Global trends in venture capital 2007 survey

Transcription

1 Technology, Media & Telecommunications Global trends in venture capital 2007 survey Global report sponsored by Deloitte Touche Tohmatsu

2 Global report sponsored by Deloitte Touche Tohmatsu in association with

3 Contents 1 Foreward 2 About the survey 5 Global report 5 Executive summary 9 perspective 24 perspective 39 perspective 53 Canada and Israel perspective 55 Global report (continued) 57 Conclusion

4 Foreword I am very pleased to present the results of the Deloitte Touche Tohmatsu (DTT) Technology, Media & Telecommunications Industry Group s (TMT) 2007 Global Venture Capital Survey. The 2007 Global Venture Capital Survey was sponsored by the DTT TMT Industry Group and was conducted in association with Venture Capital Associations in the Americas, Asia Pacific,, Middle East, and Africa. Following on from the survey in 2006, this year s survey was again designed to provide insight into the attitudes and intentions of venture capitalists around the world regarding specific geographic regions and industry sectors, over the next five years. Venture capital is often seen as the life blood of the technology industry, offering the resources and capacity for ideas to be given the chance to develop from conception into stand-alone products/ technologies, or life changing products and services. We may live in a global economy, but at this time the venture capital community is not broadly embracing global investment. Rather, roughly half of the venture community has made a commitment to a global investment strategy and even those firms are implementing that strategy slowly and cautiously. This annual survey is based on 528 responses from general partners of venture capital firms with assets under management ranging from less than $100 million to greater than $1 billion. Multiple responses from the same firm were allowed, as the survey was a general measurement of the state of global investing from general partners, not attitudes of specific firms. Of the 528 total respondents, 281 were based in the Americas, 174 in, Middle East and Africa and 73 in Asia Pacific. Igal Brightman Global Managing Partner Deloitte Touche Tohmatsu Technology, Media & Telecommunications

5 About the survey: The 2007 Global Venture Capital Survey was sponsored by the Deloitte Touche Tohmatsu (DTT) Technology, Media & Telecommunications (TMT) Industry Group, and was conducted in association with the following venture capital associations: Brazilian Association of Private Equity & Venture Capital (ABVCAP) British Venture Capital Association (BVCA) Canada s Venture Capital & Private Equity Association (CVCA) China Venture Capital Association (CVCA) Emerging Markets Private Equity Association (EMPEA) an Private Equity & Venture Capital Association (EVCA) Finnish Venture Capital Association (FVCA) French Private Equity Association (AFIC) Indian Venture Capital Association (IVCA) Irish Venture Capital Association (IVCA) Israel Venture Association (IVA) Italian Private Equity and Venture Capital Association (AIFI) Malaysian Venture Capital and Private Equity Association (MVCA) National Venture Capital Association (NVCA) Polish Private Equity Association (PPEA) Singapore Venture Capital & Private Equity Association (SVCA) Slovak Venture Capital Association and Private Equity Association (SLOVCA) Swedish Private Equity and Venture Capital Association (SVCA) Taiwan Venture Capital Association (TVCA) The survey was conducted with venture capitalists (VCs) in the Americas, Asia Pacific,, the Middle East, and Africa. There were 528 responses from general partners of venture capital firms with assets under management ranging from less than $100 million to greater than $1 billion. Multiple responses from the same firm were allowed, as the survey was a general measurement of the state of global investing from general partners, not attitudes of specific firms. The highest number of respondents 42 percent had capital under management totaling less than $100 million; 35 percent were between $100 million and $499 million; 12 percent were between $500 million to $1 billion; and 11 percent had more than $1 billion in capital under management.

6 Countries from around the world have been aggregated into the following geographic categories: Americas Canada Latin America United States () Geographically, the breakdown of responses is fairly representative of both the size and location of firms in the venture capital industry around the world. Forty-five percent of the respondents were from the United States, 31 percent from, 13 percent from countries, nine percent from the Americas (excluding the ), and two percent from the Middle East/Africa. Middle East Israel Middle East excluding Israel Figure 1. Location of respondents 1 Asia Pacific () China India Japan South Korea Other Asia Australia/New Zealand Austria, Germany, Liechtenstein, Switzerland Benelux Central & Eastern Commonwealth of Independent States (CIS) & Russia France, Italy, Monaco, Portugal, Spain Nordic Countries United Kingdom (UK) & Ireland 45% Middle East/Africa The Americas (excl. ) All charts within this report are sourced from the survey results. Percentage labels in charts have been rounded and may not add to 10. 2% 31% Africa

7 Figure 2. Assets under management (all respondents) % % 38% 36% 3 31% 27% % 17% 6% 8% 5% 1% Less than $100 Million $100 $499 Million $500 $1 Billion Greater than $1 Billion Middle East/Africa The Americas (excl. ) The survey questions sought to discover the degree to which venture capitalists are expanding their worldwide investment strategy. In short, is the venture capital community serious about implementing the strategy of investing on a broader global basis? This year s survey questions and format closely match last year s in order to track key attitude changes about global investing from year to year. However, this year a number of questions drilled down further to understand the business models and concerns of VCs who are investing globally. The questions also endeavored to: Identify countries or regions most attractive to venture capitalists interested in foreign investment. Better understand how VC business practices are changing in order to facilitate a more global investment approach. Identify the impediments and challenges VCs encounter when investing in various geographic markets. Determine the incentives that motivate VCs to overcome the challenges of foreign investing and encourage them to grow these investments.

