Pension money is the key to enabling Venture Capital at scale. Period. And Europe still sucks at this. But it matters to all of us.
Here is why: Did you know that venture capital-backed companies account for a whopping 41% of the total US market cap and 62% of US public companies’ R&D spending?
That's the power of venture capital, folks:
Among public companies founded within the last 50 years, VC-backed companies account for 1/2 in number, 3/4 by value, and more than 92% of R&D spending and patent value.
The US did not spawn top public companies at a higher rate than other large, developed countries before the 1970s ERISA pension reforms, but produced twice as many after it (more on this below).
The paper "The Economic Impact of Venture Capital: Evidence from Public Companies" suggests that the US VC industry, itself enabled by a pension money flood, is causally responsible for the rise of one-fifth of the current largest 300 US public companies.
And what's ERISA? The Employee Retirement Income Security Act (ERISA) allowed US pension funds in 1974 to invest in venture capital, leading to a significant increase in the amount of capital available for venture investments.
This policy change played a significant role in the growth of the VC industry and the creation of large public companies.
But what about Europe? Trillions are locked away in pension funds, unable to reach the local venture market.
Europe lags behind, but there are signs of change.
In the UK, the government is looking to channel more pension investments into UK companies.
Auto-enrolment has been a success, with the proportion of private sector eligible staff participating in a pension increasing sharply from 42% in 2012 to 85% in 2019.
However, most pension funds are invested in low-risk equities and bonds, missing out on a vital slice of economic growth: venture capital.
In Sweden, state-owned pension funds are putting aside billions to invest in the growing startup sector through VC funds. Not surprisingly, Nordic pension funds account for 16% of total VC funds raised in the region since 2013.
However, in Germany, pension funds’ investments in VC only account for a small percentage of VC funds raised.
The risk-averse mindset needs to be overcome with top-down policies, even if pensioners and old-school pension fund managers may disagree.
The takeaway? Europe needs to push harder to open the gate for pension funds to ignite a venture capital revolution. The US example shows a clear path of how pension money can fuel a startup revolution through VC investing.
As a deep tech VC, I can't stress enough the importance of policies that foster innovation and growth.
Let's continue to push for policies that support the VC industry and the incredible companies it helps to create.
The average financial commentator in Europe is too risk-averse to accept the clear evidence.
Of course, the average pensioner or pension fund manager in Europe, as represented by the top Financial Times readers, struggles to wrap their head around the perceived risk. But as it happened in the US, over a long time horizon and across the broader market, VC exposure does generate above-market, stable returns.
This is the power of unlocking them for pension funds: creating a huge pool of capital for the European tech sector that is not looking for quick returns and moving in and out of the market with the hype trends (like a family office or a trading fund may do), but is going to provide long-term liquidity over time horizons spanning decades.
On those timelines the top VC-backed companies outperform. And it's time their wealth creation stops being a privilege of the US tech market and benefiting only American pension investors.
The bulk of this article was first published by the author on LinkedIn