Conducted in the second quarter of 2007, the survey measured attitudes and intentions of more than 500 venture capitalists worldwide.
“U.S.-based VCs are essentially dabbling in global markets, with the majority of U.S. VC respondents indicating that less than 5 percent of their capital is invested overseas, generally in less than three deals per fund,”said Mark Jensen, national managing partner of Deloitte’s Venture Capital Services.
“VCs are making the majority of their foreign investments in areas with higher quality deal flow, entrepreneurial environments, and access to foreign markets, as well as places where they have experience and thus greater comfort levels.”
Direct Global Investment Strategies Adopted by Minority of U.S. VCs
Of U.S. VCs, 46 percent of respondents stated that they are currently investing abroad. However, 54 percent stated that they expect to expand their international investing during the next five years, up slightly from 53 percent in 2006. Three quarters (73 percent) of the U.S. VCs who are not investing globally don’t intend to invest globally anytime soon.
Of U.S. VCs who indicated they currently have capital deployed in foreign locations, 66 percent said they have less than 5 percent of their capital under management deployed in those regions, and 78 percent indicated they have less than 10 percent. Almost two-thirds of these VCs (64 percent) expect to deploy at least 6 percent to 20 percent of their capital under management in foreign locations in the next five years.
“There is a small but dedicated group of venture capital pioneers who have embarked upon a global strategy and are driving foreign growth. But as a whole, the venture capital industry has not embraced direct global investment yet,”said Mark Heesen, president of the National Venture Capital Association.
“The adage that ‘venture capital is a local business’ still rings true. U.S. VCs want to stay close to their portfolio companies, and they believe there are enough quality deals here to support their funds. That said, there is no question that the movement to globalization of venture capital is real. It is just a longer ways off than once thought.”
China, India, Israel and Canada Top Global Targets for U.S. VCs
Of U.S.-based VCs investing globally, the primary regions are China, India, Israel and Canada. Of these, Israel, China, and India are cited for high-quality deal flow while India and China are attractive due to their emerging entrepreneurial environments. China is also noted for access to its vast market. The fact that China and India are lower-cost locations appears to be a secondary consideration. Canada’s proximity to the United States, stable political environment, high levels of personal safety and security, as well as its entrepreneurial culture has always made it an attractive country for U.S. investment.
When asked about the location of certain operations of current portfolio companies, U.S. respondents cited China as the country of choice for manufacturing and India as the choice for R&D and engineering. For non-U.S. respondents, the United States is a primary choice for R&D and engineering. European respondents preferred Central and Eastern Europe for manufacturing as well as R&D operations.
Global Investment Concerns Shrinking, but Still Prevalent
While concerns about investing globally — particularly in China and India — have declined over last year’s survey, several factors are likely reasons for slower global growth. The primary concern about investing in China is lack of intellectual property laws. For India, the primary concern about investing is lack of deals that fit the VCs’ nvestment profile. The top two concerns regarding investing in Israel are the unstable political environment and personal safety and security.
“While venture capitalists realize it takes a great deal of work and resources to be successful in foreign markets, they are citing fewer concerns overall because their experience levels in these markets are growing,”Jensen said.
“While cautiousness still reigns, venture capital is an industry of fast followers. Barring any significant negative experiences in foreign markets, we will see continued growth in global VC investment.”
One way U.S. VCs are investing globally with less risk is by doing it through U.S.- headquartered entities with significant portions of their operations located outside the United States. According to the survey, there is a notable increase in VCs with a significant number of portfolio companies with operations outside of the country where they are headquartered. In fact, 88 percent and 82 percent of U.S. respondents and non-U.S. respondents, respectively, indicated that some of their portfolio had significant operations outside their headquartered country. This clearly illustrates the global nature of the venture capital industry, according to Jensen.
Local Presence Key to Successful Overseas VC Investment; VCs Focusing Investment Primarily at Home
This year’s survey data indicates that U.S. venture capitalists require a local presence in target countries that enables them to be close to their investments. Strategies to achieve that local presence include requiring partners to travel more, developing strategic alliances with foreign firms, co-investing with firms that have a local presence, and opening foreign offices.
“Those who are investing directly in global markets believe a hands-on approach with people on the ground, local connections and an understanding of the culture is necessary to succeed. You can’t manage these investments from across the ocean,”Heesen said.
Almost half (46 percent) of U.S.-based VCs currently do not intend to pursue global expansion in the next five years, instead focusing their investments at home in the United States. The situation is similar abroad: among non-U.S. VCs, European respondents favor European investments (67 percent) over the United States (17 percent), and Asian respondents favored Asia (78 percent) over the United States (18 percent). Non-U.S. VCs who selected the United States as their top destination did so because of higher quality deal flow and access to quality entrepreneurs.
“Many global VCs are focusing their investment dollars at home, which makes sense since they have local presence, experience and first-hand knowledge of these markets,”Jensen said.
“We also see non-U.S. VCs interested in Central and Eastern Europe as an attractive investment target for the same reasons that U.S. VCs are looking to China and India. Given this strong interest, it’s possible that U.S. VCs are missing opportunities in Eastern Europe.”Limited Partners Expanding Globally
Despite the fact that the U.S. VC industry is not expanding investments globally as broadly and as quickly as some might believe, their limited partnership base is expanding overseas. In fact, 60 percent of U.S. respondents indicated their foreign LP base would increase, with more dollars going to European countries and to a lesser extent to Asian countries. In addition, 63 percent of Asia Pacific respondents indicated that their LP base would expand to the United States and to a lesser extent to the United Kingdom and Ireland. Similarly, 53 percent of European respondents indicated their LP base would increase primarily from the United Kingdom and Ireland and to a lesser extent from the United States.
“There is clearly a growing interest in the U.S. venture capital asset class from overseas investors. We must be careful as an industry not to accept all the money that is made available to us as it is critical to keep the capital under management at a level that can be invested prudently,”Heesen cautioned.
U.S. Regulatory Pressures Threaten Continued Leadership
While the United States has the fewest impediments to investing in all regions worldwide, U.S. VCs still find the current environment at home challenging in several ways. Some 58 percent of U.S. respondents see the United States’ litigation environment as an additional financial risk associated with doing business here. Additionally, 46 percent of U.S. VCs cited the challenges of the U.S.regulatory environment, saying the cost of complying with corporate regulation is too high.
“Increasing regulatory pressures in the United States, including Sarbanes Oxley compliance costs, immigration restrictions, and potential tax changes, threaten to harm the environment for venture capital investing here,”said Heesen.
“We must be sure that we enact policies that are favorable to capital formation, entrepreneurship, and innovation if we wish to remain the global leader for venture investment.”
