Title: Globalization of Venture Capital and the Future of Israeli Venture Capital
1Globalization of Venture Capital and the Future
of Israeli Venture Capital
- IVA Conference 2007
- Paul A. Gompers
- Harvard Business School and Spur Capital Partners
2The challenge
- Globalization of venture capital is a fact.
- This is not some trend of the day
- Will profoundly impact the entire VC world, even
Israel - Key challenge for the Israeli VC community is to
- Determine core competitive advantages and build
on them - Professionalize partnerships and recruitment
- Differentiate a value-added strategy that can
sustain the industry and help it prosper
3Core Themes of Workshop
- Five important areas to consider
- Macroeconomic trends driving globalization
- Examination of strategies that many players are
taking. - What is special about Israel
- How can Israeli VC firms adapt successful
early-stage investment strategies? - Maximizing exit valuation and returns to LPs.
- Providing the foundation for managing the
relationship with LPs to maintain solid funding
base. - Building, managing and growing the venture
capital team.
41) Globalization of Venture Capital
- Growth in new venture markets around the world.
- Variety of strategies by US venture players
seeking to enter the market. - 60 of US firms say they want to increase their
investments outside the US - Deloitte Venture Capital Survey (2006)
5Where Do US Investors Want to Expand?
Source Deloitte Venture Capital Survey (2006)
6Reason for Desire to Expand Globally
- Lower cost location
- Higher quality deal flow
- Emergence of entrepreneurial environments in
non-traditional locations - Diversification of industry and geographical risk
- Access to quality entrepreneurs
- Access to foreign markets
Source Deloitte Venture Capital Survey (2006)
7Strategies of US Players Going Global
- Develop strategic alliances with foreign based
firms - Invest only with investors that have local
presence - Require partners to travel more
- Require partners to transfer to foreign locations
- Relocate certain portions of portfolio companies
to be near firm - Open new offices
- Hire investment staff with expertise in target
country
Source Deloitte Venture Capital Survey (2006)
8Impediments to Globalization
- Safety and security concerns
- Travel time and effort
- Regulatory environment
- Intellectual property laws
- Foreign currency concerns
- Unstable political environment
- Lack of skilled workers
- Lack of expertise of business environment
- Lack of experienced local investors
- Lack of quality deals that fit investment profile
- Difficulty achieving exits
Source Deloitte Venture Capital Survey (2006)
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1010 Forces that Flattened the World
- The Fall of the Berlin Wall 11/9/89
- Nescapes IPO
- Workflow Software
- Open Sourcing Self Organizing Collaborative
Communities - Outsourcing Y2K
- Offshoring
- Supply Chaining
- Insourcing
- In-Forming
- The Steroids Digital, Mobile, Personal
Virtual - Source The World is Flat
11Areas of Opportunity?
- Israel
- China
- India
- Europe
- Other Markets
12Israel
- POSITIVES
- Well Established Venture Market
- Equal in size to greater Boston
- Been through boom/bust cycle
- Emergence of Serial entrepreneurs
- gt 4,000 hi tech companies
- gt 100 NASDAQ IPOs
- Source of New Tech Innovation
- Civilian RD 4.2 GDP
- Highest ratio of PhDs per capita
- Generous RD grants
- Democratic Government
- NEGATIVES
- Political Instability
- Palestinian (Hamas)
- Externally (Hizbollah)
- Small Population Base
- Negligible Domestic Market
13China
- POSITIVES
- Large Population 1.3 Billion
- Growing middle class
- Migration to the Cities
- Strong in Fundamental Science
- Projected GDP Growth 10 p.a.
- World Class Infrastructure Heavy Capital
Expenditures - Transitioning to Open Market System Joined
WTO - Efficiency of Central Control
- Sea Turtles Returning Chinese VCs
- Success Stories Baidu, et al.
- Positive Trade Balance 150 Billion
- NEGATIVES
- Single Party State
- Legacy as a Closed Society
- Few Disclosure Requirements
- Due Diligence Seen as Intrusive
- Uncertain Legal Framework VC Rules Evolving
- Need for Banking Reform
- Environmental Degradation Increasing
Resource Needs - VC Explosion
- Funding bubble?
