360from public choice.

4.6

From De-risking to Sharing Both Risks and Rewards

Mazzucato (2018, p. 809) argues that “(m)issions require a vision about the direction in which to drive an economy, focusing investment in particular areas, not just creating the horizontal (framework) conditions for change.” Moreover, “these types of investments are often those that private venture capitalists are not willing to make due to their exit driven model that seeks short-term returns (usually 3–5-year cycles) . . . some have argued that it is precisely this short-termism that has caused problems in sectors like biotechnology.” Therefore, the government should act as venture capitalist as regards mission-oriented projects, sharing the risks and the rewards of its investments (cf. Mazzucato & Penna, 2016).

From a CIB perspective, the “short-termism” of VC is not to be lamented. It is merely an acknowledgment of specialization, and the fact that early-stage financiers (angels, VC firms) and later-stage financiers (buyout firms, etc.) add different things at different points of an innovation’s journey. Thus, if VC does not exit at an early stage, it can probably not be considered VC. Nor is their role easy to mimic: The process of evaluation in the private VC industry is highly complex and typically includes tacit judgments. VC firms also perform important screening functions and contribute management and market expertise. Such non-financial value appears to be a main driver of the superior performance of firms backed by early-stage financiers (Croce et al., 2013; Landström & Mason, 2016). Sure, VC actors are at best Collaborative Innovation Blocs and Mission-Oriented Innovation Policy: An. . .

361moderately successful in picking the winners among high-risk projects (Gompers & Lerner, 2004; Svensson, 2008; Gompers et al., 2009), but that is the point of VC’s many-buckets strategy. Also, there is little empirical evidence to suggest that politically controlled organizations are better placed in this respect (Baumol et al., 2007, p. 220); government venture capital appears to promote less innovation than private or mixed venture capital (Bertoni & Tykvova, 2015) and private-backed firms seem to have better exit performance (Cumming et al., 2017). One likely reason for the discrepancy is that government entities base their decisions on political rather than commercial criteria. As our discussion suggests, however, this may be considered a feature rather than a bug of mission-oriented projects.

Second, while it may certainly be possible that the state can pool risks in a way that venture capitalists cannot, the very essence of the VC business model is precisely to convert high-risk opportunities to a more acceptable risk level through portfolio diversification, thereby aligning the incentives of investors, VC firms, and entrepreneurial founders. To the extent that the state is “better” at risk-pooling, this seems to be because it essentially shares the costs of its failed VC investments with taxpayers. This is to say that Mazzucato’s (2018) suggestion that the taxpayer should also reap the rewards of successful projects seems fair (if the state acts as a venture capitalist). Still, the problem remains that the cost/benefit to each taxpayer will be so small as to be trivial, and the cost to the VC-bureaucrat non-existent, since they get a salary anyway. This lack of anyone with true skin in the game will substantially reduce the incentives to learn from failures, or even result in a “failure to fail,” to borrow Lucas’s (2019) terminology.3 According to Bloom et al. (2019), “removing constraints on the development of an active early-stage finance market (like angel finance or venture capital) might be a reasonable policy focus” to promote innovations. These sectors have been impeded historically in many countries. This was also true for the USA until a set of reforms around 1980 paved the way for the modern VC sector, without which there likely would not be any Silicon Valley to talk about (Henrekson & Rosenberg, 2001; Fenn et al., 1995). These policy prescriptions essentially entail capital gains taxes, the effective tax treatment of stock options in young entrepreneurial firms, and the right for pension funds to invest in high-risk securities, including VC funds. The recipe, where it has been tried, seems to work to unleash VC as a driver of creativity and innovation. In addition, a reasonable “compromise” (between those in favor of and against the state acting as a venture capitalist) can perhaps be found when pondering the current trend of a progressively larger share of savings going into pension funds, which is unlikely to reverse anytime soon (OECD, 2018). Elsewhere, we have argued that at least part of these assets should be allowed to be invested in equity in general and

3As an example, Swedish government venture capital often seems to result in “exits by share buybacks to the original entrepreneur[, which] indicates that many investments in practice were used as long-term loans by the entrepreneurs” (Wennberg & Mason, 2018, p. 85). For a treatment of why a large portion of returns need to be in private VCs’ hands, even in public-private VC collaborations, see Jääskeläinen et al. (2007).

362N. Elert and M. Henrekson

venture capital specifically, thus reaching not only real estate, public stocks, and high-rated bonds but also entrepreneurial firms. This seems to us like a no-regret policy lever, as it achieves greater risk-pooling while utilizing people’s specific knowledge of the circumstances of time and place, unleashing the creative power of a myriad of people. We should add that such a move does not bias the flow of capital toward a particular sector; rather, it opens doors for entrepreneurial firms that were previously only open for large incumbent firms (Elert et al., 2019).

5

Conclusion

Mazzucato paints with broad strokes, both in her books and in the article under discussion. When discussing her six lessons, we have occasionally done the same. That said, we hope our comments and criticisms have embodied some level of concreteness. We conclude by briefly summarizing our view of her lessons: 1. Picking the willing is just another way of saying picking winners. While it may

limit the risk of unwarranted failures in the CIB, it will inevitably increase the risk

of unsound economic ideas surviving for too long. 2. Actively co-shaping markets, even creating new markets, is something most

governments do. It is sometimes warranted but will result in problems. This is

especially the case if government policies curtail consumers, who are the final

arbiters of an innovation’s success in the CIB. 3. Welcoming experimentation (instead of fearing failure) is a laudable goal. Yet, the

evidence strongly suggests that market selection (through entry, exit, contraction,

and expansion) offers a way for private actors to learn from such experimentation

(and incentives to care) in a way that is unavailable to public actors. 4. Focusing on the quality of finance (rather than the quantity) may entail govern-

ment investments in R&D, but too much emphasis on R&D rests on a far too

narrow and mechanical view of how innovation comes about. R&D is an input in

a production process whose desired output—higher value creation—depends on

many more steps along the way. 5. Engagement, i.e., democratization and the inclusion of more stakeholders, is of

course laudable for government projects. Yet one may wonder if the citizen qua

consumer is not better placed to decide what they want than the government