Globalizingventure capitalGlobal venture capital insightsand trends report 2011
ForewordAmid the fragile economic recovery and highly volatile capital     Contrary to the popular perception that global ...
Contents     04 Global VC trends     05   Paradigm shifts in venture capital     10   Key global venture insights (2005–11...
Global VC trends4   Globalizing the VC industry
Paradigm shifts in venture capitalAs the economic pendulum swings toward the rapidly                                      ...
Amount raised, by hotbed, 2011 (US$m)                                                                                     ...
Global VC trends | Paradigm shifts in venture capitalVC firms in Brazil, India, Israel and the UK invest outside their     ...
centers on the revenue pre-profit stage, where 60% to 90% of                                     Venture capitalists believ...
Global VC trends | Paradigm shifts in venture capitalChiNext was in the limelight with 124 exits and 58 VC IPOs. Some Chin...
Key global venture                                                      insights (2005–11)1         Global annual VC inves...
Global VC trends | Key global venture insight Israel*                                                                     ...
4            Global VC-backed M&A                                                      public markets: more than 90% of it...
Global VC trends | Key global venture insightTime to M&A or IPO exit by region, 2002-211(Median years to exit from initial...
Global VC hotbeds14   Globalizing the VC industry
United StatesVC trends                                                                    US VC investment, 2005–11       ...
United States VC trendsKey US VC statistics                                                   as social media businesses l...
Global VC hotbeds | Americas                                               “Large US corporations are recognizing that the...
United States                        Lawrence Lenihan                                 “Bubbles pop, but they’re like fores...
Global VC hotbeds | Americas                                                                                   United Stat...
Globalizing venture capital_global_venture_capital_insights_and_trends_report_2011
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Globalizing venture capital_global_venture_capital_insights_and_trends_report_2011
Globalizing venture capital_global_venture_capital_insights_and_trends_report_2011
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  1. 1. Globalizingventure capitalGlobal venture capital insightsand trends report 2011
  2. 2. ForewordAmid the fragile economic recovery and highly volatile capital Contrary to the popular perception that global VC investmentmarkets of 2011, the venture capital (VC) sector is becoming has been concentrated primarily in the frothy digital mediaincreasingly globalized. A shift toward the emerging markets sector, VC funding has been quite evenly spread across sectorscan 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 limitedat 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 isElsewhere, in China, India and other emerging markets, vibrant viewed as good for the sector, with fewer players investinginnovation hotbeds and entrepreneurial talents are arising, and smaller amounts in companies that will reach profitability fasterinvestors are focused on less risky, later-stage deals, at least than they do today. Large corporations striving to maintainfor now. market leadership are partnering with VC firms to accessAlthough 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 andsoon surpass Europe as the second-largest venture hub for interviews, including:fund-raising in the world. Both China’s and India’s strongVC industries are expected to continue their rapid growth • Interviews with top VC investors and entrepreneurs fromand development as they capitalize on strong GDP growth, around the globegrowing domestic consumption and a dynamic entrepreneurial • “Paradigm shifts in venture capital,” our keynote article withecosystem. At the same time, due to Europe’s sovereign debt insights on VC investment, IPO, M&A and valuations, based oncrisis and its muted medium-term growth potential, Europe’s VC data from 2005 to 2011industry has lost some of its robustness. • Key trends in the global digital media and biotechnologyGlobally, companies are staying private longer, due to large sectors and from global corporate venturingcorporations seeking proven business models prior to anacquisition 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 Israelinvestors have become major investors in early-stage start-ups, We hope you find Globalizing venture capital, our ninth annualparticularly 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 globalBroadly speaking, the more mature VC markets of the US and challenges and opportunities that lie ahead.Europe favor earlier–stage investments, while the emergingmarkets of China and India generally prefer later-stagecompanies. In China and India, IPOs represent the vast majority Maria Pinelliof exits for VC-backed companies. But in the US, Europe Global Vice Chairand Israel, the main exit route for VC-backed companies is Strategic Growth Marketsacquisitions (M&A), representing more than 90% of all exits.Furthermore, VC firms are also selling companies to privateequity firms as a third path to liquidity.2 Globalizing the VC industry
  3. 3. 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
  4. 4. Global VC trends4 Globalizing the VC industry
  5. 5. Paradigm shifts in venture capitalAs the economic pendulum swings toward the rapidly the first time in three years, the median fund size rose todeveloping 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 ofincreasingly globalized world. struggle, recording the worst volume since 2004. EuropeanThe 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 showedto exits on foreign stock exchanges or by foreign acquisition, to a distinct preference for early stages. (Of the 41 funds thatVC firms opening offices overseas and helping their portfolio closed, 27 early-stage funds took US$2.1 billion of the totalcompanies 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 Indiathe different investment patterns between the mature andemerging venture markets, the associated exit mechanisms by The Chinese VC market is growing rapidly. In 2011, Chinageography 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 represents 2.53 times of the amount raised in 2010. TwentyTop-tier VC funds dominate in the