Venture Capital firms talk a good game when it comes to internationally diversifying their portfolio, but how aggressively do they really seek offshore investment opportunities? According to a recent study published Deloitte & Touche and the National Venture Capital Association apparently not very often. It seems that VCs feel that domestic investments are more attractive when contrasted to expatriating their capital abroad. While I don’t doubt that the US is a more mature, stable and certainly familiar market, I do question the study’s findings that it’s a more attractive market. In this blog post I’ll give the other side of the story from the perspective of someone who has been doing business internationally since the mid 80’s.
The 2006 Global Venture Capital Survey polled 505 venture capitalists with 53% of the respondents stating that they are looking to invest abroad in the next 5 years. I have two questions: Why wait 5 years, and what in the world are the other 47% of the VC’s that were polled thinking? It is not just a clichÃ© that this is a global economy. From a business perspective the world is getting smaller and smaller. For early stage investors with a strong risk tolerance it seems to me that venture capital firms are missing the boat. With the benefits of tax advantages, currency leverage, smart aggressive entrepreneurs and burgeoning economies why is there not more interest in going abroad? The answer can be boiled down to four words: Fear of the unknown…
There is no doubt that history has proven ill-conceived foreign investments to be fraught with peril. However the operative word in the aforementioned sentence is “ill-conceived”. I’m not suggesting that VCs not familiar with the intricacies of foreign markets should run off half-cocked and make foolish investments, but I am suggesting that they should not wait 5 years, or even worse, not consider foreign investments at all. Venture Capital firms need to get of the dime and immediately hire tier one talent with international experience, begin establishing key professional relationship abroad and start doing their market research.
The upside in emerging markets is tremendous and the opportunities five years from now will certainly not be what they are today. VCs looking to maximize returns should be looking to make allocations to markets like India, China, Brazil and former eastern block countries among others. I am as patriotic as the next person, but the US is not going to be able to maintain the dominant financial position it has held for decades as the economies of these giant emerging markets continue to develop. Moreover the increased flow of funds into capital markets is causing increased competitive pressure to place funds here domestically, and with to much capital chasing too few quality deals valuations are rapidly escalating. Tight investment supply and strong money supply is just one of many reasons venture capital firms should be looking abroad.
The bottom line is this…Those venture capital firms that make a first movers play into foreign markets will capture the best relationships, establish a foothold in the market with their brand and will ride the wave of economic growth abroad.