8 Global report Executive summary global VC investment increasing, but growth is slow and cautious We may live in a global economy, but at this time the venture capital community is not broadly embracing global investment. Rather, only about half of the venture community has made a commitment to a global investment strategy and even those firms are implementing that strategy slowly and cautiously. The intentions for growth of foreign investment, as demonstrated by this year s survey data, are modest at best, with the venture community closely split on whether to embark upon a global investment strategy at all. This razor-sharp squeeze has 51 percent of global respondents currently investing outside of their home country, with the greatest percentage doing so coming from an respondents (63 percent), followed by countries (58 percent), and the (46 percent). However, it should be noted that most respondents indicated they had fewer than five deals outside of their home country. How different is the outlook five years out? Of the 51 percent of investors currently investing globally, 83 percent plan to expand their investments in the next five years. Of the 49 percent of investors currently not investing globally, 67 percent have no plans to invest globally in the next five years. Among investors, 54 percent indicated that they would be expanding their investment focus outside of their home country or region in the next five years, compared with 53 percent in The enthusiasm was slightly higher among non- respondents, growing to 61 percent this year from 58 percent last year. Figure 3. Percentage of venture capitalists currently investing outside their home country (all respondents) % % Middle East/Africa The Americas (excl. ) Middle East/Africa The Americas (excl. )

9 It is also important to note that given the tremendous resources required to successfully invest abroad, it is those investors managing the greatest amount of assets and thus having the greatest number of resources who are most likely to be pursuing a global investment strategy. The venture community remains closely split regarding whether to embark upon a global investment strategy. Fifty-four percent of VCs stated that they are not investing globally and 73 percent of those do not intend to invest globally anytime soon. Adequate deal flow in their home country was the reason indicated most frequently for this lack of interest, although a sizeable number (23 percent) are hindered by resource constraints, such as the lack of partners, capital, and time. Given that these numbers have not changed much from last year, a conclusion can fairly be drawn that for many firms, their strategy is set. VCs around the world are essentially dabbling in global markets, with the majority of VC respondents indicating that less than five percent of their capital is invested overseas, generally in less than three deals per fund, said Mark Jensen, national managing partner of Deloitte & Touche LLP s Venture Capital Services. VCs are making the majority of their foreign investment in areas with higher quality deal flow, entrepreneurial s, and access to foreign markets, as well as places where they have experience and thus greater comfort levels. Figure 4. Percentage of venture capitalists indicating an increase in expanding global investment focus (all respondents) % % Middle East/Africa The Americas (excl. ) Middle East/Africa The Americas (excl. )

10 Despite recent headlines, the relatively static nature of the data demonstrates that while some venture investors are certainly taking advantage of opportunities outside their home countries, actual growth in terms of percentage of venture investors investing globally is occurring much more slowly than is commonly believed. And, for a lot of firms, they are not diving deep into investing in other countries, but dipping a toe in with one or two deals. This cautious approach allows the venture firms to further assess the investment and evaluate how their strategy may need to be adjusted and how critical challenges, such as tax and intellectual property (IP), impact overall performance. There is a small but dedicated group of venture capital pioneers who have embarked upon a global strategy and are driving the growth in these regions. But as a whole, the venture capital industry in the has not embraced direct global investment yet, said Mark Heesen, president of the National Venture Capital Association. But those VCs who are looking beyond their borders are not necessarily looking very far beyond them. While they may be investing outside their home country, those in the Asia Pacific region and primarily are selecting other countries in their own regions. Asia Pacific investors, for instance, are primarily targeting China for their investments, followed by the, and then other Asian countries. an VCs look to Central and Eastern first; then the cluster of Austria, Germany, Liechtenstein, and Switzerland; and then finally the Meanwhile, investors in the Americas (excluding the ) are looking at neighboring countries in the Americas and the Only investors are going halfway around the world to focus on China and India. Asia Pacific, an and non- Americas investors are still sticking fairly close to home. And, many, particularly those managing smaller amounts of capital, are investing in domestically headquartered companies with operations overseas as opposed to directly investing in foreign countries. This strategy allows VCs to build a comfort zone while they develop a presence abroad. VCs show they need to protect and enhance their investments by maintaining close connections which they do now by requiring their partners to travel more (58 percent), investing only with other investors who have a local presence (51 percent), and developing strategic alliances with foreign-based firms (48 percent). VCs, regardless of where they are based, have a universal understanding that to successfully manage and mentor their portfolio companies; they need to be near them, one way or another. Figure 5. Current business practices used by venture capitalists to manage foreign investment focus (all respondents) % 5 48% 51% % 36% % 7% 8% Develop strategic alliance(s) with foreign-based firm(s) Invest only with other investors that have a local presence Acquire foreign-based firm(s) Require partners to travel more Require partners to transfer to foreign locations Relocate headquarters of portfolio companies to be near our firm Open new office(s) in foreign location(s) Hire investment staff with expertise in target countries/regions Invest in local portfolio companies with significant operations outside of home country/region

