International investing is on course to set a record this year as GPs capitalize on a surge of global entrepreneurship from Beijing to Bogota.
Through mid-November, U.S. venture investors have placed $21 billion with companies overseas, already surpassing the previous peak year of 2000 by more than $1 billion. It is the second year in a row of big gains in dollars headed abroad, according to data from Thomson Reuters.
Numerous factors explain the growing interest. For one, emerging economies have been far more vibrant over the past five years than advanced economies, at least until recently. For another, cloud infrastructure, social site distribution and big data analytics have spread worldwide, making companies easier and less expensive to start, mirroring recent investing trends in the United States. The pace of the startup learning and innovation cycle has sped up.
On the consumer front, rising mobile phone use in emerging economies is connecting large segments of previously off-line populations to the Internet.
Perhaps the greatest springboard is an explosion of entrepreneurship from Asia to Europe to South America as founders seek to replicate the Silicon Valley startup culture in their home countries.
“Number two after movies, entrepreneurship is probably one of the largest American exports,” said Dave McClure, founding partner of 500 Startups, a firm that more than any other is pushing the boundaries of international investing. “There is a lot more of a realization that emerging markets are not just for dabbling. They are part of where the global economy is headed in the next 10 to 20 years.”
The trend appears to be gaining steam. Over the past two months, VCJ conducted more than 30 interviews with foreign founders and international investors and uniformly ran across reports of budding entrepreneurship. Several key observations from the discussions are:
- An unmistakable rise of entrepreneurship is gathering force not just in the expected places of China, India, Germany and the United Kingdom, but to varying degrees in such countries as Korea, Japan, Canada, Columbia, Indonesia, the Philippines, Kenya and the Czech Republic.
- Access to capital varies widely, as most non-U.S. locations report that raising capital is harder than in the United States, although angels appear to be playing a greater role worldwide.
- More foreigners better understand U.S. business models and seek to emulate Silicon Valley’s success.
- The availability of engineering talent has broadened considerably not just in Western and Eastern Europe, Israel and top Asian nations, such as India, but beyond.
- The number of dual-country companies has grown considerably in the past few years, with management, sales teams and certain business operations located in the United States and engineering remaining in home countries. Many GPs find this strategy to be an easy first step to greater international participation.
VCJ’s examination found that culture barriers in many countries are falling away.
“Entrepreneurial capabilities and capacities are much increased,” said Keith Larson, managing director and 19-year veteran of Intel Capital. “Used to be there was a whole education on how venture capital worked. Now you go to places and they are dialed in. That is a huge shift.”
In Europe, for instance, entrepreneurship appears to have caught the imagination of a new generation of post-graduates. Ecosystems have evolved substantially in Germany, the United Kingdom and Scandinavia, said Kevin Dillon, managing partner at Atlantic Bridge Capital. Repeat entrepreneurs have increased and pool of people to hire from has deepened. “I think the single biggest thing is the repeat entrepreneurs, the talent pool,” Dillon said.
In France, where traditional culture does not foster entrepreneurship, “more and more of my friends are talking about building startups and taking risks,” added Marc Beudet, a product manager at 3D camera developer StereoLabs.
Company formation similarly appears on the rise in Canada. “We saw 350 companies last year and we’ll see probably 400 to 450 this year,” said Frank Christiaens, a managing partner at Vancouver-based seed and early-stage investor CrossPacific Capital Partners. “We need to find a way to scale ourselves. We see more and more interesting opportunities.”
The list of firms now more than dabbling in foreign markets includes not just Sequoia Capital and Accel Partners, which are among the most active, but GGV Capital, DCM Ventures, BlueRun Ventures and New Enterprise Associates.
At long-time global investor Intel Capital, incoming President Wendell Brooks announced in November an effort to “re-emphasize” international. “There is a lot of opportunity the venture capital community has not pursued outside the valley,” he said.
All this is a significant departure from five years ago, when investing abroad drew skepticism. And in a changing world, there are good arguments to support it.
First off, the global economic engine is shifting gears. In 1990, emerging economies, including China, accounted for less than one-third of global GDP. The percentage rose to more than 50 percent in 2013. Fueling the rise are expanding middle classes, not just in India and China, but in Africa and Latin America.
Hand in hand with the increasing affluence is a rise in available talent. “We have seen an explosion of startup businesses and talent around the world,” said Murray Indick, a partner at the law firm Morrison & Foerster. “The trend is likely to continue for the foreseeable future, even if the current torrid pace of funding slows down.”
This leads to lower costs, since engineering teams in Eastern Europe, India and Canada are about half that of Silicon Valley, and they’re more loyal. Engineers abroad are less likely to be poached by a Google or a Facebook.
Investors and LPs are coming to view international as a way to diversify both geography and cost structure.
But the real opportunity is the untapped markets, from the perspective of the consumer and investor. Up to now, perhaps the most active approach to international has been to invest in clones, copy-and-paste companies that replicate U.S.-based business models and customize them for new countries. More recently, this replication is being replaced with fresh innovation, and investors in places such as China are being presented with more than just U.S. knock-offs.
VCs also are increasingly latching onto globalization plays by identifying promising companies and bringing their management teams to the United States to address the U.S. and the global markets. Again, entry prices are typically lower.
“It’s easier to go where the business is,” acknowledged Alon Girmonsky, founder of BlazeMeter, a load testing company that has engineering in Israel and management, marketing and sales in the United States. It is like “having two heads: one in business and one in technology, and being able to communicate between them.”
Both strategies are likely to bring benefits to partnerships over time. “Innovation is about multiple perspectives,” said Bert Rankin, CMO at Fortscale Security, a behavior analytics company. As more innovation takes place abroad, international investing is a path more firms will need to follow before it becomes disruptive to venture, Rankin said.
Even if just 15 to 20 percent of the world’s technology innovation takes place overseas in the next five years, it is hard to point to a firm that would want to miss backing it.
For firms expanding abroad, commitment seems the key to success. Without it, organizations can find it difficult for domestic and overseas teams to remain close. Small partnerships face the additional challenge of finding resources to scour the world and set up local offices. The bar needs to be higher for deals where distance is involved.
But sitting on the sidelines may not be an option. Returns may ultimately depend on getting active. At 500 Startups, which this year has pushed ahead with new funds and partners into Turkey, Korea, Japan, Israel and Vietnam, about 30 percent of deal volume presently comes from abroad. The number is expected to rise to about 50 percent in two years.
In the short term, better returns will likely come from domestic investments, McClure said. But over the next five to 10 years, that will switch to global.
“In the U.S. right now there certainly is more money chasing quality deals than there are quality deals available,” he said. “Outside the U.S. and China, it is exactly the opposite. There is a lot more capacity than money chasing it.”
Photo illustration courtesy of ©iStock.com/mattjeacock
Photo of Dave McClure by Mark Boslet.
Photo of Keith Larson courtesy of Intel Capital.
To download an Excel file: Top 100 international venture investors (U.S. firms only)
To download an Excel file: International venture investments from U.S.-based firms