For the US, Israel and Europe, 90% of all VC-backed company exits are through M&A.
Amid the fragile economic recovery and highly volatile capital markets of 2011, the venture capital (VC) sector is becoming increasingly globalized.
A shift toward the emerging markets can be seen in geographic VC patterns and the growth of new global VC hotbeds.
Although the United States will likely remain at the leading edge of VC-backed innovation for many years to come, US VC fund-raising continues its decade-long decline. Elsewhere, in China, India and other emerging markets, vibrant innovation hotbeds and entrepreneurial talents are arising, and investors are focused on less risky, later-stage deals, at least for now.
Although unrealistic valuations may dampen future returns, China's VC industry reached record heights in 2011 and will soon surpass Europe as the second-largest venture hub for fund-raising in the world.
Both China's and India's strong VC industries are expected to continue their rapid growth and development as they capitalize on strong GDP growth, growing domestic consumption and a dynamic entrepreneurial ecosystem. At the same time, due to Europe's sovereign debt crisis and its muted medium-term growth potential, Europe's VC industry has lost some of its robustness.
Globally, companies are staying private longer, due to large corporations seeking proven business models prior to an acquisition and investors that prefer companies with a proven proﬁtability path both before and after the IPO. As angel investors have become major investors in early-stage start-ups, particularly in the US, the competition has nudged VCs toward later-stage, high-growth ventures.
Broadly speaking, the more mature VC markets of the US and Europe favor earlier-stage investments, while the emerging markets of China and India generally prefer later-stage companies. In China and India, IPOs represent the vast majority of exits for VC-backed companies.
But in the US, Europe and Israel, the main exit route for VC-backed companies is acquisitions (M&A), representing more than 90% of all exits. Furthermore, VC ﬁrms are also selling companies to private equity ﬁrms as a third path to liquidity.
Contrary to the popular perception that global VC investment has been concentrated primarily in the frothy digital media sector, VC funding has been quite evenly spread across sectors and life-cycle stages and has progressed at a reasonable pace.
Worldwide, the VC universe continues to shrink as limited partners focus on top performers or forego VC altogether. However, the sector's continued long-term consolidation is viewed as good for the sector, with fewer players investing smaller amounts in companies that will reach proﬁtability faster than they do today.
Large corporations striving to maintain market leadership are partnering with VC ﬁrms to access external innovation and a pipeline of new products and services. This report explores these themes across the follow topics:
We hope you ﬁnd Globalizing venture capital, our ninth annual report on venture capital, to be a source of valuable insight. We look forward to working together with you on the global challenges and opportunities that lie ahead.
Maria Pinelli, Global Vice Chair Strategic Growth Markets