11 Of course, it should be noted that while these respondents are looking for foreign deals, they are not putting much money into them yet. Globally, 53 percent of VCs have only one to two international investments in their portfolio. Another 23 percent have between three and five. If you look at the percentage of capital under management currently deployed in international investments, 57 percent have between one and five percent with another 14 percent investing between six and ten percent. Figure 6. Foreign investments currently held by VC firms (all respondents) So this is a cautious group that is approaching foreign markets with deliberation. But this allows them to assess the investment, determine the adjustments their strategy may need, and evaluate how the inevitable challenges in investing in a foreign country tax issues and intellectual property issues, for example will impact performance fundamentals. Figure 7. Percent of capital under management investors currently have deployed in primary country/region of expansion (all respondents) % % 5% 5% 5% 1-5% % % % Investments 3-5 Investments 6-10 Investments Investments 16+ Investments

12 perspective Current strategies for making direct investments For VCs currently investing abroad, the trend is to develop strategic alliances with foreign-based firms (55 percent) and require partners to travel to foreign locations (53 percent) as a means of more ably managing these investments. A large number (47 percent) also invest only with other investors with a local presence in the foreign country and invest in local portfolio companies with significant operations outside of the home country/region (45 percent), as discussed above. Taken together, the adoption of these strategies demonstrates the preference venture capital firms have for physical proximity to work with management. These VCs also recognize the importance of understanding local culture and the benefits of having an indigenous presence in their target countries to make good use of their know-how in that country. To that end, some hire investment staff with local expertise (32 percent), while others open new offices in the foreign location (24 percent) or simply acquire foreign-based firms (24 percent). Very few either relocate the headquarters of a foreign portfolio firm to be near their own firm or require partners to transfer to foreign locations. Countries of choice for venture capitalists respondents are quite interested in foreign deals; in fact they are far more committed than their counterparts in other regions. Based on the survey response, they are well in them, relative to their overall holdings. Currently, 48 percent have only one or two international investments, while 23 percent have three to five international investments and 19 percent have at least 16 investments abroad. Figure 8. Current business practices used by venture capitalists to manage foreign investment focus (, and respondents) % 48% 4 47% % % 36% 32% 52% 45% 3 41% % 7% 8% 8% 6% 11% 12% Develop strategic alliance(s) with foreign-based firm(s) Invest only with other investors that have a local presence Acquire foreign-based firm(s) Require partners to travel more Require partners to transfer to foreign locations Relocate headquarters of portfolio companies to be near our firm Open new office(s) in foreign location(s) Hire investment staff with expertise in target countries/regions Invest in local portfolio companies with significant operations outside of home country/region

13 Where are Asia Pacific VCs looking? Among this year s respondents, 37 percent are interested in China to expand their investments, compared with 20 percent last year. China s venture capital market has continued to mature and attract significant interest from overseas funds in recent years, said Hugo Shong, chairman of the China Venture Capital Association and founding partner of IDGVC Partners. We are confident the progressive development of the venture capital market will continue to target diversified sectors, such as healthcare, consumer goods, retail and clean technology. The Chinese government encourages and supports venture capital investment to facilitate the development of the economy. Along with a sounder regulatory for VCs, Sino-foreign RMBdenominated VC funds are also encouraged. Another 27 percent are interested in other countries, including Singapore. Singapore has recently seen an increase in interest by both global and pan-asian firms, noted Kelvin Chan, chairman of the Singapore Venture Capital & Private Equity Association. Singapore s strategic location in Southeast Asia, together with its sound legal and financial infrastructure, good governance practices and pool of investment talent, make it an ideal location for accessing buy-out and private equity opportunities in the region. Over the past two years, we have witnessed a significant number of leading global and pan-asian firms locating their operations in Singapore including Adams, AXA, Alliance, Carlyle, Collers, Partners and TPG. Respondents this year are less interested in the (18 percent this year, compared with 22 percent in 2006). And, does not appear this year, whereas 12 percent were interested last year. So, VCs are staying fairly close to home. Global, in fact, may not be the most accurate description of their foreign investment strategy. Figure 9. Foreign investments currently held by VC firms ( respondents) 1% 1-2 Investments 3-5 Investments 6-10 Investments Investments 16+ Investments % 10

