Venture capital investment trends will make a major shift by 2015 as investors are looking outside their home borders-increasing their focus on ventures in China and India, according to Ernst & Young’s Global Venture Capital insights and trends report 2011.
The global venture capital industry will experience a number of major changes in that time — ranging from global fundraising and cross-border investment, to exits on foreign stock exchanges or by foreign acquirer, to opening offices in more overseas locations and helping their portfolio companies access markets in new regions.
“Attracted by exceptional growth opportunities that require substantial funding, VC and PE investors are currently shifting their focus from ‘traditional’ VC and PE countries towards emerging markets,” said Maria Pinelli, Ernst & Young’s Global Vice Chair for Strategic Growth Markets. “As limited partners consider where to allocate their capital, and PE and VC funds look to make the right investments themselves, the investing landscape is evolving towards China and India.”
Currently, only about 20% of VC firms in Brazil, India, Israel and the UK invest outside their home countries. However, a majority of VC firms in Canada (69%), France (82%), Germany (92%), and the U.S. (49%) invest internationally. Of those VC firms investing outside their home countries, 57% plan to increase this activity during the next five years, while 35% plan to maintain their level of international investment, according to a June 2011 survey by the National Venture Capital Association (NVCA).
U.S. Fundraising Stays Challenging
Despite strong deal flow, market volatility has had an impact on the ability of even the best VC firms to raise new funds. In 2011, total capital raised by U.S. venture firms reached $16.2 billion, a 4.5% rise from the same period last year ($15.5 billion in 2011). The size of the US VC industry in terms of active funds continues to contract – to just over 300 firms in 2011 compared to over 700 in 2000.
As in past years, the top four regions in the world with the most VC investment activity were all in the United States: Silicon Valley retains the lead by ($12.6 billion, 977 rounds), followed by Boston ($3.9 billion, 369 rounds), the New York Citymetropolitan area ($3 billion, 367 rounds) and then Southern California ($3.3 billion, 286 rounds).
“While the amount raised in the United States continues to inch forward, LPs and VC firms alike still require a more robust exit market for portfolio companies” said Bryan Pearce, Americas head of Ernst & Young’s Venture Capital Advisory Group. “2011 saw a decline in the number of M&A exits from 560 in 2010 to 477 in 2011 and the number of VC-backed IPOs were flat. The good news is that size of the exits are larger and the median length of time to exit – both for M&A and IPO has declined to 5.3 and 6.4 years respectively, suggesting that many of the very old portfolio companies have been worked out of the system”.
China and India Are the Places to Be
China’s VC industry set record highs in 2011 based on both: 1) value, and 2) number of investments. Due to its late-stage investment focus and new fundraising record, China is likely to surpass Europe as the No. 2 venture hub globally by the end of 2012 based upon dollars invested. Given the favorable exit environment, the investment pace will likely continue.
“The Chinese government recently set new policies to stimulate the continued growth of the VC industry, and more investment is planned to increase VC investors’ appetite in energy conservation, environmental protection, next generation IT, biotech, advanced manufacturing, alternative energy, innovative materials and new-energy-powered vehicles. The IT and cleantech sectors are likely, however, to predominate VC activity in the years to come,” explains Pinelli.
The VC industry has seen strong growth in both 2010 and 2011. In 2011, $5.9 billion was raised in 323 rounds, while 2010 saw$5.5 billion in 315 rounds, besting the record peak of $4.9 billion in 338 rounds in 2008. Currently, Beijing is the leading Chinese VC investment hotbed, investing $2.9 billion, followed by Shanghai, which saw $1.3 billion of investment.
India’s venture capital industry has also been particularly active – and has been since 2006. In 2011, $1.5 billion was raised in 155 rounds, while in 2010 $1.1 billion was raised in 103 rounds. Over the next two years, India will see further VC investment coming from e-commerce, mobile applications, healthcare delivery, medical devices, financial inclusion, clean technology and IT.
European VC trends analysis
The European VC industry showed signs of a tentative recovery after a particularly challenging 2009, though activity remains significantly below pre-crisis levels.
“In the next five years, equity will remain the principal source of capital, with more companies looking to VC to finance growth,” Pinelli said. “European VC and PE firms hold a staggering $138 billion of “dry powder” and seek opportunities before their investment period end.”
In 2011, the industry suffered through some of the worst volume since 2004, as European fundraising fell 13% year-on-year, to$3.0 billion for 41 funds (compared to $3.4 billion for 51 funds in 2010). $6.1 billion was invested in 1,012 rounds (compared to$6.7 billion invested in 1,253 rounds in 2010).
The UK and Ireland continued to invest the most venture capital in Europe, with $1.7 billion invested in 274 deals (down from$2.6 billion invested in 2010), while France invested $1 billion in 217 deals in 2011 (down from $1.1 billion invested in 266 deals in 2010).
“Limited partners will continue to have a strong interest in funds that focus on rapidly developing and largely underserved markets. Although the U.S. will maintain its leading position as ‘the’ VC nation for a long time to come, the emerging growth markets will play an increasing role, with less risky, later-stage deals generally favored at first,” Pinelli said. “Over 50% of VC funds in mature VC hotbeds are investing outside their home countries, with most of them maintaining or increasing their allocations abroad. New funding will come from experienced angel investors as well as increasingly active local corporate investors. These trends are part of the unprecedented paradigm shift under way in the global venture industry.”