West of the new funds raised US$100 million or more.as VC consolidation continues The growth capital venture space in India is gettingGlobal “dry powder” is US$117.7 billion (capital committed to overcrowded. With about 400 VC funds in operation, this glutVC firms but not invested yet) and remains at a level similar to has driven up valuations, prompting concerns by many privatethe 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-stagetheir fund-raising volume.1 VC funds, especially in the almost empty pre-revenue space.In 2011, 376 VC funds were fund-raising globally, trying toraise US$53.6 billion.2 Between 30% and 50% of all the funds Growing VC trend towardin the fund-raising stage are unlikely to make it at all or will do international investmentso at a substantially reduced size. VC funds closing in 2011had a buoyant start but dropped off in the second quarter.3 The next five years (2011–15) should see a major shift inThe top-tier VC firms close much faster than the average fund. geographic venture investment patterns and substantial growthThe average fund-raising takes 12 to 18 months, while the in the new global VC hotbeds.7top decile of funds in the key VC hotbeds manage to close in Currently, the vast majority of VC firms invest just in their3 to 5 months. own local home markets; however, more will be investingIn the US, fewer funds are raising more capital. US venture internationally in the near future. Currently, only about 20% offunds 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 forclosed in 2010, hitting US$16.2 billion. However, the number 26 funds in 2009. Zero2IPO (January 2012), which covers international and local VC firms in China.of funds that closed plummeted 12% to 135 funds, and for 5 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 capital1 PREQIN, March 2012. fund. Likewise for corporate investors, such as the Jubilant Group, which has shelved its fund2 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$10 billion. 347 Venture Capital Firms. Global venture capital insights and trends report 2011 5
  6. 6. Amount raised, by hotbed, 2011 (US$m) Number of rounds, by hotbed, 2011 $12,592 $3,818 $3,327 $3,003 $2,860 $1,747 $1,278 $1,224 $1,026 $993 $665 $590 $347 $364 977 369 367 286 274 217 150 141 120 119 101 59 37 35VC 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 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 2011Source: Dow Jones VentureSource, 20126 Globalizing the VC industry
  7. 7. Global VC trends | Paradigm shifts in venture capitalVC firms in Brazil, India, Israel and the UK invest outside their levels and is almost even with 2008 amounts. Canada showshome countries. On the other hand, many more VC firms in an increase in the number of new investments for every yearCanada (69%), France (82%), Germany (92%) and the US (49%) since 2008; hence, the average investment size continues toinvest internationally. Of those VC firms investing outside increase.their home countries, 57% plan to increase this activity during Europe’s number of investments is still in steady decline.the next five years, while 35% plan to maintain their level of However, as in the US, total investment amount by year-endinternational investment. surpassed the 2009 and 2010 levels but fell short of 2008’s.The distinct global VC trend toward international investment is Israel’s VC investments still did not reach the 2010 level and arebest illustrated by the example of US firms. Nearly half (49%) a far cry from 2008’s levels.of the US VC firms in the survey are currently investing outside In Asia, China hit an all-time record in 2011, in both numberof the country. Of all US firms, 42% plan to increase their of investments and investment amount, and almost matchesinternational activities, 30% plan to maintain the current level, Europe’s investment amount for the first time ever. Given3% plan a decrease and only 25% have no plans to invest outside China’s new fund-raising record in 2011 and the favorable exitthe US. environment, the investment pace will likely continue.Large-tech-platform plays are becoming increasingly important, However, the median round size and valuations have risen towith entire funds established around them. Special funds have historical heights, almost quadrupling the value of 2006–10,been established by top-tier VC firms in Silicon Valley to fund which may dampen future returns. India’s investments areapplications development,8 even in China.9 Tencent, China’s slowly picking up and are at a modest level.highly profitable multibillion-dollar revenue chat and gamingservice giant, is becoming a player on the world stage, startinga massive wave of investments in a number of new strategic Western VC favors earlier-stage investment,platforms, from micro-blogging to online security, as well as in while Asia favors later stageexisting businesses. The major difference between the more mature VC markets and the rapidly developing economies lies in the key developmentWhile US VC still dominates, Asia is starting stage of the investee companies. The global sweet spot of VCto surpass Greater Europe investments is the “revenue pre-profit” category (50% to 60% from 2006–10).The VC hotbeds around the world have seen some major shiftsin recent years. Most notably, China and India are beginning to The more mature US and European VC markets consistentlychallenge Europe and Israel in investment amounts. However, invest a considerable amount in companies in the earlierthe US has continued to maintain an almost 70% share “product development” stage (pre-revenue). In contrast, Chinathroughout the past 10 years, with California, Boston and New and India generally prefer later-stage companies. China has aYork City leading the scene. unique pattern of pouring 30% to 50% of its invested capital into profitable companies (a level three to four times higher thanThe current pace of VC investment varies significantly by the US or European VC sectors). Meanwhile, India’s sweet spotregion. At the end of 2011, the US surpassed 2009 and 20108 For Java (Kleiner Perkins Caufield & Byers’ 1996 Java Fund, with US$100 million), for the 9 In China, Sina.com established the Twitter Developer Innovation Fund (in 2010, with iPhone and iPad (Kleiner Perkins’ 2008 iFund, with US$100 million) and, most recently, for RMB200 million/US$30 million) for the micro-blogging industry, jointly with Sequoia Capital, Google’s Android (DCM’s 2011 A-Fund, with US$100 million). IDG Capital, Innovation Works, YunFeng Fund and Draper Fisher Jurvetson. The globalization of venture capital is taking many forms, ranging from global fund-raising and cross-border investment, to exits on foreign stock exchanges or by foreign acquisition, to VC firms opening offices overseas and helping their portfolio companies access markets in new regions. Global venture capital insights and trends report 2011 7
