U.S. VCs Think Globally, Act Locally
Although we live in a global economy and hear lots about booming business prospects in faraway places such as China, India and parts of the Middle East, venture capitalist in the United States are not broadly embracing global investment opportunities, suggest findings of a 2007 global VC survey sponsored by Deloitte & Touche in cooperation with the National Venture Capital Association and numerous other venture capital associations around the world. Rather, the U.S. VC community would be better described as investing slowly and cautiously within a select few markets.
“U.S.-based VCs are essentially dabbling in global markets,” says Mark Jensen, national managing partner of Deloitte’s Venture Capital Services, and the survey results indicate that global investing will broaden among U.S. VC firms at a slow pace for the foreseeable future, says the research firm.
Despite greater intentions expressed in previous surveys, less than half (46 percent) of U.S. VCs are investing abroad. What’s more, among the U.S.-based VCs that are not presently investing in other countries, 73 percent said they do not intend to invest globally anytime soon.
Meanwhile, among those that currently have capital deployed in foreign locations, 66 percent said less than 5 percent of their capital under management is deployed in those regions. More than three-quarters have less than 10 percent of capital working abroad. Likwise, among the U.S. VCs investing globally, 53 percent have two or less investments in foreign markets, while nearly 80 percent have 5 or less international deals.
“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,” says Mark Heesen, president of the National Venture Capital Association.
That’s not to say all the reasons behind the cautious movement necessarily reflect negatively on the potential for or perception of opportunities abroad. Rather, just as in the 2006 Deloitte survey, close to 60 percent of U.S. respondents cited adequate deal flow and superior returns in the U.S. as the primary reason for not expanding globally.
A secondary reason often cited was resource constraints, such as a lack of partners or capital. For the 2007 survey, for example, 25 percent of U.S. firms cited resource constraints as a barrier, up from 16 percent in 2006. Deloitte views this jump as a result of VCs gaining more experience in overseas investing and hence developing a more realistic idea of what is required to expand globally.
This resource realization isn’t exactly a surprise, however, seeing how VC firms generally prefer to keep close proximity to their portfolio companies, even those based halfway around the world.
“You can’t manage these investments from across an ocean,” Heesen says, so a prerequisite to global expansion has been establishing “people on the ground,” as well as gaining a solid grasp of local cultures, all of which demands time and money.
So it’s also not surprising that the larger VC firms so far have expressed the most optimism over direct global investment. According to Deloitte’s figures, 85 percent of U.S. firms with capital management of more than $1 billion indicated plans to increase their foreign investments.
Firms of all sizes, on the other hand, recognizing the increased risk and costs associated with investing directly in foreign markets but not wanting to miss out on obvious opportunities, are widely adopting a strategy of investing in domestic companies with operations overseas. This year 88 percent of U.S. respondents to the Deloitte survey had some portion of their portfolio investments in domestic businesses with significant operations outside of the U.S, an increase of almost twice as many as last year.
But even within this “comfort zone” approach, moderation remains the theme, as more than 60 percent of those who responded that they had portfolio companies with significant operations outside the U.S. indicated that less than 25 percent of their portfolio fell into this category.
Among U.S. firms currently investing directly in foreign markets, 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 also is noted for access to its vast market. The fact that China and India are lower-cost locations appears to be a secondary consideration, survey results suggest.
Meanhwile, Canada’s proximity to the U.S., as well as its stable political environment and high levels of personal safety and security, has made it an attractive country for U.S. investment.
Still, “even in these countries, the majority of U.S. respondents are essentially dabbling, making only one to two investments thus far,” say Deloitte researchers.
According to the survey, the primary concern over investing in China is lack of intellectual property laws, while for India, the primary concern is lack of deals that fit VCs’ investment profiles. The top two concerns regarding investing in Israel are the unstable political environment and personal safety and security, while Canada must deal with concerns over an unfavorable tax environment.
Nonetheless, when it comes to evaluating and expanding within these countries, as with most of the rest of the world’s markets, VCs are citing fewer and fewer concerns overall as experience levels grow higher, says Jensen. So while cautiousness still reigns, “venture capital is an industry of fast followers,” he says. “Barring any significant negative experiences in foreign markets, we will see continued growth in global VC investment.” IP
