What is patient capital?

By now, most people involved in raising money for early-stage companies have heard the term patient capital. The government’s Patient Capital Review defined ‘patient capital’ as long-term investment into innovative firms led by ambitious entrepreneurs. In short, if you’re looking to start a business that won’t quickly start making money, you need patient capital. Patient capital is money from investors who are prepared to wait for their return. But this might be putting the focus on the wrong place. All businesses are different. For one company five years might be plenty of time within which to deliver a return; for another they might not even be halfway to delivering a return.

What capital isn’t patient?

So investors can’t really be separated into those who are patient and those who are not. Rather there are investors who can be patient and investors who are unable to be patient. An angel investor can be patient: they invest their own money and can have no expectations of when they will get a return. Or they can want it a year later. (Typically do they have an exit horizon in mind but are usually prepared to be flexible about it). A venture capital fund, on the other hand, will have agreed with their LPs a fixed timeline within which the fund must exit its investments and deliver a return. This fund, then, is restrained in its ability to accommodate the different timelines of the companies in its portfolio. This is impatient capital. And this is the problem.

Are pension funds patient?

The Patient Capital Review has increased the pool of capital available to these kinds of high-growth, innovative firms. But its measures haven’t always ensured that that capital is patient. This because there are separate issues at play:

• Pension and insurance funds have the long term horizons that should make these high-growth firms ideal investment targets. But they have typically had very little exposure to them, especially in comparison to the amount of exposure their US equivalents have. Promoting these investments to pension and insurance increases the overall pool of capital available.
•  Where pension and insurance funds have had exposure to these investments, it has typically been by being an LP to a venture capital fund. The time horizons these funds have, as outlined above, might be patient enough for one company but completely impatient from the perspective of another.

More impatient capital and more patient capital is good.

So the important thing is not only to encourage the huge amounts of investable capital these pension and insurance funds manage to start to flow toward young and innovative companies, but that it flows towards them through the right vehicles. For example, if a pension fund invests into Draper Esprit, a listed, evergreen venture capital firm, this increases the supply of patient capital for startups (and has the added bonus of liquidity for the pension fund). If pension fund invests into a typical VC (LP/GP structure) this only increases the supply of impatient capital – which isn’t a problem if the supply of patient capital is being increased at the same time. More choice in finance options is only a good thing for entrepreneurs.
This comes down to an issue of terminology and education. One: we should be clear about what capital is impatient and what capital can be patient. Two: entrepreneurs need to be aware of when and why their investors are going to be impatient. Increasing the supply of all capital to these firms is only a good thing if we’re also encouraging diversity of capital too.