  8. 8. centers on the revenue pre-profit stage, where 60% to 90% of Venture capitalists believe high returns generated by IPOs areits capital was invested between 2009 and 2010. critical to providing superior returns to limited partners and growth capital to developing portfolio companies.13 The vastThe four stages of development — start-up, product majority of VCs around the world still look to the NASDAQ anddevelopment, revenue pre-profit and profitable — used in the VC the New York Stock Exchange (NYSE) to provide a healthy andInvestments by development stage charts provide an effective vibrant market,14 yet most US venture capitalists believe that theway to compare VC investment patterns around the globe.10 current level of US IPO activity is too low.M&A remains key exit route in the West On the other hand, a heavy dependence on IPO exits has its own risk. The examples of Japan and Taiwan in the past two toThe main exit route for VC-backed companies in Western three years illustrate this point. In those countries, 70% to 90%countries is acquisitions (M&A), representing 80% to 90% of all of exits came through public listings. With the public marketsexits. Fortunately, acquisition prices have stayed at reasonably now down and Japanese and Taiwanese major corporationshigh levels, even during and after the financial crisis. For preferring to acquire more proven and mature companies, theexample, in the US for 2011, the five biggest acquisitions entire VC industry in these countries is in serious jeopardy, asranged from US$700 million to US$800 million. Prices should pipelines are filled with companies unable to exit. This will resultremain fairly high and M&A activity can be expected to remain in poor returns for investors and, in turn, make any future fund-constant or increase over the next year, given companies’ raising very difficult.current option to go public and the fact that the 15 largesttech firms are holding US$300 billion in cash for acquisitions. In China, a similarly high proportion of exits are IPOs, yet its(Google alone acquired 48 companies in 2010 for US$1.8 billion new small and medium enterprise (SME) stock exchanges areand 79 companies in 2011 for US$1.9 billion11.) listing at global record highs.Similar acquisition trends in rapidly developing nations, notably An alternative exit route to IPOs and M&A, though generallyChina, will see the emergence of new local leaders in search less lucrative, is the buyout of shares (held by VCs) by privateof highly innovative technologies and solutions (e.g., Tencent, equity firms. While such transactions have occurred for manyBaidu, Alibaba, Sina, Huawei, ZTE). Such acquisitions help these years in the US and Europe at a low level, they have becomegiants move quickly to stay ahead of fierce competition, both increasingly important in certain emerging markets, eitherdomestically and globally. because investors want to exit earlier or the local IPO market barely exists.It is expected that India will follow suit over the next few yearsas more large local companies want to add new services, such In Latin America and Eastern Europe, this route has becomeas mobile and internet offerings — acquisitions of new ventures especially important, as the local stock markets are notwill provide quicker market deployment. developed to the point where young high-growth companies find a favorable IPO environment. The private equity route is also becoming more common in Japan.IPOs make up majority of exits in China Exits in China continue to be a success story, although the oftenand India overstated valuations of newly listed VC-backed companiesIn emerging markets (e.g., China, India, Brazil), IPOs represent have come down substantially in 2011 to more realistic levels.the bulk of exits, as they do in Japan, Korea and Taiwan. China had a total of 456 exits in 2011, including 41 trade salesRussia and Eastern European nations have yet to improve their and 356 IPOs (68% of all exits).15 The VC-backed companyenvironments for public listings, so for the time being, Western share represents 48% of all public offerings. Domestic stockVC firms investing in these countries usually try to have exchanges account for the bulk of all Chinese IPOs (93%) andcompanies listed overseas.12 VC-backed IPOs (87%) and boast impressive returns. The10 Since the large majority of investments in emerging countries go into 13 NVCA June 2011 survey. entrepreneurial companies in the revenue stage (pre-profit or profitable), most VCs and 14 Globally, 87% of respondents selected NASDAQ as one of the three most promising stock entrepreneurs in emerging markets tend to use the terms “early stage” in an early-revenue exchanges for venture-backed IPOs, while 39% selected the New York Stock Exchange (NYSE) mode, followed by “growth stage” in late revenue pre-profit mode and “late stage” in the and 33% cited the Shanghai Stock Exchange. The AIM in London (26%) has substantially lost profitable phase. This differs from how the terms are used in the more mature VC markets. ground over the past three years.11 Google SEC K-10 Filing (January 26, 2012). 15 According to Zero2IPO.12 However, the first Russian VC-backed companies have tested the waters recently and listed domestically — for example, Russian Navigation Technologies debuted last year on the Moscow Stock Exchange.8 Globalizing the VC industry
