Global Venture Investment Reaches $35B, But Exactly How Global Is the Venture Industry?

The venture capital industry appears to have rebounded from the post-tech bust slump, according to Ernst & Young’s latest Global Venture Insights Report. In the past year, venture investment has climbed to its highest point since 2001. Much of this growth has taken place in emerging markets like India, Russia and particularly China, where the venture industry is a relatively recent phenomenon. After three years of consecutive growth, China has outpaced the United Kingdom, Israel and Canada to assume the rank of second most active target market for venture investment. The report observes that this rapid growth has finally allowed China to make the leap from a promising new market to an important player in the industry.

 

Around the world, almost 20 percent of all venture deals took place across national boundaries. Ernst and Young notes that this is an increase of 250 percent over the preceding five-year period. They observe that this trend has been accelerated by the practice of “venture licensing," the replication of proven business models in new markets. Though the U.S., Europe and Israel remain key in the industry, practices like this are expected to lead to even more focus on emerging markets in the coming years.

 

However, not everyone agrees that national borders are disappearing as a factor in venture investment. Deloitte’s 2007 survey of global venture capital trends reports that most U.S. investors would prefer to focus on domestic opportunities. Fifty-four percent of firms indicated that they are not currently investing overseas, and 73 percent do not plan to seek out foreign opportunities in the foreseeable future. China and India are the most commonly targeted markets for investment, but those countries also suffer from the greatest perceived barriers to investment.

 

In China, firms cited the lax enforcement of intellectual property laws and the lack of experienced local investors for partnerships as the most vexing impediment to investment. 

 

Mark Jensen, in a Deloitte press release, added that U.S. firms are merely dabbling in overseas markets. Although many U.S. portfolios include foreign companies, most of the time those firms make up less than 5 percent of total firm investment.

 

Instead, U.S. venture firms appear to be taking a different approach to capitalizing on emerging markets. About 88 percent of respondents to Deloitte’s survey indicated that their portfolio included companies with a significant portion of their operations overseas, mostly in India and China. This figure is almost twice the number reported last year.

 

The Deloitte report concludes that venture capital firms remain cautious about expanding their global portfolios and that, although the pace of global investment will continue to grow in the next few years, it will do so slowly. 

 

So who is right? Are the emerging markets of China, India and Russia at the vanguard of a significant shift in focus for the venture capital industry? Has China finally made the leap from “interesting” opportunity to “important” market? Or can we expect the U.S. and European Union to continue to invest in domestic firms and in more familiar foreign markets? The Ernst and Young report suggests that despite the small amount of portfolio space dedicated to investments in China and India, the sum of all of these smaller investments from around the world has made China into a major presence in the industry. The report also provides a number of new models for global investment, including “international joint funds, strategic limited partners, local funds with a global brand, local teams under one global fund or a hybrid of these models” that may ease some of the reservations of U.S. firms about investing globally. These types of partnerships, which are already changing the face of global venture investment, may create an industry in which international investment is common, but a local presence is necessary.

 

Download Ernst & Young’s Acceleration: Global Venture Insights Report 2007 at: http://www.ey.com/global/content.nsf/International/SGM_-_Venture_Capital_Insight_Report_2007

 

Read Deloitte’s Global Trends in Venture Capital 2007 Survey at: http://www.nvca.org/pdf/US_Rpt_Global_VC_Survey_7-25-07.pdf

 

Links to the report and more than 4,500 additional TBED-related research reports, strategic plans and other papers also can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.