14 Figure 10. Primary location where investors would like to expand investment focus ( respondents) 27% 18% Of all respondents who expect to expand their foreign investments, 86 percent manage more than $1 billion in assets, compared with 48 percent who manage less than $100 million. This year s study continues to show a significant percentage of mid-size firms who see opportunities in investing outside of their home country and are building their businesses in a way that will allow them to take advantage of those opportunities. Figure 11. Percentage of venture capitalists expecting to expand investment focus outside their home country/region by capital under management (all respondents) China India Japan Middle East (excl. Israel) South Korea Other Asia 37% Resources are critical for international investing As respondents to this year s survey clearly demonstrate, it takes a lot of resources and a sophisticated infrastructure to successfully manage a global investment strategy. Those with fewer resources will be slower in expanding their investments outside of their home country. Of those VCs who indicated they currently have capital deployed abroad, 63 percent see a future in that strategy % Less than $100 Million 58% $100 $499 Million 68% $500 Million $1 Billion 86% Greater than $1 Billion As they plan for the future, Asia Pacific investors are primarily planning to develop strategic alliances with foreign-based firms (30 percent). Fewer (18 percent) plan to invest only with other investors with a local presence or hire investment staff with local expertise. Only 13 percent expect to invest in local portfolio companies with significant operations outside of their home country or region, and nine percent will require partners to travel more or open new offices in foreign locations. 11

15 Figure 12. Primary business practices venture capitalists expect to use to manage expanding investments (, and respondents) % % 18% 1 15% 2% 1 11% 2% 2% 2 18% 2 18% Develop strategic alliance(s) with foreign-based firm(s) Invest only with other investors that have a local presence Acquire foreign-based firm(s) Require partners to travel more Require partners to transfer to foreign locations Relocate headquarters of portfolio companies to be near our firm Open new office(s) in foreign location(s) Hire investment staff with expertise in target countries/regions Invest in local portfolio companies with significant operations outside of home country/region Contrasting this data with the previous chart concerning current business practices, the significant drop in requiring partners to travel more clearly indicates that the venture firms are adopting strategies that allow them to be sensitive to cultural differences and that they need to have a substantial local presence to be successful. Primary reasons for expanding globally At the global level, VCs are primarily interested in investing abroad to take advantage of higher quality deal flow, but when we focus only on Asia Pacific investors, it looks a little different. China s greatest allure to VCs is the emergence of an entrepreneurial (42 percent). However, 25 percent are drawn to the potential of higher quality deal flow, while 17 percent appreciate the access to its market. Interestingly, only eight percent were attracted to China as a lower-cost location or for access to quality entrepreneurs. Other countries are attractive to VCs primarily due to the diversification of industry and geographic risk (45 percent) they represent. Investors also perceive higher quality deal flow (33 percent), just as in the Less significant appears to be the emergence of an entrepreneurial or access to foreign markets (both at 11 percent). Looking at VC investments in the, it is clear that the primary reason for these investments is access to foreign markets (50 percent), although higher quality deal flow (33 percent) and access to quality entrepreneurs (17 percent) play a significant role. 12

16 Figure 13. Top locations where investors are interested in expanding and why % 45% % 2 1 8% 17% 11% 17% 11% 8% Higher quality deal flow Access to quality entrepreneurs Emergence of entrepreneurial Diversification of industry and geographic risk Access to foreign markets Lower cost locations Extensive competition for deal flow in our local market China Other Asia Majority of VCs deploying small percentages of their capital outside their home country There may be interest in investing globally, but where is the actual capital? In truth, the percentage of capital under management deployed in foreign locations for most venture capitalists, even Asia Pacific VCs, is pretty low. Among investors currently investing outside of their home country, 34 percent have less than five percent of capital under management invested in foreign locations. The number drops to 15 percent among those who have between six and ten percent of their capital invested abroad, and shrinks further to six percent for those VCs who have between 11 and 15 percent of their assets in international investments. Interestingly, it does pick back up to 15 percent among those VCs who have between 26 and 50 percent of their assets invested in foreign companies. This is double the levels seen in and more than triple the result. 13

17 Figure 14. Percent of capital under management investors currently have deployed in primary country/region of expansion (, and respondents) % % % 1 12% 6% 6% 15% 2% 6% 2% 1-5% % % % % 7% 6% 8% What about five years out? respondents expect to have a far greater percentage of their assets under management in foreign investments. Indeed, a full 31 percent plan to hold between 26 and 50 percent of their investment in foreign companies. Another 18 percent expect to have between 21 and 25 percent of their assets under management in foreign investments. The numbers go down in both directions and hit zero in the one to five percent category. Figure 15. Percent of capital under management investors expect to deploy five years from now in primary country/region of expansion (, and respondents) % 12%12% 35% 2 16% 15% 17% 1 18% 16% 1-5% % % % % 1 7% 1 8% 6% 5% 14

