Silicon Valley and other hotbeds of innovation would wither on the vine without venture capital, that angel-of-mercy investment money that can turn an idea into the next Google or Facebook.
But now that the biggest pension fund in the U.S. is moments away from curtailing its venture capital adventures, the entire venture capital market could be in for a long cold winter.
The nation's largest public pension fund, the California Public Employees' Retirement System, has decided to get out of the venture capital business, according to a recent Reuters article. "One [reason we are getting out] is that venture [capital] has been the most disappointing asset class over the past 10 years as far as returns," said Joe Dear, CalPERS' chief investment officer.
"Second, it's very difficult for a large fund like CalPERS to gain access to the best venture partners in the size that makes a difference to our performance."
CalPERS currently has about $2.1 billion in venture capital assets, or 6 percent of a $34 billion private-equity portfolio. If an investment committee meeting decides to get out of the venture capital business completely, it is not clear if they will sell off their current portfolio or simply stop investing in new ventures.
A report that will be presented to the investment committee of CalPERS will allegedly show that there is “little upside” to staying in the venture capital business.
According to published reports, the venture capital portfolio has been the worst performing asset class for CalPERS over the last ten years, producing a net zero return. The dot-com bust of the early 21st Century and the following financial crisis helped put CalPERS venture capital investments in a money-losing situation, one where they could not easily get out of losing positions, thus causing bigger losses.
By contrast, CalPERS earns much better returns on their private equity portfolios and credit-related investments, earning 15.4 and 14.1 percent respectively over the last ten years.
A move out of venture capital would hurt Silicon Valley at a time when money for startups is proving more scarce than even a few years ago. Companies like Apple, Facebook , Google, Twitter and eBay all might not have seen the light of day had a not been for venture capital. Add in the poor performance of the Facebook IPO and many potential ‘angel investors’ are getting gun shy.
Reports show that just $11.2 billion venture capital has been raised this year, a far cry from the year 2000. Should CalPERS back out all together, other smaller pots of money could stop providing venture capital out of fear that there is no longer major support for the asset class.
As of April 30, CalPERS had $237 billion under management.