U.S. Venture Funds Attract More Foreign LPs

Even though I said I wasn’t surprised by this week’s 2010 venture capital predictions, one item did catch my attention — the slide where 48% of U.S. VCs said they expect more foreign LPs to invest in their funds next year.

VCs are telling the National Venture Capital Association that the percentage of foreign money in their funds has been climbing from 5% to as high as 15% or 20%, said president Mark Heesen. Some LPs are attracted to the U.S. because funds here tend to offer more exposure to early stage startups than European or Asian funds, which are very late stage and more like private equity.

Also, foreign investors are more sophisticated than they used to be — an inevitable outcome of globalization. “They think, if I learn it in the U.S., maybe I can do it in my own geography,” Heesen said.

In addition to the Dutch, who’ve been active in the U.S. for decades, LPs from the UK, Switzerland, Asia, Australia and the Middle East are all showing interest.

VCs may have to work harder when they have foreign LPs if the LPs are new to U.S. venture — maybe too hard for some, Heesen said. More handholding and education are required. “Old LPs understand risky and very long term, and they understand what long term means.”

Foreign LPs may be hard to find — to seek them out, VCs will likely have to use placement agents, and the SEC is considering restricting those.

Also, VCs and Congressmen will all have to ask themselves at some point whether they want returns from U.S. venture funds going to foreign countries — although Heesen said in the short term that would be a good problem to have because it would mean there are returns.

On the flip side, quite a few more U.S. VCs say they expect to invest more in China and India next year — 70% are looking at China, compared to 17% last year, and 58% are looking at India, up from 26%. Israel and Europe are now less interesting to U.S. VCs.

Heesen says it’s all part of the swirl of globalization.