Globalizing venture capital Global venture capital insights and trends report 2011 Foreword Amid the fragile economic recovery and highly volatile capital Contrary to the popular perception that global VC investment markets of 2011, the venture capital (VC) sector is becoming has been concentrated primarily in the frothy digital media increasingly globalized. A shift toward the emerging markets sector, VC funding has been quite evenly spread across sectors can be seen in geographic VC patterns and the growth of new and life-cycle stages and has progressed at a reasonable pace. global VC hotbeds. Although the United States will likely remain Worldwide, the VC universe continues to shrink as limited at the leading edge of VC-backed innovation for many years to partners focus on top performers or forego VC altogether. come, US VC fund-raising continues its decade-long decline. However, the sector’s continued long-term consolidation is Elsewhere, in China, India and other emerging markets, vibrant viewed as good for the sector, with fewer players investing innovation hotbeds and entrepreneurial talents are arising, and smaller amounts in companies that will reach profitability faster investors are focused on less risky, later-stage deals, at least than they do today. Large corporations striving to maintain for now. market leadership are partnering with VC firms to access Although unrealistic valuations may dampen future returns, external innovation and a pipeline of new products and services. China’s VC industry reached record heights in 2011 and will This report explores these themes in our articles and soon surpass Europe as the second-largest venture hub for interviews, including: fund-raising in the world. Both China’s and India’s strong VC industries are expected to continue their rapid growth • Interviews with top VC investors and entrepreneurs from and development as they capitalize on strong GDP growth, around the globe growing domestic consumption and a dynamic entrepreneurial • “Paradigm shifts in venture capital,” our keynote article with ecosystem. At the same time, due to Europe’s sovereign debt insights on VC investment, IPO, M&A and valuations, based on crisis and its muted medium-term growth potential, Europe’s VC data from 2005 to 2011 industry has lost some of its robustness. • Key trends in the global digital media and biotechnology Globally, companies are staying private longer, due to large sectors and from global corporate venturing corporations seeking proven business models prior to an acquisition and investors that prefer companies with a proven • An in-depth analysis of the key global VC hotbeds of the US, profitability path both before and after the IPO. As angel China, Europe, India and Israel investors have become major investors in early-stage start-ups, We hope you find Globalizing venture capital, our ninth annual particularly in the US, the competition has nudged VCs toward report on venture capital, to be a source of valuable insight. later-stage, high-growth ventures. We look forward to working together with you on the global Broadly speaking, the more mature VC markets of the US and challenges and opportunities that lie ahead. Europe favor earlier–stage investments, while the emerging markets of China and India generally prefer later-stage companies. In China and India, IPOs represent the vast majority Maria Pinelli of exits for VC-backed companies. But in the US, Europe Global Vice Chair and Israel, the main exit route for VC-backed companies is Strategic Growth Markets acquisitions (M&A), representing more than 90% of all exits. Furthermore, VC firms are also selling companies to private equity firms as a third path to liquidity. 2 Globalizing the VC industry Contents 04 Global VC trends 05 Paradigm shifts in venture capital 10 Key global venture insights (2005–11) 14 Global VC hotbeds Americas United States 15 VC trends 18 VC interviews: Lawrence Lenihan, FirstMark Capital, and Jeffrey Glass, Bain Capital Ventures 20 Entrepreneur interview: Barry Silbert, SecondMarket Brazil 21 VC interview: Clovis Meurer, CRP Companhia de Participações Asia China 22 VC trends 25 VC interview: Gary Rieschel, Qiming Venture Partners India 26 VC trends 28 VC interview: Sudhir Sethi, IDG Ventures India Japan 29 VC interview: Toshihisa Adachi, Itochu Technology Ventures/JVCA Greater Europe Europe 30 VC trends 33 VC interview: Simon Cook, DFJ Esprit LLP Israel 34 VC trends 36 VC interview: Daniel Cohen, Gemini Israel Funds Russia 37 VC interview: Yan Ryazantsev, Russian Venture Company/OJSC 38 Global VC hot topics 39 Global corporate venturing trends 44 Global digital media trends 48 Global biotechnology trends 51 Biotech VC interview: Hans Peter Hasler, HBM BioVentures 52 Entrepreneur interviews: Gil Shwed, Check Point Software Technologies Ltd., and Olivia Lum, Hyflux Ltd. 54 Global PE/VC Country Attractiveness Index 55 Contacts and acknowledgements Global venture capital insights and trends report 2011 3 