U.S. Venture Capital Firms Not Investing Heavily Globally

July 27, 2007
Prefer to invest in domestic companies that have offshore.

U.S.-based venture capital firms are being cautious in investing in countries such as China, India, Israel and Canada, according to a new study, "2007 Global Venture Capital (VC) Survey." VCs instead prefer to "play globally by investing in domestic companies with significant operations offshore versus directly investing in foreign entities," according to the study sponsored by Deloitte & Touche LLP in cooperation with the National Venture Capital Association (NVCA) in the U.S. and numerous other venture capital associations around the world.

"U.S.-based VCs are essentially dabbling in global markets, with the majority of U.S. VC respondents indicating that less than 5% of their capital is invested overseas, generally in less than three deals per fund," said Mark Jensen, national managing partner of Deloitte's Venture Capital Services. "VCs are making the majority of their foreign investments in areas with higher quality deal flow, entrepreneurial environments, and access to foreign markets, as well as places where they have experience and thus greater comfort levels."

But VCs are still investing -- with 46% of respondents saying that they are currently investing abroad. While, 54% said that they expect to expand their international investing during the next five years, up slightly from 53% in 2006, 73% of the U.S. VCs who are not investing globally don't intend to invest globally anytime soon.

Mark Heesen, president of the National Venture Capital Association observes that U.S. VCs, "want to stay close to their portfolio companies, and they believe there are enough quality deals here to support their funds. The adage that 'venture capital is a local business' still rings true."

Of U.S.-based VCs investing globally, the primary regions are China, India, Israel and Canada. Of these, Israel, China, and India were cited for high-quality deal flow while India and China were cited for their emerging entrepreneurial environments. When asked about the location of certain operations of current portfolio companies, U.S. respondents cited China as the country of choice for manufacturing and India as the choice for R&D and engineering. For non-U.S. respondents, the U.S. is a primary choice for R&D and engineering. European respondents preferred Central and Eastern Europe for manufacturing as well as R&D operations.

The survey data also indicates that U.S. venture capitalists require a local presence in target countries that enables them to be close to their investments. Strategies to achieve local presence include requiring partners to travel more, developing strategic alliances with foreign firms, co-investing with firms that have a local presence, and opening foreign offices.

In looking at regulatory considerations when it comes to investment, VCs still find the current environment in the U.S. challenging. Some 58% of U.S. respondents see the litigation environment in the U.S. as an additional financial risk associated with doing business. Additionally, 46% of U.S. VCs cited the challenges of the U.S. regulatory environment, saying the cost of complying with corporate regulation is too high.

For a copy of the Deloitte & NVCA 2007 Global Venture Capital Survey visit http://www.deloitte.com/us/vcsurvey

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