  9. 9. Global VC trends | Paradigm shifts in venture capitalChiNext was in the limelight with 124 exits and 58 VC IPOs. Some Chinese enterprises They seek not only market access, butwent public on foreign exchanges — 13 of them VC-backed — taking place on the innovation. These emerging marketsNASDAQ, the NYSE and the Frankfurt Börse. are an increasingly fertile ground for innovation that may be applicableAngel investors become a growing funding source globally or in other developing markets with similar characteristics.New tax incentive programs for high net worth individuals (HNWI) are under way allover the world (with the UK taking the boldest step in April 2011). These changes areexpected to increase the amount of angel investing. Even China and India are seeingtheir first angel groups established, thanks to a growing number of experienced New venture hotbedsentrepreneurs who successfully exited their ventures. Limited partners will continue toOut of Silicon Valley have risen the oft-noted “super angels,” former executives from have a strong interest in fundssuccess stories such as Google, Facebook, eBay and PayPal who have built successful that focus on rapidly developinginvestment track records by investing personal capital in companies at the seed and largely underserved markets.stage.16 Although the US will maintainBut the rise of angel seed investing is driven not only by the existence of wealthy its leading position as ”the” VCformer tech managers. The cost to start consumer web-focused businesses has nation for a long time to come, thedecreased dramatically in recent years, allowing companies to effectively prove emerging growth nations will playtheir products on far less initial capital. If these products are subsequently proven, an increasing role, with less risky,angels’ investments are often written up significantly or acquired for an attractive later-stage deals generally favoredinvestment multiple. at first. More than 50% of VC funds inCorporate venture capital in emerging markets expands mature VC hotbeds are investing outside their home countries,Corporate venturing has been practiced for more than 40 years. Corporate venture with most of them maintainingcapital (CVC) has historically accounted for 6% to 10% of all VC globally. During the or increasing their allocationsdot-com peak of 1999–00, when corporate venturing was often more motivated by abroad. New funding will come fromirrational exuberance than thoughtful strategy, its share of the VC pie grew. Since experienced angel investors as wellthen, CVC has returned to its historic share, with the exception of cleantech, where as increasingly active local corporateCVC accounts for a slightly greater proportion of all venture capital (10% to 15%). investors.In China and India, big local corporations are beginning to challenge the local VCs To be sure, a significant number ofand their foreign CVC colleagues. The major players are new giants (e.g., Baidu, investors and entrepreneurs will getTencent, Alibaba, Huawei, ZTE, Tata, Wipro, Infosys, Reliance) and leaders in their scars in the initial phase of theseindustries. They look for strategic access to new technologies, business models and new venture hotbeds. These trendsentrepreneurs in their highly competitive markets, balancing strategic with financial are part of the unprecedentedobjectives. At the same time, a significantly larger number of big local corporations paradigm shift under way in thewill invest directly into later-stage VC-backed companies for pure financial returns global venture industry.because their margins in manufacturing or business process outsourcing are eroding.Western corporations have already done substantial CVC investment in these rapidlygrowing nations for years; however, an even larger number are now preparing for it. Several of these investors recently raised small institutional funds (typically less than US$75 million) to continue this strategy and16 have invested in about 500 start-ups in Silicon Valley over the past 18 months. Contributors: Dr. Martin Haemmig Bryan Pearce Adj. Professor CeTIM, Americas Venture Capital Advisory Germany/Netherlands (former Group Leader Senior Advisor on Venture Capital, Ernst & Young Stanford University—SPRIE) Global venture capital insights and trends report 2011 9
  10. 10. Key global venture insights (2005–11)1 Global annual VC investment Global annual venture capital investment, 2005–11 The US maintains a strong lead, with about 70% of global Totals: (Rounds) 4,641 4,961 5,642 5,211 4,522 4,958 4,959 investment in any given year, driven by Silicon Valley, Totals:Massachusetts, Southern California and New York City. Canada, (US$b) 33.9 42.7 49.4 49.8 34.2 45.6 48.7Europe and Israel are stagnating or contracting, while India $0.9 $0.8 $1.0 $0.9 $1.7shows modest growth patterns and China is close to surpassing $3.8 $4.9 $0.9 $1.5 $0.8 $1.1 $5.9Europe as the No. 2 venture hub globally — although most of $0.6 $1.9 $2.1 $5.5 $2.5 $1.6the investments in Asia will go into revenue-generating and $1.5 $7.5 $7.6 $1.8 $0.6 $0.5 $6.1profitable companies. $0.3 $1.1 $6.3 $0.8 $6.7 $1.3 $2.7 $0.8 $5.4 $5.2 $34.3 $32.7 $32.6 $31.0 $29.6 $25.0 $24.1 2005 2006 2007 2008 2009 2010 2011 US Europe Israel* China India Canada *All-site Israeli companies Source: Dow Jones VentureSource, 20122 Annual VC investment by geography threaten the entire industry. Israel remains a typical early-stage investment environment and needs to scale. However, its local The 2011 VC market in the US is recovering to the levels VC firms are struggling in the current fund-raising environment, seen just before the irrational dot-com spikes of 1999 while foreign VC firms are moving earlier-stage and increasinglyand 2000. Levels are now almost back to where they were competing head-on with their local VC peers. China has shownbefore the 2008 financial crisis. Europe saw a rapid decline in the rapid growth since 2005 and again reached record levels innumber of deals over the past decade but was able to maintain 2011, almost surpassing the whole of Europe in investmenttotal investment amounts thanks to larger deals. Continental amount due to its late-stage investment focus.Europe is in danger of dropping below a critical size, which couldVC investment by region, 2000-11 United States Europe (US$b) (US$b) 3,070 2,981 3,033 3,209 2,854 2,714 2,618 1,669 1,484 1,415 1,412 1,186 1,253 1,012 $25.0 $31.0 $34.3 $32.7 $24.1 $29.6 $32.6 $5.4 $6.3 $7.5 $7.6 $5.2 $6.7 $6.1 2005 2006 2007 2008 2009 2010 2011 2005 2006 2007 2008 2009 2010 2011 Amount raised Number of roundsNote: chart scales vary for claritySource: Dow Jones VentureSource, 2012 (continued next page)10 Globalizing the VC industry