Global VC trends 4 Globalizing the VC industry Paradigm shifts in venture capital As the economic pendulum swings toward the rapidly the first time in three years, the median fund size rose to developing economies, the venture capital sector is US$140.0 million. experiencing its own paradigm shifts, reflecting an By contrast, the story for European venture funds was one of increasingly globalized world. struggle, recording the worst volume since 2004. European The globalization of venture capital is taking many forms, fund-raising declined 11% to US$3 billion (amount closed) ranging from global fund-raising and cross-border investment, for 41 funds.4 In contrast to the US, European funds showed to exits on foreign stock exchanges or by foreign acquisition, to a distinct preference for early stages. (Of the 41 funds that VC firms opening offices overseas and helping their portfolio closed, 27 early-stage funds took US$2.1 billion of the total companies access markets in new regions. US$3 billion closed.) This article analyzes the trends in fund-raising for VC funds, Rapid growth of fund-raising in China and India the different investment patterns between the mature and emerging venture markets, the associated exit mechanisms by The Chinese VC market is growing rapidly. In 2011, China geography and, finally, the new funding sources going forward. saw 382 new VC funds raise a record US$28.2 billion for investments into Chinese VC-backed companies.5 This Top-tier VC funds dominate in the West represents 2.53 times of the amount raised in 2010. Twenty of the new funds raised US$100 million or more. as VC consolidation continues The growth capital venture space in India is getting Global “dry powder” is US$117.7 billion (capital committed to overcrowded. With about 400 VC funds in operation, this glut VC firms but not invested yet) and remains at a level similar to has driven up valuations, prompting concerns by many private the past few years, as VCs invest at a pace that is reflected by equity investors.6 Yet there is still plenty of room for early-stage 1 their fund-raising volume. VC funds, especially in the almost empty pre-revenue space. In 2011, 376 VC funds were fund-raising globally, trying to raise US$53.6 billion.2 Between 30% and 50% of all the funds Growing VC trend toward in the fund-raising stage are unlikely to make it at all or will do international investment so at a substantially reduced size. VC funds closing in 2011 had a buoyant start but dropped off in the second quarter.3 The next five years (2011–15) should see a major shift in The top-tier VC firms close much faster than the average fund. geographic venture investment patterns and substantial growth 7 The average fund-raising takes 12 to 18 months, while the in the new global VC hotbeds. top decile of funds in the key VC hotbeds manage to close in Currently, the vast majority of VC firms invest just in their 3 to 5 months. own local home markets; however, more will be investing In the US, fewer funds are raising more capital. US venture internationally in the near future. Currently, only about 20% of funds that closed during 2011 had 5% more capital than those 4 This compares unfavorably to US$2 billion for 26 funds in 2010 and US$2.9 billion for closed in 2010, hitting US$16.2 billion. However, the number 26 funds in 2009. of funds that closed plummeted 12% to 135 funds, and for 5 Zero2IPO (January 2012), which covers international and local VC firms in China. 6 According to The Economic Times in India (26 September 2011), Marquee Silicon Valley VC Accel Partners has scrapped plans to raise a US$400 million India-focused growth capital 1 PREQIN, March 2012. fund. Likewise for corporate investors, such as the Jubilant Group, which has shelved its fund 2 PREQIN, January 2012. sponsorship idea. 3 Of the 20 that closed in 2Q 2011 with US$5.8 billion, the largest five had 66%, or 7 According to the National Venture Capital Association (June 2011) nine-country survey, with US$3.8 billion. 1Q 2011 had reached 2008 levels with 47 funds at US$10 billion. 347 Venture Capital Firms. Global venture capital insights and trends report 2011 5 Amount raised, by hotbed, 2011 (US$m) Number of rounds, by hotbed, 2011 2 9 5 , 2 1 $ 8 1 7 3 0 8 2 , 0 6 3 3 , 0 7 8 4 6 8 , , $ 3 4 7 2 2 3 4 7 0 5 3 2 $ 7 2 2 0 $ 6 4 9 6 9 , , , , $ 3 3 5 6 9 1 1 1 1 $ $ $ $ $ $ $ $ $ 977 369 367 286 274 217 150 141 120 119 101 59 37 35 VC Investments by development stage (as % of US amount), by region, 2006–11 Start-up Product development 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Europe US China India Revenue (pre-profit) Profitable 100% 100% 90% 80% 80% 70% 60% 60% 50% 40% 40% 30% 20% 20% 10% 0% 0% 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Source: Dow Jones VentureSource, 2012 6 Globalizing the VC industry Global VC trends | Paradigm shifts in venture capital VC firms in Brazil, India, Israel and the UK invest outside their levels and is almost even with 2008 amounts.