VCs slow to go global

This may be the era of the global economy, but the venture industry is not broadly embracing international investment. Rather, roughly half of the venture firms have made a commitment to a global investment strategy, and most are implementing that strategy slowly.

Those were the findings of a survey on global trends in venture capital, released last week by Deloitte & Touche and the National Venture Capital Association. The survey, which included responses from 528 general partners on six continents, found that large firms were most likely to be ramping up global investments. Currently, however, overseas investment represents a small slice of venture allocations. Most firms, the survey found, have invested less than 5% of their total capital under management abroad.

But global investments are poised to rise. Among U.S. investors, 54% indicated that they would be expanding their investment focus outside of their home country or region in the next five years, compared with 53% in 2006. The enthusiasm was slightly higher among non-U.S. respondents, growing to 61% this year from 58% last year.

In particular, partners plan to direct more funds to emerging markets. China ranked as the top choice for relocating manufacturing operations, for U.S. and worldwide respondents, while India was favored for R&D operations and back office activities. Among U.S. firms, those who invest globally tend to concentrate on four countries: China, India, Israel and Canada. However, even in these countries, the majority of U.S. respondents made only one to two investments from their funds, researchers found.

For non-U.S. respondents, the United States was the primary choice for overseas R&D and engineering. Among European partners, however, Central and Eastern Europe ranked highest for manufacturing, R&D and engineering.

VCs say they’re primarily interested in investing globally to take advantage of higher quality deal flow, to diversify industry exposure and geographic risk, to tap into the emerging entrepreneurial environment in China and India, and to gain access to foreign markets. Globally, in five years, 56% of firms indicated they plan to deploy between 6% to 20% of capital under management in a foreign location.

But not everyone’s looking overseas. More than half of the U.S. VCs stated that they are not investing globally and 73% of those said they don’t intend to invest globally anytime soon. Adequate deal flow in their home country was the reason indicated most often for not wanting to expand globally.

At the same time, many venture capitalists are reaching overseas markets indirectly by investing in domestic companies with significant international operations. This year, 88% of U.S. respondents had some portion of their portfolio investments in domestic businesses with significant operations outside of the U.S.—primarily China and India—almost twice as many as last year.

Although VCs are expanding slowly around the globe, a majority believe that their limited partner base will become more international. Worldwide, 59% of respondents expected that the number of their LPs located outside their home country or region would increase over the next five years. —Joanna Glasner