  11. 11. Global VC trends | Key global venture insight Israel* China (US$b) (US$b) 381 338 315 323 274 267 291 243 268 228 166 147 141 172 $1.3 $1.5 $1.9 $2.1 $0.8 $1.8 $1.6 $1.1 $2.5 $3.8 $4.9 $2.7 $5.5 $5.9 2005 2006 2007 2008 2009 2010 2011 2005 2006 2007 2008 2009 2010 2011 *All-site Israeli companies Amount raised Number of roundsNote: chart scales vary for claritySource: Dow Jones VentureSource, 20123 Global VC-backed IPOs world in 2010 both in number of VC-backed deals and in capital raised in IPOs. Recent signs, however, indicate a cooldown The stock exchanges that list VC-backed companies in because the P/E ratios are not sustainable and the future the US, Europe and Israel are still recovering from the earnings by the listed companies have seemed inflated in recentfinancial crisis. China has experienced phenomenal growth since quarters, leading investors to be cautious. Yet, even if a majoropening the SME Board and the high-growth stock exchange correction happens, returns may still be staggeringly good byChiNext in Shenzhen. China surpassed the combined rest of the Western measures.Global VC-backed IPOs by region, 2003-11. Record high in China; increasing activity in US, Europe and IsraelUnited States Europe(US$m) 81 (US$m) 70 57 97 46 46 45 72 46 23 37 8 8 9 18 14 9 3$1,454 $5,288 $2,454 $3,716 $7,532 $562 $904 $3,255 $5,358 $126 $1,063 $2,590 $2,120 $1,185 $36 $170 $564 $990 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011 Amount raised Number of roundsIsrael* China(US$m) (US$m) 141 97 8 8 5 45 4 24 2 2 2 Pre -2005 data not 7 12 11 available $119 $184 $122 $120 $7 $42 $24 $442 $759 $4,893 $619 $4,448 $21,961$15,328 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011*All-site Israeli companiesNote: chart scales vary for claritySource: Dow Jones VentureSource, 2012 Global venture capital insights and trends report 2011 11
  12. 12. 4 Global VC-backed M&A public markets: more than 90% of its VC-backed exits in recent years have been IPOs. But the new local corporate giants in The M&A market for VC-backed companies is still internet, mobile and telecommunications are likely to become very healthy in the Western world, thanks to large substantial acquirers of young companies in order to stay aheadcompanies’ big cash reserves and their drive for growth. This of the competition. This may fundamentally change the pricesis expected to continue, and as IPO activity for VC-backed and valuations of local companies going forward, making themcompanies rises, median valuations and deal sizes will also more attractive for entrepreneurs and their VC investors.increase. China, on the other hand, has been focusing on theVC-backed M&A by region, 2003–11United States Europe(US$b) (US$b) 530 533 560 336 509 519 320 311 306 434 477 400 416 230 243 193 191 168 $20 $30 $34 $47 $59 $32 $25 $40 $71 $10 $14 $18 $21 $25 $22 $27 $23 $42 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total transaction value Number of M&AsIsrael China(US$b) (US$b) 17 34 15 13 24 25 17 18 18 17 8 8 16 15 7 5 $16 $10 $20 $50 $33 $50 $26 $30 $30 N/A $11 N/S $28 $63 N/S 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011Note: chart scales vary for claritySource: Dow Jones VentureSource, 20125 Median years from initial VC financing year two or three into a new fund, investment into start-up stage companies in biotech, cleantech or other core technology to IPO and M&A exit is less likely to take place, since the company exit would likely While the holding period in the US and Europe from the come after the 10-year life of the fund had ended. In China andinitial VC-financing round to an IPO or M&A exit was extremely India, the later-stage investments predominantly into morebrief during the dot-com boom in 1999–00, the pendulum mature, revenue-generating or profitable companies leadhas swung to the other extreme, where 6 to 10 years has to rather short holding times. This may change, as there isbecome the norm in several industry sectors. This causes pressure to move investors into earlier stages due to the verymajor concerns for early-stage funds, which are commonly competitive late-stage environment.experiencing 10-year holding periods. This means that as of12 Globalizing the VC industry
  13. 13. Global VC trends | Key global venture insightTime to M&A or IPO exit by region, 2002-211(Median years to exit from initial VC investment)United States Europe 8.7 7.9 8.1 6.8 6.4 8.9 6.2 8.3 5.7 5.6 5.6 6.3 6.5 5.8 6.0 6.0 5.5 5.4 5.6 5.4 5.3 6.5 6.7 4.1 6.0 5.6 5.7 5.7 4.6 3.4 4.9 3.8 4.2 3.8 3.2 N/A2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 IPO M&AIsrael China 9.5 9.5 7.5 8.6 7.1 7.0 6.2 5.9 5.0 4.5 6.0 3.5 3.6 4.1 3.4 3.2 4.1 3.5 5.0 3.2 2.6 3.0 2.5 2.0 2.3 N/A 1.7 N/A2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Note: chart scales vary for claritySource: Dow Jones VentureSource6 Global median pre-money valuations considerations rather than purely financial goals. China’s valuations will be driven largely by the P/E ratios on the new Uncertainty in the capital markets about the US local stock exchanges and by the rise of new larger funds economic recovery and the situation in the Eurozone investing predominantly into late-stage deals. Unlike in Westernhas slowed the increase of the median pre-money valuation. markets, Chinese corporate venture groups are not willing toHowever, the situation may improve if large companies’ direct pay a premium when investing into companies for equity. TheyVC-investment activities are strongly driven by strategic argue that their value-add warrants a discount, not a premium.Figure 6. Median pre-money valuation by region, 2003–11United States Europe(US$m) (US$m) $10.1 $12.0 $15.0 $18.3 $17.2 $20.0 $19.2 $16.9 $21.3 $4.3 $4.3 $4.9 $6.2 $7.1 $6.4 $5.6 $5.8 $6.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011 Median pre-money valuationIsrael China(US$m) (US$m) Pre2006 data not available $13.3 $32.1 $38.9 $42.8 $46.3 $60.5 $8.0 $9.0 $9.7 $14.0 $5.5 $19.0 $11.0 $6.8 $5.6 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011Note: chart scales vary for claritySource: Dow Jones VentureSource, 2012 Global venture capital insights and trends report 2011 13
  14. 14. Global VC hotbeds14 Globalizing the VC industry
  15. 15. United StatesVC trends US VC investment, 2005–11 United States US$bOutlook: US fund-raising continues 3,209 3,070 2,981 3,033to be challenging 2,854 2,714 2,618• Despite strong deal flow, market volatility has had an impact on the ability of all but the very best VC firms to raise new funds. In 2011, total capital raised for US venture firms reached US$32.6 billion, a 10% rise from the same period a year ago. However, the number of firms that closed fell to 19 funds, a 38% drop from a year ago. (In 2010, the total US VC investment was US$29.6 billion.) Overall, VC fund-raising $25.0 $31.0 $34.3 $32.7 $24.1 $29.6 $32.6 continues its almost decade-long decline. While current fund- 2005 2006 2007 2008 2009 2010 2011 raising surpasses levels prior to the dot-com bubble years Amount raised Number of rounds (pre-2000), it has not yet returned to levels reached in the Source: Dow Jones VentureSource, 2012 2000–08 time frame.