Global annual VC investment
The US maintains a strong lead, with about 70% of global investment in any given year, driven by Silicon Valley, Massachusetts, Southern California and New York City.
Canada, Europe and Israel are stagnating or contracting, while India shows modest growth patterns and China is close to surpassing Europe as the No. 2 venture hub globally — although most of the investments in Asia will go into revenue-generating and proﬁtable companies.
Annual VC investment by geography
The 2011 VC market in the US is recovering to the levels seen just before the irrational dot-com spikes of 1999 and 2000. Levels are now almost back to where they were before the 2008 financial crisis.
Europe saw a rapid decline in the number of deals over the past decade but was able to maintain total investment amounts thanks to larger deals. Continental Europe is in danger of dropping below a critical size, which could threaten the entire industry.
Israel remains a typical early-stage investment environment and needs to scale. However, its local VC ﬁrms are struggling in the current fund-raising environment, while foreign VC ﬁrms are moving earlier-stage and increasingly competing head-on with their local VC peers.
China has shown rapid growth since 2005 and again reached record levels in 2011, almost surpassing the whole of Europe in investment amount due to its late-stage investment focus.
Global VC-backed IPOs
The stock exchanges that list VC-backed companies in the US, Europe and Israel are still recovering from the financial crisis. China has experienced phenomenal growth since opening the SME Board and the high-growth stock exchange ChiNext in Shenzhen. China surpassed the combined rest of the world in 2010 both in number of VC-backed deals and in capital raised in IPOs.
Recent signs, however, indicate a cooldown because the P/E ratios are not sustainable and the future earnings by the listed companies have seemed inflated in recent quarters, leading investors to be cautious. Yet, even if a major correction happens, returns may still be staggeringly good by Western measures.
Global VC-backed M&A
The M&A market for VC-backed companies is still very healthy in the Western world, thanks to large companies' big cash reserves and their drive for growth. This is expected to continue, and as IPO activity for VC-backed companies rises, median valuations and deal sizes will also increase.
China, on the other hand, has been focusing on the public markets: more than 90% of its VC-backed exits in recent years have been IPOs.
But the new local corporate giants in internet, mobile and telecommunications are likely to become substantial acquirers of young companies in order to stay ahead of the competition. This may fundamentally change the prices and valuations of local companies going forward, making them more attractive for entrepreneurs and their VC investors.
Median years from initial VC financing to IPO and M&A exit
While the holding period in the US and Europe from the initial VC-financing round to an IPO or M&A exit was extremely brief during the dot-com boom in 1999–00, the pendulum has swung to the other extreme, where 6 to 10 years has become the norm in several industry sectors. This causes major concerns for early-stage funds, which are commonly experiencing 10-year holding periods.
This means that as of year two or three into a new fund, investment into start-up stage companies in biotech, cleantech or other core technology is less likely to take place, since the company exit would likely come after the 10-year life of the fund had ended.
In China and India, the later-stage investments predominantly into more mature, revenue-generating or profitable companies lead to rather short holding times. This may change, as there is pressure to move investors into earlier stages.
Global median pre-money valuations
Uncertainty in the capital markets about the US economic recovery and the situation in the Eurozone has slowed the increase of the median pre-money valuation. However, the situation may improve if large companies' direct VC-investment activities are strongly driven by strategic considerations rather than purely financial goals.
China's valuations will be driven largely by the P/E ratios on the new local stock exchanges and by the rise of new larger funds investing predominantly into late-stage deals. Unlike in Western markets, Chinese corporate venture groups are not willing to pay a premium when investing into companies for equity. They argue that their value-add warrants a discount, not a premium.