18 A case for refraining from an overseas strategy Figure 16. Primary reason for not expanding international investment over the next five years (, and respondents) % % 1 25% 1 16% % 8% Adequate deal flow in existing markets Resource constraints (lack of partners capital, time, etc.) Contractual restrictions/ Limited Partner agreement restrictions Legal restrictions Superior returns are available in our local market Not everyone, of course, is eager to put their capital in companies abroad. It can be very challenging to invest overseas and not always profitable. For respondents, the primary reason among those not expanding their international portfolio in the next five years is resource constraints the partners, capital, and time needed to effectively manage the foreign investment are lacking. Given the relatively recent emergence of venture capital in Asia, it is not surprising that resource constraints are keeping VCs close to home in some ways the VC industry is still in its infancy. Almost as important to these investors is existence of adequate deal flow in their existing markets (28 percent). Related to that, the respondents noted, were the superior returns they already receive in their local market (23 percent). 15

19 Investing globally by investing locally Of course, one way to address resource constraints, as mentioned above, and to build a comfort zone for global investing, is to invest locally in companies with operations abroad. A full 79 percent of respondents noted that at least some portion of their portfolio has significant operations outside the country in which their companies are headquartered. The numbers, however, are still low when the percentages of the portfolio are examined. More than one-third (38 percent) identify only one to ten percent of their portfolio companies as having operations located abroad. Another 18 percent indicate that 11 to 25 percent of their portfolio had significant foreign operations. The number drops to 13 percent at the 26 to 50 percent level, nine percent at the 51 to 75 percent level and a mere one percent as it goes from 76 to 100 percent. These numbers represent a modest change from the past for respondents. Among those who noted zero percentage of significant operations outside the headquarter country, the number dropped minimally from 23 to 21 percent. Figure 17. Percent of portfolio companies with significant operations outside the country/region of headquarters (, and respondents) 4 38% 3 28% 32% % 1 12% 18% % 18% 15% 1 5% 1% 2% % %

20 Those investors with assets in local companies with foreign operations have different targets depending on the activity. Not surprisingly, China is the clear choice for manufacturing operations (38 percent), followed by other Asian countries (18 percent), India (three percent), and the (one percent). For research and development, investors prefer the (28 percent), with China (13 percent), other Asian countries (seven percent), and India and South Korea (both at one percent) trailing behind. investors again look primarily to China for engineering, although at a lower level (15 percent). And, interest flattens out among the other countries: Other Asian countries and the (nine percent), India (six percent), and South Korea and the Middle East excluding Israel (one percent). For back office operations, Asian countries other than China are the top selection (15 percent), followed by India (12 percent), China (ten percent), and the (three percent). For Global VCs, clearly China and India are the favorites among nations for manufacturing and R&D operations. Globally, China, at 30 percent, is the country of choice for manufacturing, while India leads in R&D (15 percent), engineering (18 percent), and in back office operations (25 percent). Recent years have witnessed a steady increase in the number of tier one venture capital firms from the and establishing their offices in India, with the objective to make direct investments, rather than mere support of portfolio back office operations, observed Jaswinder Kaur, executive director of the Indian Venture Capital Association. We anticipate continued growth in VC investment in India in 2008 as global investors continue to recognize the quality of deal flow and management talent. While an respondents are mixed about relocating operations in the Asia Pacific region as opposed to being closer to home in other an countries, VCs have strong preferences for China and India. They by far would relocate manufacturing operations to China (41 percent), and R&D (29 percent), engineering (34 percent), and back office operations (42 percent) to India. No other country even remotely comes close. Taken together, it can be seen that while directly investing in foreign companies remains a slow moving trend, global investing is spreading, albeit primarily through foreign operations. It also reflects the new reality that many companies are global from the day of their inception. And, as an investment strategy, selecting companies with overseas operations allows portfolio companies (and investors) to take advantage of cost savings and access to talent in foreign markets. Figure 18. Location of choice when relocating significant operations outside country/region of headquarters ( respondents) 4 38% 3 28% % 1% 1 7% 1% 1% 15% 6% 1% 1% 15% 12% 1 Manufacturing Research & Development Engineering Back Office Operations China Other Asia India South Korea Middle East (excl. Israel) Canada Latin America 17

21 Impediments to global investing While global investing remains an ideal due to the perceived benefits of getting into new markets, obtaining the talents of foreign entrepreneurs and other professionals, and perhaps lowering costs there is no doubt that VC firms encounter a variety of risks and challenges in executing this strategy. The is often perceived as a country in which the cost of complying with regulation is too high. On the other hand, the opposite issue has struck a chord among all respondents, even including VCs: the laxness of regulation in specific foreign countries and the additional business risk this creates. Countries/regions hit hardest by this criticism were India, Central and Eastern, and China. This could explain why VCs are going so slowly and waiting to see how things develop before committing larger percentages of their capital. Figure 19. Top locations where regulation is too lax and creates additional business risk (, and repsondents) % 26% 3 25% % 16% 16% 11% 11% 11% 5% 5% 2% 2% 5% 8% 8% 2% 5% 2% 2% 2% China Central & Eastern Africa Canada Other Asia UK & Ireland CIS & Russia India Middle East (excl. Israel) South Korea 18