• Seven well-known VC funds raised most of the capital in Fund-raising is shifting toward later-stage 2011, as wary limited partners invested less and in only a few VC firms. Top VCs were primarily early investors in areas such • Many VCs show reluctance to invest in early-stage untested as social media. And 2011 marked the fewest number of US companies. They are altering their investment objectives, funds closed in 18 years, with just 135 and amount closed of seeking greater flexibility, growth equity opportunities US$16.2 billion. and later-stage deals. The average fund size substantially increased in 2011, to US$140 million. Companies in the• The US still maintains an approximately 70% share of the expansion and later stage of development received most of the global VC market, followed by the UK, Beijing and Shanghai. funding during 2011. A total of US$18.7 billion in funding was Globally, the top four regions in the world with the most VC split between 1,103 later-stage companies. activity were all in the US: Silicon Valley retains the lead by far (US$12.6 billion, 977 rounds), followed by New England/ • Nevertheless, the seed/early-stage market is still active, Boston (US$3.8 billion, 369 rounds), the New York City thanks largely to highly valued internet companies. The metropolitan area (US $3 billion, 367 rounds) and then relatively small amount of capital now required by start-ups Southern California (US$3.3 billion, 286 rounds). However, all due to innovations such as cloud computing has lowered of these US hotbeds have experienced a decline in the number operating costs dramatically, effectively allowing companies to of active investors. prove their products on far less initial capital. In 2011, 1,339 companies received a total of US$5.8 billion in first-time financing (an increase of 7% in capital raised and a increase of 19.5% in deal numbers, compared with the same period in 2010). Global venture capital insights and trends report 2011 15
  16. 16. United States VC trendsKey US VC statistics as social media businesses like Facebook and Groupon. They are enabled by private exchanges such as SecondMarket (see 2009 2010 2011 interview on page 18) and SharesPost, which allow investors Invested capital (US$m) $24,084 $29,595 $32,557 to trade the equity of private companies more efficiently. Investment rounds 2,714 3,033 3,209 The exit environment remains fragile Median round size (US$m) $5.0 $4.3 $5.0 Number of VC-backed IPOs 8 46 45 • Investors are moving further out the risk spectrum in search of companies with strong growth stories. Since 1Q IPO capital raised (US$m) $904 $3,255 $5,358 2010, the VC-backed company exit environment has improved Median time to IPO (years) 7.9 8.1 6.5 for mature start-ups, driven by relatively stronger aftermarket Number of VC-backed 416 560 477 IPO performance and greater strength in M&A, divestitures M&As and emerging market growth. The improved exit environment Median M&A valuation $25.0 $40.4 $70.7 has raised VC funds’ hopes that they may finally be able (US$m) to cash in some investments at better valuations, thereby Median time to M&A 5.6 5.4 5.3 reducing the pressure from impatient investors. (years) • The VC-backed IPO market has been soft, but social mediaSource: Dow Jones VentureSource, 2012 companies have substantially improved volumes, stability and aftermarket performance. Despite the ongoing uncertainty, in 2011, 45 VC-backed IPOs valued at US$5.4 billion came• Companies are staying private longer to market, a 64% increase in dollar value and a decrease in• Angel investors are financing many of these early-stage the number of offerings compared with 2010 by one IPO. companies, particularly in digital- and mobile-related The US VC-backed IPO market first experienced a significant investments. Subsequently, such angels’ investments are turnaround in 2010, when IPOs raised US$3.3 billion, or 267% often written up significantly or acquired for an attractive more than in the previous year. investment multiple. The proliferation of angel investors is • Another exit route for VCs has been to sell portfolio helping fill the void left by the consolidation of VC firms. companies to PE firms. This path to liquidity is driven largely• The “super angel” phenomenon involves former executives by the relative weakness of the IPO market. PE firms can from high-profile consumer internet companies who have create some liquidity for good companies and their investors. invested personal capital in companies at the seed stage. Several of these investors recently raised small institutional funds (typically less than US$75 million) to invest in about 500 US investment hotbeds start-ups in Silicon Valley over the past 18 months. Hotbed 2010 investment 2011 investment• The average time a company remains private has roughly (US$m) (US$m) doubled in recent years. As some highly successful companies refrain from pursuing an IPO for much longer than used to 1 Silicon Valley $11,377 $12,592 be the norm, this has led to the rise of private secondary 2 New England $2,605 $3,818 stock markets, which provide early investors and employees a 3 Southern California $2,919 $3,327 chance to sell out before an IPO. This has reduced the need to 4 New York Metro $2,420 $3,003 go public because liquidity needs have been lessened. 5 Texas $1,779 $1,015• The rise of more liquid private exchanges reflects a big 6 Potomac $819 $1,224 change in financing sources. For instance, the inflated frothy valuations in the tech market have been forming largely out Source: Dow Jones VentureSource, 2012 of sight in private markets. Professional investors are putting billions in private capital into late-stage investments, such16 Back to basics
  17. 17. Global VC hotbeds | Americas “Large US corporations are recognizing that they need to partner with VC firms and their portfolio companies to access external innovation relevant to their businesses.” Bryan Pearce, Americas VC Leader, Ernst & YoungHowever, the primary exit route remains the • The IT sector, especially software, saw an upswing. In 2011, software companies raised US$4.6 billion in 743trade sale deals, a rise of 12% from 2010. Software companies,• M&A makes up close to 90% of US VC-backed exits. With which had plummeted in 2009, bounced back in 2010 with many cash-rich US businesses focused on organic growth, US$4.1 billion in investments over 671 deals, a 21% rise in companies are expected to look to acquisitions and increase capital from 2009. their focus on divestitures as a way to maximize shareholder • Health care rebounded in 2011 with US$8.4 billion raised, value, raise capital or generate growth. M&A deal activity is although the number of deals — 738 — represent a slight expected to moderately