While the recent U.S. venture capital “trade junkets” to Israel, China, India and beyond may appear to be only expedition trips for curious VCs, it is a sign of much more-an emerging paradigm in which the market for venture capital investment becomes truly global.
In the spring of this year, Deloitte & Touche LLP and the National Venture Capital Association jointly conducted the 2005 Global Venture Capital Survey, which measured the attitudes and intentions of venture capitalists in the Americas, Europe and the Middle East and Asia Pacific. The first of its kind, the Global Survey received 545 responses from general partners with assets under management ranging from less than $100 million to greater than $1 billion.
According to the survey, venture capital investing in the United States and abroad is going to look very different in the future. The data suggest that over the next five years, cross-border investments will become more prevalent, and traditional geographic limitations on investing will evaporate as firms increasingly look to all geographies for the best opportunities.
According to the survey, about half of the U.S. general partners will be investing globally by 2010. Of the U.S. respondents, 18% indicate they will increase their non-U.S. focus and plan to reduce their investment focus in the United States. In addition, 32% indicate they plan to increase their non-U.S. investment focus while maintaining their current investment focus in the United States. Finally, 50% of the U.S. respondents expect no change in their geographic investment focus.
While the findings indicate that traditional venture capital firms are jumping on the global bandwagon, the survey also suggests that most general partners expect their global investment activities to be incremental to, rather than in place of, their current activities. The good news for the U.S. economy, and U.S. entrepreneurs in particular, is that there will be minimal, if any, reduction in the investment activity in the United States.
In many respects, the portfolio companies are driving the VC impetus toward globalization, as the majority of these emerging companies have international strategies from day one. As a result, VCs have been compelled to look beyond the U.S. markets as part of managing their existing portfolios. And what they have found is that investing in other geographies is not only possible, but it is an achievable investment strategy.
One way the venture capital industry has jump-started its global expansion is by following networks of successful entrepreneurs. Engineers, scientists and other entrepreneurs from all over the world have gone to U.S. universities and taken subsequent positions at venture-backed startups here. After gaining experience, they are in the position to return home and start their own companies. Once home, they reach out to their VC contacts and networks here, and connections are re-established. In these instances, the U.S. venture capital industry has effectively exported entrepreneurialism.
Asia continues to hold a great deal of interest for the U.S. VC industry. U.S. general partners named China and India as significant investment targets over the next five years. In fact, 20% of the U.S. general partners who responded plan to increase their investment focus in China and 18% in India.
What made regions like China and India so attractive initially was that they offered a way to significantly reduce development and manufacturing costs and increase efficiencies. Yet, many of these cost advantages will not be sustainable over the long term. The primary reasons that venture capitalists are interested in these countries today are an impressive supply of human talent; an entrepreneurial spirit that will drive interesting companies and technologies; and a wide open field to value creation.
Ironically, the survey found that these two regions are perceived to have the most impediments to investing of all the regions worldwide. But with these barriers to entry comes tremendous opportunity for those who can successfully navigate the challenges. While many of the environmental factors will need to be addressed before we see a significant amount of investment activity in China and India, VC pioneers are already there paving the way, hoping to leverage a first-to-market advantage and allowing others to follow suit.
No Tourists, Please
Venture capitalists have learned that to be successful in a foreign country, one must fully understand the ecosystems at play. Venture firms have no intention of investing abroad without the support of full-time professionals, preferably natives to the target country, on the ground.
Plans to expand investments outside of the United States will be accomplished by taking advantage of experienced local investors, regardless of the region. According to the survey, 42% of U.S. VCs intend to invest globally only by partnering with other investors who have a local presence, while another 39% say they intend to develop strategic alliances with foreign venture capital firms.
Furthermore, 30% plan to open new offices in foreign regions, and less than 10% will require partners to transfer to foreign locations. Not surprisingly, 40% of U.S. VCs will ask partners to travel more. These statistics reflect a tried and true tenet of the venture capital business-you must remain close to your companies.
U.S. Will Stay Dominant
Although more than half of respondents have plans to invest outside the United States in five years, the United States will remain the predominant entrepreneurial market with 16% of non-U.S. investors indicating they intend to increase their investments in the United States over the next five years. This increase will come from Canada, Asia Pacific (primarily Taiwan), the Middle East (Israel) and Europe, in descending order based on their anticipated investment levels.
According to the survey, the United States is a region without any perceived impediments to investing with the exception of travel time and effort. For other regions, significant impediments include safety issues, foreign currency concerns, unstable economies, unstable political environments, lack of experienced local investors and difficultly in achieving successful exits. And while it is difficult to conceive that the United States would ever develop these types of investment impediments, it is critical that we continue to foster an environment where entrepreneurship can thrive.
In addition to an influx of foreign capital flowing directly into U.S. companies, we continue to see an influx of foreign investment into U.S venture capital firms. Almost half the U.S. general partners say that they have seen an increased interest in investment in their funds from foreign limited partners. More than half of all the U.S. respondents expect to see that trend continue over the next five years, ensuring an adequate capital source for the industry from a diverse group of investors.
Venture Capital 2010
As the venture capital industry moves toward globalization, there will be more competition for the attention and time of general partners. Instead of competing with just the company down the street for funding, the entrepreneur’s competition will come from all over the world. To succeed long term, they will need to have their own global reach, and they will need to understand their foreign competition. Additionally, time to market will be paramount as there will be more runners in each race. Efficiency will take on an entirely new meaning, and those companies who move swiftly will be poised for leadership. The bar will, in fact, be raised considerably.
For general partners, the same will hold true. It will not be enough to only track the U.S. environment; they will need to have a window on the world and understand that their portfolio companies’ competition is likely to be in India, China or elsewhere. Additionally, if foreign firms begin increasing direct investment in U.S. companies, there will be more competition for deal flow and more than likely a quickened pace.
If one believes that competition creates more efficiency and quality, then the increasing global focus by general partners will be positive for the industry. Success in 2010 will come to those who understand the macro-economic factors and micro-economic nuances of the global marketplace. Due diligence will be a global process. Complexities will abound as currencies, cultures, supply chains and legal systems are added to the already long list of investment consideration factors. Yet, for a growing number of general partners, these challenges are worth the expected rewards. Ultimately, innovation will prevail, and the world will be a better place.
Mark Jensen is a Partner and National Director of Deloitte & Touche LLP’s Venture Capital Services Group. He may be reached at