Innovation in Global Industries U.S. Firms Competing in a New World (Collected Studies) (2008) / Chapter Skim
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9 Venture Capital
9 Venture Capital
Pages 313-340
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Venture capitalists have backed nearly all of the significant U.S. information technology (IT)
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The VC industry is not significant in terms of either direct employment or the total capital under management. Rather its significance lies in the role of venture capitalists in finding, funding, and assisting entrepreneurs whose firms will be instruments of Schumpeter's (1939)
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Investing in young firms is risky -- many fail and become total losses. The compensation for the failures comes from investments that yield 10, 20, or even 100 times the initial capital invested by the venture capitalists.
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found that venture capitalists in financial centers such as New York and Chicago exported capital to technology centers such as Silicon Valley, where the entrepreneurs and deals were clustered. More recently, Kogut et al.
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Through an analysis of contracts written by U.S. venture capitalists in foreign markets, Kaplan et al.
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. The finance literature research on the global diffusion of venture capitalism is remarkable because it ignores the fact that the predominant deal flow for venture capitalists has come from the information and communication technology (IT)
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For example, Mäkelä and Maula (2006) found that the presence of foreign venture capitalists and top managers with foreign experience increases the probability that a portfolio firm will list on foreign markets.
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Over time, venture capitalists in Asia formed associations. The most recent major nation to form an association is China.
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In the 1970s, some U.S. VCs believed Europe would provide significant investment opportunities.
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As U.S. firms entered Europe, European firms continued to enter the U.S.
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funds formed during the period 1986-2005. These rates were calculated from Thomson Financial, the National Venture Capital Association, and European Venture Capital Association data.
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In the late 1980s and early 1990s, the largest Taiwanese VC firms established Silicon Valley operations. In many developing nations, however, VC funds failed due to inadequate investment opportunities (Aylward, 1998; Fox, 1996)
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. In the 1990s, the environment changed for VC investing, even for the elite Silicon Valley venture capitalists.
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For example, if it is located in a leading entrepreneurial cluster it can provide market information to the home office to prevent it from investing in "me-too" startups. Alternatively, in technologies where the skills may be available in multiple locations, the branch office may notice initiation of investment by leading venture capitalists in the United States and pass this information to its parent office so that it can fund domestic startups -- receiving such a signal early could prove a significant advantage.
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European VCs agreed with Asian firms on the insufficient domestic deal flow, but they also felt a need to assist their portfolio firms in globalizing. Higher potential returns and larger markets were also mentioned.
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Using data from the National Venture Capital Association, EVCA, Israeli Venture Capital Association, and the Asian Venture Capital Journal (2001) , we aggregated data on the investment flows between and within four regions -- the United States, Europe, Asia, and Israel.
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venture capitalists includes capital that was raised by U.S. venture capitalists for Europe in Europe (e.g., Accel Europe)
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Whether this is a trend or anomaly is not certain, but is an interesting phenomenon to watch. There are currently four avenues for venture capitalists to exit their investments in Chinese firms.
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A number of these have provided high returns to their investors. The third exit window is listing on foreign markets, since Chinese firms backed by foreign VC cannot list on Chinese markets.
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Securities and Exchange Commission filings for IPOs, we extracted the names of the venture capitalists serving on these firms' boards of directors. The preponderance of the firms had foreign venture capitalists on their board of directors (this includes non-Hong Kong venture capitalists located in Hong Kong)
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. All Chinese firms listed on the NASDAQ were focused on the Chinese internal market with the exception of the Semiconductor Manufacturing International Corporation, which was a semiconductor
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The final missing ingredient is worldclass technology. Despite the fact that China does not appear to have global-class technological opportunities, the rapidly growing domestic market is creating numerous opportunities for substantial capital gains attracting venture capitalists from around the world.
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The other chapters in this book will answer the question of whether global-class technology is currently being developed, either in Chinese firms and universities, or in the R&D operations of multinational firms in China. This chapter did not examine VC investing in India, which up until the last 18 months has been quite limited, but in 2007 began to grow rapidly.
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For European and Asian firms, better returns and more investment opportunities were prime motivators for investing and operating in the United States. For the European firms, the ability to assist their portfolio firms abroad (in the U.S.
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The globalization of VC will not result in a lack of available capital in the United States. Policies that reduce the number of globalclass technologists and entrepreneurs in the United States will directly affect decisions by venture capitalists to invest in the United States.
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From page 338... ...
. The Globalization of Venture Capital: A Management Study of International Venture Capital Firms.
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From page 339... ...
. Do UK venture capitalists have a bias against investment in new technology-based firms?
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From page 340... ...
. Venture capital funding of Asian entrepreneurs in Silicon Valley: A longitudinal analysis.
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