Risk-taking in America

It has been estimated that well over half of venture investment activity taking place around the world is found in the United States. Consequently, the American market is viewed as a model for other industrialized countries in Europe, Asia and South America where such activity is usually non-existent, struggling or geared to the mainstream demand of large corporations. Interest is being expressed about the American market's apparent efficacy in supporting the growth of global high technology industries, such as computer hardware, software and system products in the 1980s, and today, in Internet-related goods and services and life sciences.

Much of the economic success of American venture financing is attributable to its links with sources of innovative ideas, including entrepreneurs, post-secondary education institutions, and government research laboratories. In Silicon Valley, California, the relationship between the market and new technology is especially synergistic. A leading actor is Kleiner, Perkins, Caufield and Byers (KPCB), a venture capital institution that emerged from the original Kleiner Perkins partnership of 1972. Among the over 370 such institutions operating across the country in 1998 (and over 600 partnerships and pools), KPCB has the enviable record of having facilitated the emergence of 100 now publicly-listed enterprises, with another eighty currently in progress. These include a disproportionately large share of venture-backed technology-intensive SMEs. In 1998, KPCB pooled capital stood at $1.2 billion.

Sufficient backing of KPCB and other institutions/pools is taken for granted in the American institutional venture capital market where pension funds have historically been the major source of supply. In recent years, and over the course of several cycles, such funds have been responsible for approximately 50 percent of new commitments to American private equity markets of all kinds - from venture financing to leveraged buyout activity. The consequence of cumulative supply from pension funds and other institutional investors to venture financing has been annual growth rates in the order of 25 percent and capital inflows that reached $10.3 billion at the end of 1997. A slight drop in pension supply to 38 percent registered at this time is attributed only to increased participation from other sources. At the beginning of 1998, venture capital under management exceeded $46 billion in total.

With regard to total assets allocated, the largest pension suppliers currently are CalPERS, Utah State Retirement Systems, Michigan Retirement Investments, Connecticut Trust Funds and NYNEX Corporation. Most of these names allude to yet another trend - the meteoric rise of public sector pension plans as suppliers to the venture capital market. In recent years, their participating opposites in the private sector have continued to contribute proportionally more money per plan (e.g., typically, between 2-4 percent of total assets and as high as 25 percent). However, the sheer size of public sector participants has given them a greater market presence, despite what have been more moderate per plan commitments (e.g., typically, between 1-3 percent of total assets). Evidently, the latter have also leveraged more sharing of venture disbursements to SMEs among American economic regions and states (see Pension Funds and Venture Investing).

Sources: KPCB, Brochures, 1998; The Private Equity Analyst, Vol. VIII, Issue 1, January, 1998; Office of Advocacy, US Small Business Administration, 1995; Venture Economics, 1997 Annual Report, 1998

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