Is Venture Investing Like Pascal’s Wager?

Pascal’s Wager (or Pascal’s Gambit) is a suggestion posed by the French philosopher Blaise Pascal that even though the existence of God cannot be determined through reason, a person should wager as though God exists, because so living has everything to gain, and nothing to lose.
    – Wikipedia

Peter Thiel made a provocative claim in a recent talk about the innovation deficit in the U.S.:

Peter recently
talked to an LP (endowment) who was thinking of  re-allocating its
portfolio to hold less than 5% in venture capital as its recent returns
had not matched expectations. Peter told the LP that they’re thinking
is flawed: if their 5% allocated to vc eventually does not return a
mega profit, the remaining 95% allocation is going to be worthless
anyway. “Investing in technology as a VC is like Pascal’s bet: if that
isn’t going to work, nothing will.”

It’s an interesting argument, but does it have the added value of being true? In other words, Is it true to say that an LP can’t afford not to invest in venture capital, because to do so would be tantamount to saying the U.S. economy is dead, in which case you shouldn’t be investing in the U.S. economy at all?

For this argument to hold, at least three things would have to be true:

  1. There can be no free-riders
  2. All LPs investing in venture at 5% commitment level wouldn’t destroy returns
  3. There is no cyclicality to venture

Are these all true? I don’t think so. There certainly can be free-riders in venture — I benefit from your investment, even if  don’t invest myself — so not everyone has to imbibe. Similarly, if every LP invested in venture at the 5% level the industry would be in worse shape than it is today. And, finally, venture is demonstrably cyclical, so a constant allocation is irrational.

To be fair, if you don’t believe there any material growth prospects in the U.S. economy, and the situation is so bad that you think no-one should ever invest in growth companies, then clearly you should be out of the market entirely as it’s dead in all but name. But that is affirmedly not the same thing as saying that there are too many LPs investing too much money in too many funds.