22 Protection of intellectual property continues to be a concern, particularly in China. Globally, 59 percent of respondents pointed to China as a country where intellectual property laws create additional risk, breaking down to 60 percent of respondents and 57 percent of non- respondents. This number jumped significantly from last year both on the part of (37 percent) and non- respondents (49 percent). While some of this may be the result of VCs gaining more experience in China, there undoubtedly is a lot of fallout from various significant IP-related issues reported in the press recently. Figure 20. Top locations where intellectual property laws create additional financial risk (, and repsondents) % % % 16% 17% 6% 6% 6% 2% 1% 1% 1% 1% China India Central & Eastern Other Asia Middle East (excl. Israel) Latin America Israel Africa Canada 19

23 Comparing this year s survey results to the previous year, impediments to investing in both India and China were down in almost all categories. This trend may be due to investors becoming more comfortable with the investment s in these countries as they gain more experience in these regions. Figure 21. Impediments to investing in China (, and respondents) % % 8% 11% 6% 1 11% 1 11% 1 7% 1 1% 2% 1% 1% 2% 6% 6% 1 1% 5% % 2% 2% 1 5% 1 1% 2% Difficulty in achieving succesful exits quality deals that fit investment profiles experienced local investors talented portfolio management team skilled workers Unstable economy Unstable political Exchange rate risk Intellectual property laws Tax Litigation Regulatory Personal safety and security concerns Figure 22. Impediments to investing in India (, and respondents) % % 6% 8% 8% 1% 5% 1 1% 1% 2% 1% 2% 5% 7% 7% 2% 6% 1% 1% 2% Difficulty in achieving succesful exits quality deals that fit investment profiles experienced local investors talented portfolio management team skilled workers Unstable economy Unstable political Exchange rate risk Intellectual property laws Tax Litigation Regulatory Personal safety and security concerns 20

24 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 is 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. Figure 23. Impediments to investing in Japan (, and respondents) % 1 7% 7% Difficulty in achieving succesful exits 8% quality deals that fit investment profiles 6% experienced local investors 5% 5% talented portfolio management team 1% 1% 1% 1% 1% 1% 2% 1% 2% 1% skilled workers Unstable economy Unstable political Exchange rate risk Intellectual property laws Tax Litigation Regulatory Personal safety and security concerns 21

25 Among other countries, such as Japan, South Korea, Australia, and New Zealand, there were some concerns noted by a modest number of VCs. The only notable issue and by investors had to do with a lack of quality deals that fit their investment profile. For Japan, 15 percent of investors found that to be an impediment. It was an issue in South Korea for 14 percent of investors and 13 percent identified that for Australia and New Zealand. For other countries, that number was 15 percent. These numbers indicate that the level of concern for investors in countries are fairly low, with the exception of IP laws, and overall concerns seem to be declining. Figure 24. Impediments to investing in South Korea (, and respondents) % 7% 7% 7% 5% Difficulty in achieving succesful exits quality deals that fit investment profiles 6% experienced local investors 5% 5% 2% 2% 2% 2% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% talented portfolio management team skilled workers Unstable economy Unstable political Exchange rate risk Intellectual property laws Tax Litigation Regulatory Personal safety and security concerns 22

26 Figure 25. Impediments to investing in Other Asia (, and respondents) % 1 12% 5% 5% Difficulty in achieving succesful exits 1 quality deals that fit investment profiles 6% 5% 6% 6% experienced local investors talented portfolio management team 2% 1% 1% 1% skilled workers Unstable economy 7% Unstable political 2% 2% 2% 2% 2% 1% Exchange rate risk Intellectual property laws Tax Litigation Environment Regulatory Environment Personal safety and security concerns Figure 26. Impediments to investing in Australia/New Zealand (, and respondents) % 6% 6% Difficulty in achieving succesful exits 1 1 quality deals that fit investment profiles 6% 6% 5% experienced local investors talented portfolio management team 2% 2% 2% 2% 1% 1% 1% skilled workers Unstable economy Unstable political Exchange rate risk Intellectual property laws Tax Litigation Environment Regulatory Environment Personal safety and security concerns 23

