Following the Money: Venture Capital Flocks to Emerging Markets

Venture capital is growing more global by the day, with half of the successful investments now taking place overseas. What does this mean for VCs and entrepreneurs?
Venture capital is growing more global by the day, with half of the successful investments now taking place overseas. What does this mean for VCs and entrepreneurs?

The venture capital universe has grown, and the U.S. is no longer at the center of it. That was the message from investors speaking at the Global Technology Symposium on Sand Hill Road last week.

"The world is opening up," Tim Draper, founder of VC firm Draper Fisher Jurvetson, said in a keynote speech at the Menlo Park, Calif., event. "New technologies are happening everywhere and we've got to be prepared for a new globalization of the world."

Part of the reason for VC's globalization is that U.S. has lost ground as the biggest market economy, he said. After all, the richest man in the world (Carlos Slim) is Mexican, the tallest building in the world (the Burj Khalifa) is in Dubai, and the most valuable company in the world is in China, he added. At one point last year, Petro China (PTR) had the largest market capitalization of any public company in the world, but it's currently smaller than Exxon Mobil (XOM) or Apple (AAPL).

Foreign investments now make up half of the successful VC deals -- those in which investors get a return of at least 10 times the amount they invested -- he said. Among emerging markets, DFJ has made investments in Russia, the Ukraine, India and China, for instance. "We have no idea where the next Baidu ... is going to come from," Draper said.

The Cross-Pollination of Money

However, international investments aren't just moving outward from the U.S. Investors from other countries also are investing abroad.

At the symposium, for example, Russian Venture Company made its first investment in a U.S. fund, director Yan Ryazantsev told DailyFinance. He wouldn't disclose how much RVC put into Palo Alto, Calif.-based VC firm Trident Capital, but said RVC plans to invest in two or three more such funds.

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It already has invested in two London-based funds, and its venture-capital fund Russian Venture Capital I LP invested $10 million in California solar company BrightSource Energy last year.

RVC is a government fund of funds: an institutional investor that puts money into venture funds, which in turn invest in startups. With some $1 billion under management, its goal is to boost the VC sector in Russia, and to ultimately help plug Russian companies into the global technology network, said Ryazantsev, director of RVC's investment and expertise department.

The company plans to "significantly increase" activities in the global market, he added. "If our descriptions of Russian opportunities are reasonable for VCs, then they will start to think about Russia. It's a very comfortable way to attract interest in the Russian market."

Many countries are now competing for minds, businesses and innovation, Draper said. Governments have switched "from 'buy' mode to 'sell' mode," he added. "Geographic borders will fall."

Recruiting Innovation

In some ways, investing in emerging markets is not as different from domestic investing as some might think. DFJ lost all of its money in its first three Chinese investments by backing people who claimed to have "great government connections," Draper said. The company regrouped and began focusing on the same investment criteria that had worked well in the U.S., a strategy which yielded some big successes, he said.

Still, the globalization of VC certainly has shifted the landscape for startups. Ideas that only work in one market -- or that already face strong international competition, even if there aren't yet domestic competitors -- could have a harder time getting funding. Companies need to think globally right away, Draper said.

And that means more competition in some cases, but also more opportunities for companies that might previously have started in too small a market ever to get going, Ryazantsev said. "It could be in a very small town, but it must be global from the very beginning. It must have a global vision. But today, that's much easier to do," he said, because the Internet has removed the distances between markets."

Even in just the last year, so much has changed, said Irina Mitchell, a program manager at CRDF Global , a nonprofit that promotes international collaboration in science and technology. Not only has it become more important for investors to diversify geographically to keep their portfolios competitive, but -- now that some of the largest markets are outside of the U.S. -- venture capitalists also need to be active internationally to help their portfolio companies succeed, she said.

Also, the relative risk of international investment has decreased as the risk of investing in the U.S. has increased, she added. "You almost have to be international now," she said.

Will Emerging Markets Mean Earlier Deals?

Mitchell thinks that the international deals will spur more early-stage investment. "There is a void, but we're seeing more VCs at least proclaim that they're open to earlier opportunities," she said.

Investing too early is still a big risk, though. Most of the time, when DFJ has lost money on its investments, it was betting on science projects, Draper said. "But as Moore's law progresses along, I think we will see less of that and more when we're too late." Moore's law is the trend -- initially describing integrated circuits, but now often applied to other technologies as well -- of computer power doubling every year.

As the pace of innovation accelerates, Draper predicts that the same amount of technological innovation that happened in the last 150 years will happen in the next 15.

Some of the advances he expects to see in the next 15 include cheaper, better water desalination technology, a near-infinite energy supply, green buildings, better batteries, self-navigating electric cars, near-thought communication and cures for heart disease, cancer and malaria.

And after that? Perhaps time travel, transporters, holodecks, a cure for death and Martian colonies, he said.

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