A survey by Deloitte and the National Venture Capital Association (NVCA) of more than 500 venture capital firms worldwide, finds a surprisingly solid consensus that the future for venture capital deals lies largely in emerging markets. Of itself the finding is not surprising, since deal flows follow growth and East is where the growth is. What makes the consensus surprising is that when Deloitte asked the 563 respondents to the survey what they thought about the likely deal flow across all regions, 47% said that they expected the deal flow in the US to improve over the next five years and almost as many thought it would be at least as good as now.
For Germany three percent more than in the US (96%) thought deal flows would be better, or as good. Yet despite this, only 28% of respondents planned to increase or keep their US or German activities at present levels. Some 57% planned to decrease their activities in the US by up to 30% and another 15% thought that they would be redirecting significantly more than 30% of their present activities outside the US. The only possible reading of this is surely that while the venture capital community by and large believes that VC funding is important to developed economies, and most believe that deal opportunities will improve in the years ahead, they overwhelmingly believe that these opportunities are nowhere near as attractive as those offered by overseas markets.
The reason why the VC community is united in this belief is thrown into sharp relief when respondents are asked to rate the likelihood of valuations in private companies increasing over the next five years, across the various countries. Almost uniformly, opinion on developed markets divides into even thirds, with one third thinking valuations are likely to improve, one third thinking they will stay the same, while the remaining third anticipate falling values. So where do they think valuations are most likely to grow? No prizes if you guessed Brazil (81%), India (68%) and China (64%).
Incidentally, France comes rather badly out of this survey, with just six percent of respondents believing that private company valuations are likely to improve over the next five years and 67% convinced that they will fall. The UK does rather better, with 37% believing that valuations will rise, 39% arguing that they will stay the same and just 24% expecting a fall. (Germany: 22%, 61% and 17%).
Interestingly, when asked what factors were most supportive in creating a favourable climate for VC activity the top two factors by quite a margin both lay in the realm of government policy initiatives. VCs rated the creation of an entrepreneurial environment as crucial (59% giving it top priority) and they also wanted to see strong incentives for R&D (49%). These were rated above growing markets and benign tax regimes.
Conversely, when asked what factors inhibited the market for VC firms, US respondents cited a weak IPO market and unfavourable tax and regulatory regimes. Deloitte partner Mark Jensen, managing partner for VC services comments: “Traditionally strong markets like the US and Europe will continue to be important hubs despite consolidation in the number of VC firms. However, the stage has now been set for emerging markets like China, India and Brazil to rise as drivers of innovation.”
What the survey does not pick up on particularly is the huge capital flows coming from emerging markets as companies, VC funds and sovereign wealth funds in emerging countries go hunting developed market assets. Many of the VC funds that are currently looking at emerging markets may well find themselves operating in both directions simultaneously, if business gets brisk.
Further reading on sources of funding and global venture capital:
- Private Equity Fund Monitoring and Risk Management, by Rainer Ender
- Sources of Venture Capital, by Lawrence Brotzge
- Assessing Venture Capital Funding for Small and Medium-Sized Enterprises, by Alain Fayolle and Joseph LiPuma
Tags: Brazil , China , Deloitte , France , Germany , India , IPOs , Venture Capital