Global Study Says U.S. Is Still A VC Gem

While our electoral process may no longer be the envy of the world, the global entrepreneurial community is still an acknowledged step behind U.S.-based start-ups when it comes to raising venture capital.

So says the Global Entrepreneurship Monitor 2000 (GEM), a study of the relationship between entrepreneurial activity and economic growth in 21 countries. It builds upon a 1999 report that examined only 10 countries, and includes a global analysis of last year?s global venture capital commitments, as well as rankings of the entrepreneurial activity in each particular country and the impact of female entrepreneurs on economic growth.

The actual research ? which consisted of approximately 28,000 commissioned interviews of entrepreneurs and industry experts ? was conducted by Babson College, London Business School, the Kauffman Center for Entrepreneurial Leadership and Ernst & Young.

U.S. Growth Spurt

The venture financing portion of the study indicated that of the nearly $58 billion worth of “classic” venture financing (i.e. excluding acquisitions and buyouts) given to entrepreneurs in the 21 countries studied during 1999, $46 billion was invested into the U.S. That figure represents around a 150% increase over the amount invested here in 1998, and more than eight times the amount invested in 1995.

Europe?s 1999 also saw an 84% jump over 1998 activity, but it still only managed to procure $10.8 billion.

Asian start-ups placed a distant third, amassing only $1.035 billion in 1999.

The most interesting trend discovered, however, was that while the U.S. received approximately 80% of all 1999 venture disbursements, only about 3,500 companies of the nearly 14,000 which received funding were based in the U.S. As such, U.S.-based companies received an average of $13.2 million per company, while non-domestic start-ups took in average commitments of $1.31 million.

According to Babson College Professor William Bygrave, although U.S. investors have significantly stepped up their funding efforts within the past nine years, the number of companies able to get their hands on private equity money is declining.

“VCs are looking for the companies that could potentially become superstars and make a difference in the economy,” Bygrave said. “Although the amount of venture capital has increased twenty-fold between 1991 and 1999, the number of companies receiving it has increased less than four-fold.”

Currently, businesses focused on digital equipment, microprocessors, biotechnology and Internet infrastructure have been credited with the most “superstar” potential in VC circles, he added.

Indeed, the GEM study concluded that most U.S. investments were of the New Economy variety, accounting for a whopping 86% of all global information technology deals (including acquisitions and buyouts).

Conversely, most of the UK?s private equity investments were in Old Economy companies such as those operating in the offline consumer sector.

Entrepreneurship Is Localized

While the U.S. led the way in classic venture capital investments, it had a bit of competition when GEM went about comparing the amount of venture capital raised to a country?s gross domestic product.

The U.S. did manage to squeak into first place with 5.4% of its GDP comprised of VC financings, but was closely followed up by Israel (4.3%), Canada (2.3%), Korea (2.1%) and Singapore (1.8%). Japan finished almost out of the running, with in-country venture financings counting for less than 1% of its GDP.

According to Michael Hay, a professor at the London Business School, the discrepancy could be attributed to the fact that out of the 2,000 people surveyed in Japan, relatively few said they were starting a business. Its close neighbor, Korea, however, elicited hundreds of responses from entrepreneurs pursuing start-up careers.

“We consistently find that disparity,” Hay said. “It?s strange that two countries who are nearby geographically and share similar interests are so different. That?s why we do studies like these, to get to the bottom [of such differences] and, hopefully, help influence policies that can foster more of an entrepreneurial spirit in countries where it may not generally be accepted, or where people don?t recognize the opportunities they have available to them.”