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US venture capital looks abroad

Global Trends in Venture Capital 2006 Survey by Deloittle & Touche USA LLP makes interesting reading, especially the observed "fledgling" trend for US venture capital enterprises to look abroad, ie invest in non-US ventures.

That July 2006 report was sponsored by the US National Venture Capital Association (NVCA) and other venture capital associations world-wide. There were 505 responses to the survey, with 45% of those from the US. The assets under management of the respondents ranged from less than US$100 million to greater than US$1 billion. Of the 505 responses 55% were based in the Americas, 24% in Europe, 17% in Asia Pacific and 4% in the Middle East.

Already over half of the US respondents indicated that at least 10% of their portfolios have a majority of overseas operations. Most venture firms responding to the survey were inclined to operate in foreign markets through locally based investors with experience operating in the local market.

venture-capital-usA remarkable fact in the report is that funds in the US are beginning to look abroad, with the top two destinations being China and India.

Canada and the UK were the only other two specific locations which the report says captured "significant interest". The name "Australia" did not rate a mention in the report, though responses from it may form part of the reports' "Asia Pacific" aggregated data set.

venture-capitalThe report states that:

 Until recently, venture capital investment was a local activity with most venture capitalists never considering investments that were not within driving distance (or at least a short plane ride) from their offices so that they could keep in close contact with their portfolio companies. The fact that more than half of all US respondents stated that they were planning on expanding internationally (albeit cautiously) signals a sea change in the venture industry.”

Though it is described as only a "fledgling" trend, the reasons given for why US venture firms would like to go non-US are: 

  • Low cost locations
  • Higher quality deal flows
  • Emergence of entrepreneurial environment in non-traditional locations
  • Diversification of industry and geographical risks
  • Access to quality entrepreneurs
  • Access to foreign markets

venture-fundingAs an observation by us, interestingly the above list of factors driving US venture capital to look abroad, is comparable to the factors which led to Hollywood looking abroad (including for deal flow, locations and story ideas or styles) in the period from about the late 1980s.

Though "fledgling", it may be that with globalisation and other factors the grand canyon divide (hence the photo to this post) between US venture capital firms and the rest of the world may be reducing.

However, the report also points out that while over half the US venture firms plan to increase their overseas involvement, only 19% intend to reduce their investments in the US.

venture-financeKeys reasons for the U.S venture firms not globalising are given as:

  • Adequate deal flows in the existing markets
  • Contractual restrictions
  • Lack of partner capacity
  • Legal restrictions (see commentary below on recent developments in Australia)
  • Size of fund does not allow for cross border investing
  • Superior returns in local markets

Various factors were identified as impediments to investment:

 
  • Safety and security
  • Travel time and effort
  • Regulatory environment
  • Intellectual property laws
  • Foreign currency concerns
  • Unstable political environment
  • Unstable economy
  • Lack of skilled workers
  • Lack of knowledge expertise of business environment
  • Lack of experienced local investors
  • Lack of quality deals that fit investment profile
  • Difficulty in achieving successful exits

Major current investment areas are: 

  • Communications and networking
  • Electronics and hardware
  • Semiconductors
  • Software
  • Information services
  • Consumer business
  • Medical devices
  • Biopharmaceuticals
  • Healthcare services
  • Energy

A Deloittes press release for the report noted that the survey shows the United States has the fewest impediments to investing of all regions worldwide.  However, US VCs find the current US environment challenging in several ways.  Some 70% of US respondents versus 36% of non-US respondents saw the threat of legal action as an additional financial risk associated with doing business in the United States.  Additionally, 55% of the US VCs and 28% of non-US VCs said the cost of compliance and corporate governance regulation in the US is too high.

The survey was conducted in the second quarter of 2006.  Of US firms, 89% were venture capital firms, while 7% were exclusively private equity firms and 4% were buyout firms. Of non-US firms, 69% were venture capital firms, compared to 25% private equity firms and 6% buyout firms

Venture Capital Developments in Australia

Developments in Australia on VC have recently increased. The tax changes that were introduced in 2002 and 2004 were not adequate to boost the sector. In a media release of 9 May 2006, the Commonwealth Government announced further incentives for the venture capital industry.

A new entity called “early stage venture capital limited partnership" (ESVCLP) will be introduced with full exemption from income and capital taxation. This new entity will replace the existing pool development funds. The ESVCLP will have a maximum fund size of A$100 million, total assets of investees cannot exceed A$50 million immediately prior to investment.


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