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Start-ups too risky for state pension fund investment

Post by Cheryl Tucker on July 7, 2011 at 7:30 pm |
July 7, 2011 5:36 pm

This editorial will appear in Friday’s print edition.

If elected governor next year, U.S. Rep. Jay Inslee says he’d focus on job creation in innovative fields.

That’s a worthy goal. But the way he’d fund it – by investing a portion of the state pension funds in start-up companies that pledge to stay in Washington – is worrisome. His plan would use money that needs to be as secure as possible to fund the kind of investments that are about as risky as they come.

The Washington State Investment Board folks who manage $61 billion in state pension funds don’t seem too thrilled by Inslee’s idea either. The board’s executive director, Theresa Whitmarsh, told the Seattle Times that the WSIB is bound by a “very, very strict fiduciary duty” to maximize return on investments that fund state retirees’ benefits. Its goal of an 8 percent return was set by the Legislature.

According to research by Harvard Business School senior lecturer Shikhar Ghosh, about 30 to 40 percent of new companies lose most or all of the money investors put into them. About 70 to 80 percent of start-ups fail to deliver the projected return on investment.

“Failure is the norm,” Ghosh says.

Even those new  businesses that survive often take a few years before they start making serious money. Sure, some technology start-ups have been wildly successful (think Google), but their failure rate is high, too.

Inslee notes that he would only use a “small, defined portion” of the state pension funds to create a pool of capital for start-up companies. But even a small percentage of $61 billion is a lot of money – and too much to gamble on such risky ventures.

A better idea, said venture capitalist Greg Gottesman, is for the state to build up its research universities to attract innovative minds from around the world.

Unfortunately, Washington is going in exactly the opposite direction with its decreasing investment in higher education. That’s a problem that won’t be solved by putting state pension funds into start-ups facing long odds.

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