strengthen for 2012 and beyond. decline from 2010. Many innovative venture-backed biotech• Larger deals but fewer transactions characterize the M&A companies are being acquired by large incumbents. market. In 2011, there were 477 VC-backed M&A deals • Cleantech venture has slowed down. In 2011, US cleantech worth an aggregate US$47.8 billion, representing a 23% rise with 297 energy companies received US$4.9 billion. in capital and an 15% decrease in deal numbers compared (Cleantech venture investment in the US had registered a with the same period in 2010. (In 2010, the venture-backed sharp upturn at the end of 2010, with total investment for M&A market in the US recorded its first rise in both deal 2010 reaching US$5.1 billion from 300 deals.) US venture numbers and value since the peaks of 2007, with 560 deals investment in 2011 continued to see large investments in the generating $39.0 billion, almost 69% higher than in 2009.) solar and energy storage sectors. M&A valuations are quite strong and offer broad investor participation, with capital efficiency on par with the pre- internet bubble period. Longer-run VC horizons are brightening• Driving the acquisitions momentum is the recognition • Longer-term trends suggest a positive direction for VC, by large corporations that they cannot generate all of the including more VC money funding start-ups, the proliferation innovation they need internally, and that they need to partner of angel investors, the fast growth of private secondary with VC firms and their portfolio companies to access external markets, the emergence of new overseas investors and innovation relevant to their businesses. In addition, with a growth opportunities in new and innovative segments such generally soft IPO market, valuations for many companies as cleantech, cloud computing, social networks, wireless and are low, making acquisitions attractive to large cash-rich information security. corporations. • The VC universe continues to shrink as US institutional• Corporate VC makes up nearly 3% of all capital being investors focus on top performers or forego VC altogether. committed to US start-ups, and 2011’s total was just under However, the VC industry’s continued long-term consolidation US$1 billion. Large companies are launching seed funds to is viewed as good for the industry, as it weeds out weaker boost their bottom lines and scope possible acquisitions. firms, reduces excess competition and improves returns. Corporate venturing units have an important role in acting as Better returns will in turn attract more capital to venture funds in-house strategic advisors and helping portfolio companies as the cyclical process continues. accelerate their businesses. The reduction in the number of • Limited partners were asked for their prerequisites for traditional VC firms has helped open new opportunities for re-engaging with the VC industry as an asset class in our US corporate venturing. limited partner sentiment survey of 2010. Currently, all of the prerequisites cited by limited partners are being exhibitedIT, health care and cleantech make up in current markets: 1) more successful exit track records byhalf of all VC capital raised VC firms, including both IPO and M&A activity; 2) continued contraction of VC firms so as to weed out weaker firms; and• With funding in various sectors and life-cycle stages, the 3) fewer dollars into VC funds, creating a focus on more pace of US VC investment has been reasonable and deliberate, capital-efficient company investments and better returns for contrary to popular perceptions. limited partners. Global venture capital insights and trends report 2011 17
  18. 18. United States Lawrence Lenihan “Bubbles pop, but they’re like forest fires: in the Founder and Managing Director end, they’re healthy. This market is going to come FirstMark Capital back stronger and much bigger 5 to 10 years New York City from now.”Ernst & Young: What is your perspective on the current VC orderly manner. But in the end, we would much prefer to exit inenvironment in the US? an M&A process. It’s nice to get it all done at once and then you don’t have to worry about it.Lawrence Lenihan: Nationally, right now we’re in a venturebubble. Not so much A-round money, but lots of later-round Ernst & Young: Are you seeing corporates more willing nowmoney. There’s too much money chasing the next Facebook. than they were a year or so ago to do deals?Bubbles pop, of course, but they’re kind of like forest fires: in Lawrence Lenihan: Yes. Without a doubt. But that can changethe end, they’re healthy. This market is going to come back on a dime in an uncertain environment.stronger. There will be something much bigger in terms of theentrepreneurial market 5 to 10 years from now. Ernst & Young: Whether it’s national initiatives like Startup America to provide funding for start-ups or other stateErnst & Young: What sectors do you see as increasingly or local initiatives, will we see more government, wealthyactive in VC in the US? private individuals or large companies trying to play aLawrence Lenihan: I think a lot of people thought advertising catalytic role for start-ups?technology was over. Our belief is that it’s really in a third Lawrence Lenihan: Yes, I think we’re going to see it more, and Iinning. We’re also going to see a lot more games. Games as also think it will end abruptly. I just don’t think these incubatorsentertainment, content, engagement. We are also big, big and accelerators do much. The best thing they do is providebelievers in data, and with that, analytics. You need very community, a good central point where expertise can gather.sophisticated analytics to really drive key decision-makingacross all industries. Ernst & Young: What do you think the optimal VC fund looks like three to five years out?We’re also seeing a whole new development of security, fromthe highest-level enterprise all the way down to the personal. Lawrence Lenihan: After 15 years of doing this, I think ventureWe also think that application technology for very specific capital is the most unscalable business on the planet. You can’tindustry problems, such as finance, insurance, pharma and just hire somebody and say, “Hey, you’d be a good investor.”health care, will do well. Retail is a gigantic opportunity, but it is You find out over many years. So I think the perfect A-roundincredibly bubbly right now — there are many investors chasing venture fund is small, a US$200 million to US$250 million fund.this space, but most of them don’t really know or appreciate the It’s four or five