The venture capital industry is supply determined. Capital allocation is what makes VC funds work. The focus of this chapter is on the main source of capital to VC funds (institutional investors) and on the question, why do institutional investors allocate capital to VC funds? Pension funds have fi duciary obligations to their benefi ciaries. We show in the chapter that allocating a small fraction of the savings of the beneficiaries to "lottery-like" investments that, if successful, will change future consumption in a substantial way is congruent with long-term maximization of the utility of consumption of the savers. Successful, innovative, VC-backed companies increase consumption possibilities both by changing relative prices and by introducing new goods and services.
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