The International Venture Capital Industry


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The International Venture Capital Industry

  1. 1. The International Venture Capital Industry Where are we at? Where are we going? Dr. Gordon Murray London Business School
  2. 2. Where are we at. Where are we going? <ul><li>A short review of both practice and contemporary issues in the </li></ul><ul><li>International Venture Capital industry </li></ul>
  3. 3. Where are we at. Where are we going? <ul><li>How can one best sum up the way in which governments of all complexions and political stances are seeing the present growth in the importance of the New or Knowledge Economy? </li></ul>
  4. 4. We’re ALL Californians now!
  5. 5. Descriptives <ul><li>A Simple Taxonomy of Venture Capital </li></ul><ul><li>Size </li></ul><ul><li>Growth Trends </li></ul><ul><li>Stage of Investment </li></ul><ul><li>Returns to Investors </li></ul>
  6. 6. Global Venture Capital Funds in 1999 $557.9 billion
  7. 7. US Capital Commitments
  8. 8. US Disbursements
  9. 9. European Capital Commitments (€ million)
  10. 10. European Disbursements (€ million)
  11. 11. US Disbursement by Investment Stage1999
  12. 12. European Allocation by Investment Stage 1999
  13. 13. US Disbursements by Technology 1999
  14. 14. The Attraction of Technology -e.g. UK Venture Capital Investment in £ millions inc. MBOs
  15. 15. Technology Growth in European VC Investments
  16. 16. The Attractions of High Tech Firms <ul><ul><ul><li>( Quality) Employment Growth </li></ul></ul></ul><ul><ul><ul><li>Efficiency of Innovation </li></ul></ul></ul><ul><ul><ul><li>Export Intensity </li></ul></ul></ul><ul><ul><ul><li>Regional Development </li></ul></ul></ul><ul><ul><ul><li>Reciprocal Relationship with Large Firms </li></ul></ul></ul><ul><ul><ul><li>Increase Industry Competitiveness </li></ul></ul></ul>
  17. 17. FACT: for most UK venture capitalists, technology historically* has not been a success Range of Returns of Mature Funds *1980-95 by Investment Stage in %
  18. 18. Exceptions - not the rule ... FIND THE EUROPEAN?
  19. 19. US Venture Capital Returns to 1998 Source; Burgel 2000
  20. 20. Contemporary Issues <ul><li>Relationship Government and VC </li></ul><ul><li>How to manage early-stage investments </li></ul><ul><li>How to understand technology investments </li></ul><ul><li>How to manage a European context </li></ul><ul><li>The academic/investment inter-face </li></ul><ul><li>The Corporate Venturing phenomena </li></ul><ul><li>What happens when the bubble bursts? </li></ul>
  21. 21. Everyone wants their own Silicon Valley <ul><li>Industry policy is back </li></ul><ul><li>Creating enabling environments </li></ul><ul><li>Identification of market barriers </li></ul><ul><ul><li>information </li></ul></ul><ul><ul><li>taxation </li></ul></ul><ul><ul><li>incentives </li></ul></ul><ul><li>Finance a key issue </li></ul>
  22. 22. Early-stage investment is really important <ul><li>SO LONG AS SOMEONE ELSE DOES IT </li></ul><ul><li>ergo: several schemes to attract venture capital activity </li></ul><ul><ul><li>Government as backer </li></ul></ul><ul><ul><li>Government as underwriter </li></ul></ul><ul><ul><li>Government as syndicate partner </li></ul></ul><ul><ul><li>Government as provider </li></ul></ul>
  23. 23. Technology Investment Challenges <ul><li>Until very recently, European VCs have not had the skill sets to be sufficiently technologically informed. Issues of: </li></ul><ul><ul><li>information asymmetries </li></ul></ul><ul><ul><li>agency costs </li></ul></ul><ul><ul><li>appraisal and monitoring </li></ul></ul><ul><ul><li>technology networks </li></ul></ul>
  24. 24. European Context <ul><li>Venture capital has been/is about networks </li></ul><ul><ul><li>ergo, it has been highly parochial </li></ul></ul><ul><li>The geographical scope is changing: </li></ul><ul><ul><li>internationalisation of technology </li></ul></ul><ul><ul><li>‘ weight of money’ </li></ul></ul><ul><ul><li>integration of economies </li></ul></ul><ul><ul><li>the half-life of technologies </li></ul></ul>
  25. 25. Academic-Industry- Investor Interface <ul><li>Historically ‘separate lives’ </li></ul><ul><li>US model becoming dominant </li></ul><ul><li>University finances becoming conditional on external support esp.. expensive science </li></ul><ul><li>Often fraught relationship </li></ul><ul><li>Government encouraging greater awareness and contact. IN UK </li></ul><ul><ul><li>University Challenge Fund </li></ul></ul><ul><ul><li>Science Enterprise Challenge </li></ul></ul>
  26. 26. The Corporates Cometh <ul><li>In 1999, US based corporations invested $9.5 billion in 1021 investee companies. </li></ul><ul><li>i.e. 20% by value and 28% by volume of total US venture capital activity. </li></ul><ul><li>In 6mnths of 2000, corporations placed a further $7.4 billion into 901 companies. </li></ul><ul><li>This is in excess of a ten fold increase in investment activity in three years. </li></ul>
  27. 27. CVC Activity is growing very, very fast Derived from Venture Economics data. Includes subsidiaries and affiliates of industrial corporations and corporate partnerships according to the definitions of Venture Economics. Pension funds and financial corporations are excluded.
  28. 28. Challenges to the VC boundaries? Traditional VC Funds Corporate Venture Capitalists Incubator Funds
  29. 29. and finally ... <ul><li>the VC industry is heavily dependent on stock market performance, particularly (volatile) high tech stock performance </li></ul><ul><li>we have seen an exception period of bullish markets in the 1990s, and in the 2000s? </li></ul><ul><li>VC is investment this year estimated to be $70 million - a 12 fold increase in 5 years </li></ul><ul><li>Investors are coming to expect 1 year net IRRs of 62.5% </li></ul><ul><li>Is the current rate of growth sustainable? </li></ul>