contrast, total venture capital assets under management run somewhere between one and two trillion bucks. Yes, despite last year’s record-breaking investment rates, which exceeded $693 billion, according to our friends at Dealroom, venture capital represents less than 1% of global assets.

Venture capital is so teeny-tiny in the scheme of things that it is often bundled with “private equity”, a completely different type of strategy.

How much venture capital ought there to be?

There are a number of different lenses through which we can look at this question. More than three-quarters of the value created by public companies on the Nasdaq stock market since 1995 has been created by firms who received some form of venture capital.