How Giants Can Play in Venture Capital

Sovereign wealth funds have dialed back their VC commitments. But a case study shows proper engagement with the asset class can present big opportunities.


Despite some big wins lately, many Giants are still scaling back their venture capital commitments to external managers. This stems in part from the poor returns generated by the asset class over the last decade. But it is primarily a function of the small mandates that VC managers offers Giants; an allocation of $10 or $20 million to a VC fund won’t affect the overall return for a large pension or sovereign fund, even if the underlying VC investment were highly successful. Also, the monitoring costs for the Giant are the same independent of the size of the mandate. (And spreading an allocation across many VC firms would mean paying high fees and high monitoring costs for beta exposure to an underperforming asset class; not attractive.) As such, many Giants are instead choosing to build up allocations to alternative asset classes that scale, such as private equity, infrastructure or real estate.

However, as I’ve argued a few times (here, here and here), I actually think the ‘green’ mess the VCs created over the past decade may offer a unique opportunity for some Giants to re-engage with the asset class, at least in some growth-stage venture opportunities in capital-intensive companies. It’s in this niche area — e.g. capital-intensive clean energy companies — that the Giants’ long time horizon and massive scale can provide real added value to the VCs and entrepreneurs (and can thus lead to them getting good deals).

To walk you through this concept in greater detail, I’d like to direct you to a paper I’ve just finished with Jagdeep S. Bachher, Gordon L. Clark and Kiran Sridhar entitled, “‘The Valley of Opportunity’ Rethinking Venture Capital for Long-Term Institutional Investors.” In it, we present the Innovation Alliance, which is a group of three SWFs that came together to look for growth-stage opportunities in which the time and size of the investments allow them to extract investor-friendly terms from companies that could one day disrupt large markets. The three SWFs pooled internal resources to vet these opportunities, and, to date, they have deployed over $500 million into four companies as part of the Alliance.

In the paper, we argue that making VC work for Giants requires more than writing a check to Sand Hill Road and then crossing fingers. It requires meaningful engagement with the asset class and even the companies therein. It also means not being naïve about the relationships that are still required with the traditional VCs; these ‘partnerships’ will only work if the Giants have the in-house talent to vet the opportunities that the VCs bring to the table. In short, the asset class probably isn’t one for the masses.

Anyway, we’d be very keen to hear your feedback on the draft working paper. Email me here if you have a comment.