Should American Venture Capitalists Be Less Picky?
American venture capitalists appear reluctant to invest outside the United States. Deloitte's annual survey of worldwide venture capitalists has show year after year that Americans have least confidence in investing outside their own country: only 2.41% American venture capitalists showed confidence in investing outside the USA in the 2013 poll of 14 countries worldwide. J.P. Morgan shows U.S. investors allocating 75% of their assets to American firms.
Sure, there are some logical reasons for this. Why invest my money outside my home country when there are plenty opportunities in the USA! I prefer to keep my money in America rather than invest in a foreign country! While many VCs let emerging companies get on with themselves, others might feel that geographical proximity to their assets to be an advantage, making it easier for them to influence their rate of growth.
Worldwide Emerging Markets
These reasons might seem valid in an economic climate where Americans prefer to spend in America. But does it make economic sense to ignore worldwide emerging markets that are crying out for Silicon Valley expertise and funding?
Perhaps so, when we consider that almost 70% of exits involving venture capital have taken place in the USA. Who can blame investors remaining in markets that have served them well in the past. However, there is a fly in this particular ointment: global growth is rising at a faster rate outside of the USA than in it, and American VCs could miss out if they continue to ignore the new technology emerging from Asia and Europe.
Emerging Markets are Game-Changers
Only 10% of internet users are based in the United States. The increase in the use of inexpensive internet-enabled cell phones, particularly in Asia, will swing this balance even further. According to Ernst & Young, 64% of merger and acquisition efforts will be focused on emerging markets in the coming year. EY also identified China, India and Russia as being currently the most important emerging technology markets with Europe running fourth. India, China and Canada were last year's top 3 investment areas.
By ignoring such markets, U.S. technology investors might miss some great opportunities. It is likely that most major exits in the coming years will come from the above markets. They are growing rapidly, and VCs that get a share will certainly expect to benefit. Almost 90% of users of search engines and social media now reside outside of the USA.
One of the issues involved should U.S. venture capitalist miss this boat is the knock-back effect on future bright new ideas in the United States. One of the benefits of profitable exits is that the founders and executives of such firms become investors and angels for other new companies. They provide the capital to enable new entrepreneurs to create successful companies that continue to pump revenue into the country.
Should American Venture Capitalists Change?
There is a demand for technical expertise and investment all around the world, and by leveraging this demand American venture capitalists can not only help emerging companies to become successful, but can also boost the economy of their own country. Certainly, emerging ventures involve a high risk factor, but American VCs should perhaps be less picky.
It may be that, because of their caution and introverted investment policies, most American venture capitalists will miss out. If they want to capitalize from the surge of exits that are virtually sure to arise in these new markets, they should perhaps be expanding their own borders and looking outwards. VC is changing, and if you don't go with the tide then you are likely to miss the boat.