27 perspective Current strategies for foreign investing an venture capitalists who are currently investing abroad have established several strategies to manage their foreign investments. Leading with 60 percent is the practice of investing only with other investors who have a local presence. They also require their partners to travel more to foreign locations (57 percent) and develop strategic alliances with foreign-based firms (48 percent). A significant number (30 percent) invest in local portfolio companies with operations abroad. Clearly, these strategies demonstrate that an venture capital firms prefer to have some kind of physical proximity to their portfolio companies in order to work more effectively with management. They understand the importance to the success of their investment of being familiar with the local culture. And, they realize that there are benefits in having a local presence and know-how in their target countries. To that end, more than one-third of an VCs hire investment staff with local expertise (36 percent) or open new offices in the foreign location (35 percent). Very few acquire foreign-based firms, relocate the headquarters of a foreign portfolio firm to be near their own firm, or require partners to transfer to foreign locations. Figure 27. Current business practices used by venture capitalists to manage foreign investment focus (, and respondents) % 48% 4 47% % % 36% 32% 52% 45% 3 41% % 7% 8% 8% 6% 11% 12% Develop strategic alliance(s) with foreign-based firm(s) Invest only with other investors that have a local presence Acquire foreign-based firm(s) Require partners to travel more Require partners to transfer to foreign locations Relocate headquarters of portfolio companies to be near our firm Open new office(s) in foreign location(s) Hire investment staff with expertise in target countries/regions Invest in local portfolio companies with significant operations outside of home country/region 24

28 Primary target countries for an venture capitalists an VCs are very active in foreign investing, although these investments actually are less global than they are regional, since an VCs actually focus more on other an countries as opposed to Asia or the Americas. Currently 51 percent have only one or two international investments. However, 24 percent of an VCs have three to five foreign investments, 12 percent have six to ten foreign investments, and ten percent have 16 or more investments abroad in their portfolio. By far, an VCs are sticking close to home when assessing future investment opportunities, with 23 percent most interested in Central and Eastern and another 19 percent interested in the cluster of Austria, Germany, Liechtenstein, and Switzerland. The appeals to 17 percent of an investors, and 12 percent show interest in the Nordic countries. Only nine percent are interested in expanding their investment focus to China. Altogether, 66 percent of an respondents show a strong preference for investing in other parts of. Figure 28. Foreign investments currently held by VC firms ( respondents) 1 Figure 29. Primary locations where investors would like to expand investment focus ( respondents) 5% 12% Central & Eastern 1% 17% Austria, Germany, Liechtenstein, Switzerland Nordic Countries China France, Italy, Monaco, Portugal, Spain UK & Ireland Benelux CIS & Russia India, Other Asia, Japan, South Korea Other* * Africa, Israel, Middle East (excl. Israel) % 51% These results are in sync with Asia Pacific respondents, who are primarily interested in other Asian countries, and contrast with investors, who are primarily focused on China and India Investments 3-5 Investments 6-10 Investments Investments 16+ Investments 25

29 Resources are critical for international investing Investing globally takes a tremendous number of resources to be successful. It also requires a uniquely sophisticated infrastructure. Those VCs with fewer resources are certainly going to move more slowly to expand their investments abroad and may find it to be prohibitive. Globally, among those respondents who plan to expand their investments overseas, 86 percent manage more than $1 billion in assets, compared with 48 percent who manage less than $100 million. Figure 30. Percentage of venture capitalists expecting to expand investment focus outside their home country/region by capital under management (all respondents) % % 6 58% 5 48% Less than $100 Million $100 - $499 Million $500 Million - $1 Billion Greater than $1 Billion 26

30 Future business practices Of those an VCs who currently have capital deployed abroad, 85 percent of firms plan to expand those investments over the next five years. As these an investors look and plan ahead, how do their strategies change from their current practices? Thirty-one percent expect to invest only with other investors with a local presence, while 18 percent plan to hire investment staff who have local expertise. Another 17 percent intend to develop strategic alliances with foreign-based firms. Fewer plan to open new offices in foreign locations (14 percent), or require their partners to travel more (11 percent). Figure 31. Primary business practices venture capitalists expect to use to manage expanding investments (, and respondents) % % 18% 1 15% 2% 1 11% 2% 2% % 18% Develop strategic alliance(s) with foreign-based firm(s) Invest only with other investors that have a local presence Acquire foreign-based firm(s) Require partners to travel more Require partners to transfer to foreign locations Relocate headquarters of portfolio companies to be near our firm Open new office(s) in foreign location(s) Hire investment staff with expertise in target countries/regions Invest in local portfolio companies with significant operations outside of home country/region 27