partners. I think VC funds are going to be smallerindustry. going forward, using more of the GP’s own money, because new companies need less money to figure it out and grow.Ernst & Young: What do you think about the prospects forthe exit environment over the next few months? Ernst & Young: Do you see venture becoming more globally focused in the US?Lawrence Lenihan: There has been a massive appetite forIPOs over the past 12 months. But what’s going to happen 6, Lawrence Lenihan: Actually, I think it’s going to be increasingly12 months from now? I think these markets are no longer the local. And concentrated. I think that, for example, New York’sfinancing vehicles for venture companies that they once were. gains have come at the expense of Boston.Companies need to be large, mature and have predictable Ernst & Young: Would you see start-ups, on the other hand,revenue streams that fund earnings and future development. going more global?Companies with a longer outlook in terms of their developmentwill be slaughtered in the public markets because these markets Lawrence Lenihan: Absolutely. And every company we’rehave such a short-term focus. looking at, we talk about being global from the beginning. How can your product be purchased anywhere? How do you serviceNevertheless, everybody is still driving for that IPO — we’re your customers anywhere? For us, customer acquisition is theQ&Adoing it, too. We’ve got a company that recently filed for an IPO. most important determinant of success, and those customersWe’re going to cross our fingers and hope that the markets hold can be anywhere in the world.together for six months after its offering so we can exit in an18 Back to basics
  19. 19. Global VC hotbeds | Americas United States Jeffrey Glass “VCs have seen some spectacularly big Managing Director valuations created and are therefore less Bain Capital Ventures afraid to invest at a later stage.” BostonErnst & Young: What general trends are you seeing in Ernst & Young: What trends are you seeing in theventure investing in the US? relationships between start-ups and big corporations?Jeffrey Glass: I’m seeing two major trends. The first is a move Jeffrey Glass: One thing we’re seeing a lot of in tech istoward later-stage investing. Some firms that traditionally only development partnerships: an early-stage software companydid early-stage investment have either switched to late-stage will develop its product by partnering with a larger corporationor are employing a multistage approach. Some of these are and creating the initial version or building out the platform to fiteven investing in very late-stage, high-valuation, mezzanine the particular requirements of that customer. I’m also seeing anrounds. I think VCs have seen some spectacularly big valuations increase in foreign corporate activity — as investor, as acquirercreated and are therefore less afraid to invest at a later stage. and as customer.Sometimes they’re even willing to enter at what used to be Ernst & Young: You mentioned VC firms selling companiesconsidered untouchable valuations. to PE firms as a third path to liquidity. Do you see a trendAlso, many start-ups today require much less capital than they there?used to, so I think some larger funds — depending on how they Jeffrey Glass: The extent of it is largely driven by the weaknessare structured — are finding that it can be harder to compete for of the IPO market. When there are good companies that haveearly-stage opportunities. So they migrate to later stage, where been around for several years but the IPO market is weak, that’sthere is more need for the kinds of capital they are looking to a good time for PE to move in and create some liquidity for thedeploy. companies and their investors. We’ve been seeing this recentlyThe second trend is a massive proliferation of seed and because, overall, the IPO market has not been strong. As longangel investing, particularly in digital- and mobile-related as that continues, PE will be a significant exit route for ventureinvestments. Here, again, the driver is the relatively small investors.amount of capital that’s now required. In some cases, you can Founders, of course, are still looking down the road toward thatput your infrastructure in the cloud and use open-source tools. IPO. But we always advise companies to focus on developingErnst & Young: How do you see the exit environment their company, keep running their offense. You can’t control theevolving right now? vagaries of the market, so you need to focus on your company. So if this handoff to a larger PE firm gives the young companyJeffrey Glass: Clearly, the last couple of years have seen some more time and cash to keep developing, it’s good for them.improvement. In fact, the last two years have been the mostprolific for us, both in terms of number of exits and total dollar Ernst & Young: What do you think the venture fundreturns. These have included IPOs, M&A, as well as a couple of landscape will look like five years down the road in the US?investments where larger private equity firms bought some of Jeffrey Glass: It’s a cyclical process. Right now, certain sectorsour companies. This last is an interesting third path to liquidity that have done well are attracting too much funding. It createsthese days. a highly competitive environment in which no start-up can buildIn 2008 and 2009, a lot of larger companies tightened their a big, profitable business, so there will be lower returns forbelts. They did a nice job at it, too, creating record amounts investors. When LPs are disappointed, they’ll start pulling theirof cash on their balance sheets. But in the process, they cut money, and the environment will be less competitive, leading toR&D. Then, in need of innovation and flush with cash, these better returns. Better returns will in turn attract more capital tocompanies enabled a nice surge of strategic exits. This was venture funds, and the cycle continues. This cycle is probablyfollowed, at least for a little bit, by a wide-open IPO window the nature of the beast and what we can expect to see continue.where public investors were looking for growth opportunities It’s worth noting, though, that the top quartile of VC firms isand where a number of IPOs did quite well. My sense is that, less prone to the ups and downs of this cycle. Q&Aeven though markets have been volatile lately, it’s a pretty goodtime for exits, both IPO and M&A. We expect to be active overthe next year. Global venture capital insights and trends report 2011 19

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