"While the recession has slowed the pace of venture investing in the short term, it may very well have expedited the global evolution of the industry in the long run," said Mark Jensen, national managing partner of Deloitte LLP's Venture Capital Services. "In recent years, many entrepreneurs who have been educated in the United States have returned home to start companies in their home countries. The playing field continues to level out in terms of new innovation hot spots, broader access to capital and growing regional ecosystems that foster risk taking and capital formation."
"The venture capital industry will evolve significantly in the next few years as the asset class responds to a Darwinian contraction resulting from the recession, the rise of innovative industry sectors such as clean technology and the continued interest in venture capital outside the United States," said Mark Heesen, president of the NVCA. "As the survey results suggest, we will see more globalization in the next decade, not only in terms of investments but also in fundraising and exits as well. Those countries that can nurture entrepreneurs and investors as well as offer attractive exit opportunities have the most to gain economically in the next decade."
Clean Technology and Later Stage Investments to Increase
While investment levels may decline, the majority of venture capitalists are not shifting their investment strategies in terms of the industries where they are putting their money to work. A majority of venture capitalists (79 percent) anticipate stable levels of investment across all industry sectors with the exception of the clean technology sector where 63 percent of venture capitalists expect to increase their investments over the next three years. Advances in new technology, growing consumer demand in alternative energy and the ambitious plans of governments worldwide to invest in clean technologies have made this sector a key focus for the venture community.
The medical device sector ranked second in terms of growth potential with 37 percent of the respondents anticipating increases in investment followed by new media (26 percent), consumer business and biopharma (24 percent) and software (22 percent). Venture capitalists are less optimistic about more mature sectors, such as the telecommunications and semiconductor industries, with just 15 and 6 percent of venture capitalists surveyed planning to increase their investment in those sectors respectively.
The recession also has a core group of venture capitalists shifting their stage of development investment focus. Thirty-six percent of the respondents surveyed intend to move toward later stage investing in order to support existing portfolio companies until the exit markets improve. Just 6 percent intend to move toward early stage investing to take advantage of the longer runway for company growth.
Globalization of Innovation and Limited Partner Community
Fifty-two percent of all venture capitalists surveyed in the 2009 study indicate that they are currently investing outside their home countries. Looking forward, venture capitalists believe that investment levels are more likely to increase in countries outside of the United States in the next three years. According to the survey, 50 percent of respondents believe that investment will increase in Asia (excluding India); 43 percent in India; 36 percent in South America; 25 percent in Europe and the UK; and just 17 percent in North America.
Not only is venture investment continuing to globalize but so is the limited partner community. Of the survey respondents, 54 percent predict that their number of limited partners outside their home country will increase. Only 8 percent believe that foreign limited partner involvement will decrease; 38 percent expect the number of foreign limited partners to remain unchanged.
Yet, venture capitalists are also predicting that the economic crisis will result in less willingness on the part of limited partners to invest in the venture capital asset class over the next three years. Most at risk to decrease their venture allocations according to venture capitalists are commercial banks (88 percent), investment banks (87 percent), insurance companies (65 percent) and corporate operating funds (63 percent). Fifty- four percent of the respondents believe that governments may see an increased appetite for venture funding followed by corporations and family offices (23 percent) and fund of funds (22 percent).
Governments Crucial to Fostering Competitiveness and Innovation
Survey respondents are already demonstrating a shift in the perception of global competitiveness: when asked which country has the most to gain from the current economic crisis, 38 percent of venture capitalists cited China while only 18 percent chose the United States. Conversely, when asked which country has the most to lose, 51 percent of the respondents named the United States, followed by the United Kingdom at 14 percent, China at 10 percent and Russia at 6 percent.
Venture capitalists believe that governments of all countries have roles to play in fostering innovation. When asked which government actions would be most important over the next 12 months to help move technology forward, 66 percent of venture capitalists cite the implementation of favorable tax policies; 40 percent believe that government support for entrepreneurial activity is important; 31 percent would like governments to encourage more active public markets; and 29 percent believe improved access to private capital sources will help better support innovation.
When specifically queried about which policies would directly help venture capitalists, 58 percent would like to see the government motivate institutional investors to invest in venture capital; 39 percent believe governments need to motivate endowments and family offices to invest in venture; 36 percent favor a liberalization of tax policies; and 31 percent believe an increase in research and development funding would be favorable to the venture industry.
Optimism Endures
Over the long term, the majority of venture capitalists surveyed remain optimistic with just over half (51 percent) believing that it is currently a terrific time to invest in promising entrepreneurial companies. Only 6 percent believe that it is not a good time to make investments. Further, fund sizes will increase according to 45 percent of the respondents who predict their next fund will be larger than the one they are currently investing. Only 19 percent predict they will raise smaller funds.
In summarizing the results from this year's study, Terry McGuire, chairman of the NVCA and co-founder of Polaris Venture Partners believes that the increased competition from globalization will result in all players operating at a higher level.
"Innovation is abundant on a global basis today and opportunities are alive and growing everywhere," said McGuire. "Any country that is prepared to nurture its venture capital and entrepreneurial ecosystem is poised to benefit economically and not necessarily at the expense of another region. This game is one for everyone to win."