31 One technique that VCs currently use to manage global investments, requiring partners to travel more, showed a significant decline. This reflects the growing realization that successful international investing requires more than regular visits from the home office that instead firms need to be culturally sensitive and have a significant local presence. Primary reasons venture investors are expanding globally Globally, the most frequently reason stated for investing in foreign countries or regions is to take advantage of higher quality deal flow. Of course, when individual countries are identified as investment targets, the motivations can shift. an investors definitely continue to see higher quality deal flow in Nordic countries (57 percent); the (48 percent); and Austria, Germany, Liechtenstein, and Switzerland (42 percent). Access to quality entrepreneurs and to foreign markets (both 21 percent) also make the an attractive target for expansion. The main attraction of an investors to China is due to the emergence of an entrepreneurial there (50 percent). Access to foreign markets draws 30 percent of an VCs. Another 20 percent are attracted by the potential of higher quality deal flow. Central and Eastern are of less interest to investors globally, but nonetheless, 23 percent of an VCs are looking at higher quality deal flow and the emergence of an entrepreneurial, while 12 percent see the region as having access to quality entrepreneurs. Among venture capitalists, nine percent are interested in investing in the UK and Ireland, while seven percent are interested in the remainder of. Figure 32. Top locations where an investors are interested in expanding and why % 5 48% 5 42% % 1 21% % 5% 3 21% 1 8% 8% 12% Higher quality deal flow Access to quality entrepreneurs Emergence of entrepreneurial Diversification of industry and geographic risk Access to foreign markets Lower cost locations Extensive competition for deal flow in our local market Austria, Germany, Liechtenstein, Switzerland Central & Eastern China Nordic Countries 28

32 Majority of VCs deploying small percentages of their capital outside their home country While an VCs are engaging in foreign investment deals, they do not represent a significant percentage of their capital under management. Among an investors currently investing abroad, 52 percent have less than five percent of capital under management invested in foreign locations. Only 14 percent have between six and ten percent of their capital invested abroad, and just four percent have between 11 and 15 percent of their assets in international investments. However, the percentages begin to rise a bit, with nine percent of an VCs having foreign investments between 51 to 75 percent of capital invested abroad, triple the level of the U.S and double that of. Figure 33. Percent of capital under management investors currently have deployed in primary country/region of expansion (, and respondents) % % % 1 12% 6% 6% 15% 2% 6% 2% 1-5% % % % % 7% 6% 8% 29

33 The numbers even out somewhat when investors look five years in the future, shifting dramatically from disproportionately being in the one to five percent range to a broader spectrum of capital under management, with the bulk of anticipated international investments ranging from 11 percent to 50 percent of capital under management. This demonstrates a far greater commitment to investing in foreign deals in the next five years than what we are seeing currently. Figure 34. Percent of capital under management investors expect to deploy five years from now in primary country/region of expansion (, and respondents) % 31% % 12%12% 2 16% 15% 17% 1 18% 16% 1-5% % % % % 1 8% 6% 5% 30

34 A case for refraining from an overseas strategy For some venture capitalists, there are either too many hurdles or too few incentives to invest abroad. Among an VCs, it is mostly a matter of not enough incentives. The greatest number of respondents (40 percent) cited adequate deal flow in existing markets as the primary reason for not expanding their international portfolio in the next five years. However, 19 percent also identify resource constraints and contractual restrictions or LP agreement restrictions as primary reasons for not expanding their international investments. Another 14 percent note legal restrictions. Figure 35. Primary reason for not expanding international investment over the next five years (, and respondents) % % 1 25% 1 16% % 8% Adequate deal flow in existing markets Resourse constraints (lack of partners capital, time, etc.) Contractual restrictions/ Limited Partner agreement restrictions Legal restrictions Superior returns are available in our local market 31

35 Investing globally by investing locally Obviously, there is no single way to invest globally. Indeed globalization manifests itself at various business levels. While investing directly in a foreign company is the most conventional approach, there are certainly other options available to investors, including investing locally in portfolio companies with overseas operations. Additionally, given that resource constraints can put a damper on international investment, it makes sense that some VCs find investing in local companies with operations abroad attractive. This strategy can help VCs gain exposure in foreign markets with greater ease of mind and less risk. Among an respondents, 86 percent acknowledged that at least some part of their portfolio has significant operations manufacturing, R&D, engineering, and back office located outside the country in which their companies are based. One point this brings out is that many companies that are venture backed are developed as global companies from day one. It is, of course, a competitive necessity as VCs anticipate their eventual exit strategy. By launching significant operations abroad, investors are developing the company into a global market leader to prepare it for acquisition by a global buyer. More than a quarter (28 percent) identify only one to ten percent of their portfolio companies as having operations located abroad. Another 23 percent indicate that 11 to 25 percent of their portfolio had significant foreign operations. The number drops to 18 percent at the 26 to 50 percent level, 15 percent at the 51 to 75 percent level and two percent as it goes from 76 to 100 percent. Nevertheless, these latter numbers are higher than their VC counterparts. Among VCs, the numbers are slightly higher than an VCs at the low end of the scale, evening out at 18 percent when both groups of respondents reach the 25 to 50 percent mark. VCs are far behind both an and investors when reaching the 51 to 75 percent range. However, they slightly exceed an and investors at the highest level. This is a modest change from last year for an respondents. Among those VCs who stated zero percentage of significant operations outside the headquarter country, the number fell from 18 to 14 percent. Figure 36. Percent of portfolio companies with significant operations outside the country/region of headquarters (, and respondents) 4 38% 3 28% 32% % 2 18% 18% 18% 15% 1 12% 1 5% 2% 1% % %