Paul Kedrosky's Infectious Greed Musing about technology, finance, venture capital, & the money culture with Paul Kedrosky by Paul Kedrosky

• Home
• Speaking
• About
• Media

• Subscribe:
• 
• 
• 

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.

Lijit Search




Recent Comments

Archives

Select a Month... December 2009 November 2009 October 2009 September 2009 August 2009 July 2009 June 2009 May 2009 April 2009 March 2009 February 2009 January 2009 December 2008 November 2008 October 2008 September 2008 August 2008 July 2008 June 2008 May 2008 April 2008 March 2008 February 2008 January 2008 December 2007 November 2007 October 2007 September 2007 August 2007 July 2007 June 2007 May 2007 April 2007 March 2007 February 2007 January 2007 December 2006 November 2006 October 2006 September 2006 August 2006 July 2006 June 2006 May 2006 April 2006 March 2006 February 2006 January 2006 December 2005 November 2005 October 2005 September 2005 August 2005 July 2005 June 2005 May 2005 April 2005 March 2005 February 2005 January 2005 December 2004 November 2004 October 2004 September 2004 August 2004 July 2004 June 2004 May 2004 April 2004 March 2004 February 2004 January 2004 December 2003 November 2003 October 2003 September 2003 August 2003 July 2003 June 2003 May 2003 April 2003

Hosting

• SuperbHosting.net provides affordable managed dedicated server solutions to small and medium sized businesses throughout the world. SuperbHosting.net has generously donated a dedicated server to ensure maximum performance, reliability, and scalability.