China’s VC industry is set to hit record highs by the end of 2012 and surpass Europe as the second largest venture hub globally

Global venture capital (VC) investment trends will see a major shift by 2015 towards venture investment in China and India.



• The US maintains 70% share of the global VC market, followed by the UK and China

• 2011 also marks the fewest number of US funds closed in 18 years

• Fifty-seven percent of VC firms plan to increase investment outside their home countries by 2015

• India will see further VC investment coming from e-commerce, mobile applications, healthcare delivery, medical devices, clean technology and IT



Global venture capital (VC) investment trends will see a major shift by 2015 towards venture investment in China and India. Currently, the majority of VC firms still invest in their own local markets, however, more of them will start investing internationally in the next five years, according to Ernst & Young’s Global Venture Capital insights and trends report 2012.

The venture capital industry is experiencing a global shift, ranging from global fund-raising and cross-border investment, to exits on foreign stock exchanges or by foreign acquirer, to VC firms opening offices overseas and helping their portfolio companies, access markets in new regions.

The report also looks at the trends in fund-raising for VC funds, the different investment patterns in mature and emerging venture markets, the associated exit mechanisms by geography and the new funding sources.

Franck Sebag, Partner Ernst & Young Global Strategic Growth Markets comments:

“Attracted by exceptional growth opportunities that require substantial funding, VC and PE investors are currently shifting their focus from traditional VC and PE countries towards emerging countries. As Limited Partners consider where to allocate their capital, and PE and VC funds looking to make the right investments themselves, the investing landscape is evolving towards China and India.”

Currently, only about 20% of VC firms in Brazil, India, Israel and the UK invest outside their home countries. However, a number of VC firms in Canada (69%), France (82%), Germany (92%), and the US (49%) invest internationally. Of those VC firms investing outside their home countries, 57% plan to increase this activity during the next five years, while 35% plan to maintain their level of international investment.(1)

China’s VC industry reaches new heights while India is particularly active

China’s VC industry set record highs in 2011 in both value and number of investments. Due to its late-stage investment focus and new fund-raising record, China is likely to surpass Europe as the second-largest venture hub globally by the end of 2012. Given the favorable exit environment, the investment pace will likely continue.

“The 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. The IT and cleantech sectors are likely, however, to predominate VC activity in the years to come,”

explains Franck Sebag.

The Chinese VC industry has seen strong growth in both 2010 and 2011. Investments in 2011 raised US$5.9b in 323 rounds, while 2010 saw US$5.5b raised in 290 rounds, exceeding the investment record peak of US$3.9b in 381 rounds 2007. Currently, Beijing is the leading Chinese VC investment hotbed, with companies raising the most capital (US$2.9b), followed by Shanghai, which raised US$1.3b.

The India venture capital industry has been particularly active since 2006.

In the first half of 2011, US$1.5b was raised in 155 rounds, while in 2010 US$1.1b was raised in 103 rounds. Over the next two years, India will see further VC investment coming from e-commerce, mobile applications, healthcare delivery, medical devices, financial inclusion, clean technology and IT.



US fund-raising continues to be challenging

Despite strong deal flow, market volatility has had an impact on the ability of the best VC firms to raise new funds. In 2011, total capital raised for US venture firms reached US$16.2b, a 4.5% rise from the same period last year (US$15.5b in 2011). However, the number of firms that closed fell to 19 funds representing a 38% drop. 2011 also marks the fewest number of US funds closed in 18 years with just 135 rounds and US$16.2b amount closed._Unsurprisingly, globally, the top four regions in the world with the most VC activity were all in the US – Silicon Valley retains the lead by (US$12.6b, 977 rounds), followed by Boston (US$3.9b, 369 rounds), the New York City metropolitan area (US$3b, 367 rounds) and then Southern California (US$3.3b, 286 rounds). However, all of these US hotbeds have experienced a decline in the number of active investors._Continues Franck Sebag: “Many VCs show reluctance to invest in untested early-stage companies. They are increasingly altering the investment objectives, seeking greater flexibility, growth equity opportunities and later-stage deals. However, thanks to highly valued internet companies, the early-stage market is still active.”

European VC trends analysis_The European VC industry showed signs of a tentative recovery after a particularly challenging 2009, though activity is still significantly below pre-crisis levels.

Comments Franck Sebag,

“In the next five years, equity will remain the principal source of capital, with more companies looking to VC to finance growth. European VC and PE firms hold a staggering US$138b of “dry powder” and seek opportunities before their investment periods end.”

2011 has seen the worst volume since 2004, as European fund-raising fell 11% year-on-year, to US$2.9b for 41 funds (compared to US$3b for 51 funds in 2010), in 2011 VC investments also declined to US$6.1b in 1,012 rounds (compared to 1,253 rounds worth US$6.7b in 2010).

The UK and Ireland continued to raise the most capital in Europe, with US$1.7b through 274 deals, (down from US$2.6b raised from 331 deals in 2010), while France raised US$1b in 217 deals in 2011.

Concludes Franck Sebag:

“Limited partners will continue to have a strong interest in funds that focus on rapidly developing and largely underserved markets. Although the US will maintain its leading position as the VC nation for a long time to come, the emerging growth nations will play an increasing role, with less risky, later-stage deals generally favored at first. Over 50% of VC funds in mature VC hotbeds are investing outside their home countries, with most of them maintaining or increasing their allocations abroad. New funding will come from experienced angel investors as well as increasingly active local corporate investors. These trends are part of the unprecedented paradigm shift under way in the global venture industry.”

(1) According to a June 2011 nine-country survey with 347 VC firms by the National Venture Capital Association (NVCA).