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Global venture capital insights and trends report 2011 - Paradigm shifts in global capital - EY - Global

Global venture capital insights and trends report 2011

Paradigm shifts in global capital

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China and India are beginning to challenge Europe and Israel in investment amounts.

As the economic pendulum swings toward the rapidly developing economies, the venture capital sector is experiencing its own paradigm shifts, reflecting an increasingly globalized world.

The globalization of venture capital is taking many forms, ranging from global fund-raising and cross-border investment, to exits on foreign stock exchanges or by foreign acquisition, to VC firms opening offices overseas and helping their portfolio companies access markets in new regions.

Top-tier VC funds dominate in the West as VC consolidation continues

Global "dry powder" is US$117.7 billion (capital committed to VC firms but not invested yet) and remains at a level similar to the past few years, as VCs invest at a pace that is reflected by their fund-raising volume.

In 2011, 376 VC funds were fund-raising globally, trying to raise US$53.6 billion. Between 30% and 50% of all the funds in the fund-raising stage are unlikely to make it at all or will do so at a substantially reduced size. VC funds closing in 2011 had a buoyant start but dropped off in the second quarter.

The top-tier VC firms close much faster than the average fund. The average fund-raising takes 12 to 18 months, while the top decile of funds in the key VC hotbeds manage to close in 3 to 5 months.

Rapid growth of fund-raising in China and India

The Chinese VC market is growing rapidly. In 2011, China saw 382 new VC funds raise a record US$28.2 billion for investments into Chinese VC-backed companies. This represents 2.53 times of the amount raised in 2010. Twenty of the new funds raised US$100 million or more.

The growth capital venture space in India is getting overcrowded. With about 400 VC funds in operation, this glut has driven up valuations, prompting concerns by many private equity investors. Yet there is still plenty of room for early-stage VC funds, especially in the almost empty pre-revenue space.

Growing VC trend toward international investment

The next five years (2011–15) should see a major shift in geographic venture investment patterns and substantial growth in the new global VC hotbeds. Currently, the vast majority of VC firms invest just in their own local home markets; however, more will be investing internationally in the near future.

VC firms in Brazil, India, Israel and the UK invest outside their home countries. On the other hand, many more VC firms in Canada (69%), France (82%), Germany (92%) and the US (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.

While US VC still dominates, Asia is starting to surpass Greater Europe

The VC hotbeds around the world have seen some major shifts in recent years. Most notably, China and India are beginning to challenge Europe and Israel in investment amounts. However, the US has continued to maintain an almost 70% share throughout the past 10 years, with California, Boston and New York City leading the scene.

The current pace of VC investment varies significantly by region. At the end of 2011, the US surpassed 2009 and 2010 levels and is almost even with 2008 amounts. Canada shows an increase in the number of new investments for every year since 2008; hence, the average investment size continues to increase.

Western VC favors earlier-stage investment, while Asia favors later stage

The major difference between the more mature VC markets and the rapidly developing economies lies in the key development stage of the investee companies. The global sweet spot of VC investments is the revenue pre-profit category (50% to 60% from 2006 - 10).

The more mature US and European VC markets consistently invest a considerable amount in companies in the earlier product development stage (pre-revenue). In contrast, China and India generally prefer later-stage companies.

China has a unique pattern of pouring 30% to 50% of its invested capital into profitable companies (a level three to four times higher than the US or European VC sectors). Meanwhile, India's sweet spot centers on the revenue pre-profit stage, where 60% to 90% of its capital was invested between 2009 and 2010.

The four stages of development — start-up, product development, revenue pre-profit and profitable — used in the VC Investments by development stage charts provide an effective way to compare VC investment patterns around the globe.

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