More venture capital firms look to invest outside home borders

Venture capital investment activity, which has long been dominated by the US and Europe, is taking on a more global profile, according to a new Ernst & Young report.

Cross-border investment is increasingly focused on emerging economies such as China and India, and more funds are being raised in those countries, according to the report, “Globalizing Venture Capital”. 

“Although the U.S. will maintain its leading position as the [top] VC nation for a long time to come, the emerging growth markets will play an increasing role, with less risky, later-stage deals generally favored at first,” Maria Pinelli, Ernst & Young’s global vice chair for strategic growth markets, said in a statement. “…These trends are part of the unprecedented paradigm shift under way in the global venture industry.”

Of venture capital firms investing outside their home countries, 57% plan to increase international investments during the next five years, according to a June 2011 survey by Deloitte and the National Venture Capital Association.

US venture capital firms raised $32.6 billion in 2011– up 10% from the previous year, according to the Ernst & Young report. The US accounted for 67% of the $48.7 billion raised globally.

Meanwhile, China is poised to pass Europe to take the No. 2 spot in terms of dollars raised this year.

European VC firms raised $6.1 billion in capital in 2011, which is about 5% less than the annual average over the previous six years. Chinese VC firms, meanwhile, raised $5.9 billion in capital in 2011—74% more than the annual average of the previous six years.

“The Chinese government recently set new policies to stimulate the continued growth of the VC industry, and more investment is planned to increase VC investors’ appetite in energy conservation, environmental protection, next-generation IT, biotech, advanced manufacturing, alternative energy, innovative materials and new-energy-powered vehicles,” Pinelli said. “The IT and cleantech sectors are likely, however, to predominate VC activity in the years to come.”

India’s venture capital industry has also remained active. In 2011, $1.5 billion was raised, compared to $1.1 billion in 2010.  The country’s 2011 total was 67% more than the annual average over the previous six years.

—Jack Hagel (jhagel@aicpa.org) is the editorial director of CGMA Magazine.