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Venture Capital Dollars Leaving U.S. As Industry Goes Global

June 17, 2009

New evidence suggests that venture capitalists increasingly view international investment as the future of the industry. The 2009 Global Venture Capital Survey, conducted by the National Venture Capital Association (NVCA) and Deloitte, finds that 52 percent of venture capitalists around the world are currently investing outside their home country. Most investors also believe that their involvement with international partners will increase in the near future. Fifty-four percent of respondents predict that their number of limited partners outside their home country will increase over the next three years. Overseas investment means new opportunities for venture firms, but for U.S. firms, particularly those in areas without a strong local venture industry, this trend could mean that attracting the attention of investors will soon become even more difficult that it is now.

While the U.S. is still home to more venture capital firms than any other country, most of these firms are located in California and a few other coastal states. Over the past few years, industry investment has become more, not less, concentrated in California (see the July 2, 2008 issue). This trend, along with a growing preference for late-stage firms over seed- and early-stage companies has made it increasingly difficult for small firms in other states to find sources of capital. With firms in California and Massachusetts now increasing their overseas activity, smaller non-coastal U.S. firms must now compete with firms in China and India in addition to those in Silicon Valley and the Route 128 region.

The survey indicates that the international focus of the industry will continue to grow. Only 17 percent of respondents said that investment levels are likely to increase in North America over the next three years, while 50 percent said they are likely to increase investments in Asia (excluding India). Forty-three percent said their investment in India will grow over that period, while 36 percent said the same for South America, 25 percent for Europe and the UK and 19 percent for Israel.

Fifty-one percent of responsdents also said that the U.S. stood to lose more than any other country from the current financial crisis. Only 18 percent said the U.S stood to gain from the crisis. Thirty-eight percent felt that China had the potential to gain the most in the current economy.

The survey provides a few clues about how countries, states and regions can go about attracting venture firms and investment. Most believe that government plays an important role in fostering innovation and, in turn, creating investment opportunities. Fifty-nine percent of respondents said that one of the things that governments could do over the next year to promote innovation is to implement favorable tax policies. Fifty percent said that governments should increase their support for entrepreneurial activity.

Respondents also were asked about what actions could be taken to support the venture capital community. Fifty-eight percent said that governments should help motivate institutional investors to invest in venture capital.

NVCA's summary of the survey results is available at: http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=455&Itemid=93.