Why the world needs more long-term investment
Photo by @shawnanggg on Unsplash
Venture capitalists love short-term investing. They’ll happily put their money away for five years if they know that, by the end of it, they can double or triple their money.
But convincing them to part with their cash for longer than that is a challenge. Investors usually want to see returns on their capital sooner rather than later. Thus, projects that require ten or twenty-year horizons tend to receive less-than-optimal funding.
Usually, you would expect the government to step in at this point and correct the so-called “market failure.” But, it turns out, that’s not a particularly appealing idea, either. Governments are notoriously bad at allocating capital because they don’t always know which projects have the highest payoff. Many wind up overrunning or costing much more than originally planned without the anticipated payoffs.
These developments are unfortunate. The world is in need of long-term investments more than ever before because of the challenges it faces. For instance, we need new energy solutions that will help defeat climate change in the 22nd century. We also need massive investments in space exploration and education.
But, unfortunately, due to the fickle nature of international capital markets, that’s uncommon. Almost noone with a serious sum of money to play with is willing to make long-term investments.
Take anti-aging science, for instance. Currently, the world is facing a massively aging population. Some countries, like Italy, Japan, Korea and Germany, are expected to see their populations cut in half by 2100, a massive drop. The number of elderly people is going to balloon, putting more pressure on those in work to take up the slack. Economically speaking, it is a disaster.
At the same time, researchers are uncovering the mechanisms in the human body that cause us to age. Evidence collected so far suggests that we really can stop the aging process in its tracks and even reverse it in some tissues.
However, the major breakthroughs – as with so many things – are more than ten years away. And because of that, investors are unwilling to plow money into pure research.
Rationally speaking, it doesn’t make much sense for investors to refuse this type of project finance. Failing to deal with the aging population is going to make them poorer in the long-term. And, furthermore, not dealing with their own mortality means that many of them will not be able to enjoy their accumulated wealth.
Still, the basic problem remains: investors won’t lengthen their time horizons. So what’s the solution?
The trick here is to change the payoff conversation. Investors might be willing to put money into a project for longer if they knew that they were going to get a higher return than short-term projects.
One way to do this is for the government to match the investments that private individuals make. This way, for every one pound an investor puts into a project, it is the equivalent of putting in two. Options like this might not be popular with the public, but it would improve the attractiveness of long-term projects and perhaps have a bigger payoff for society overall.