- VC turnover
14TITLE
15India
- POSITIVES
- Large Population 1.1 Billion
- 8 p.a. Projected Growth in GDP
- Expanding Middle Class 300M
- Youthful Population gt50 lt 25 yrs
- India Institute of Technology 100K grads per
year - Established Rule of Law
- Worlds Largest Democracy
- Economy Transitioning to Free Enterprise, Open
Market - English as a Second Language
- Large Pool of Successful Indian VCs
Entrepreneurs
- NEGATIVES
- Social Inequalities
- Bureaucratic Administration
- Multi-Party Parliamentary System
- Massively Inadequate Infrastructure
- Growing Venture Base Still in Flux
- Alliances being formed
- Possible short term bubble?
- Deal volume up 3X yr on yr
- Rash of new funds being raised
16Europe
- POSITIVES
- New Early Stage Players on the Scene Accel,
Benchmark, Index - Improved Exit Routes
- AIM, et al.
- Notable large acquisitions KISS Technology,
Skype (2.6B) - Broadband Pervasive
- Cutting edge wireless wireline
- Video on demand, VoIP
- Large (Economically) Unified Market
- Modest But Stable GDP Growth, Inflation
Exchange Rates Steady
- NEGATIVES
- Early Stage Venture Ecosystem Less Well
Developed - Small number of tech-focused VCs poor
early stage performance - Buyout late-stage funds predominate
- Labor Inflexibility
- High Tax Structure But Changing
- Low GDP Growth Rates
Opportunistic Rather Than Core Target Market
17Conclusions
- The World of Early Stage Tech Investing is
Truly Global - Experienced VCs returning home with resident
skill sets - Top quality US firms establishing
collaborations - ROW Now Offers
- Technical expertise (PhDs, MSEEs)
- Increasing managerial and executive experience
- Growing middle class
- Large and expansively growing markets
- Improving IP protection rule of law
18Future Trends
- Industry will be truly global
- Continued role of new, targeted funds in a
variety of sectors - Industry composition will change and will be
harder to predict - Returns will vary considerably, but for the
long-run investor, these returns likely to be
quite attractive as compared to other asset
class.
192) Successful early stage investment strategies
- The US venture market has a much longer history
than Israel - Top tier players have emerged and sustained their
performance over many years. - Research demonstrates that returns are sticky,
i.e., top tier funds generally tend to remain,
top tier funds.
20Persistence of performance
- High likelihood that the next funds of a given
partnership stays in the same performance bracket
- ? Persistence.
- 1 boost in past performance ? 0.77 boost in
next funds performance.
21Identify Key Elements of Top Tier Funds
Strategies
- Investment focus
- Board construction
- Co-investors
- CEOs
- Contact with acquirers
- Company building
223) Maximizing Exit Valuation
- The continuation of performance of top-tier funds
can be tied to maximizing exit valuations - Much higher cash on cash multiples for their
winners. - What strategies are employed?
- Negotiations with acquirers
- Continuation of post-IPO performance
- Dont pump up stock too high on day 1 after IPO
- Credibility with institutional buyers
- Better distribution strategies
23Need to Be Opportunistic
- More choices (AIM), but is there liquidity for
LPs? - LPs care about ability to sell the stock.
- Relationships with acquirers matter.
- In US, prior portfolio companies are future
acquirers. - Long-run reputation matters.
- Dont unload the dog food at too high a price.
- Performance of acquirers of VC-backed companies
typically outperform industry peers.
24Distribution Policies Matter
- Distributions are (would be) a nice problem to
have. - Wide dispersion of distribution policies and
practice. - What is value of distributed shares?
- What happens after the distribution?
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274) Managing GP-LP Relationships
- Far too often, LPs are only really considered
every three years - Dont call me, Ill call you.
- Part of the professionalization of venture
capital firms involves understanding better the
LP perspective.
28LPs Perspective
- Valuation and distribution policy
- Communications
- Annual meetings
- Avoiding surprises
- Investments
- Team departures
- Write-offs
29Does the LP Perspective Differ by LP Type?
- Role within the VC Food Chain matters a lot.
- Endowments
- Pension Fund
- Gate Keeper
- Fund of Funds
- Corporate
- Individuals
305) Building, Managing, and Growing the Venture
Firm
- Recent headlines in the US have chronicled the
falling apart of some old and venerable venture
capital franchises - Loss of direction
- Poor returns
- Embattled younger partners
- Critical for Israeli venture firms to manage this
process
31Who do you hire?
- People that are similar to existing team or
different? - Young vs. old?
- Operating background?
- Technical areas?
- How are they included in decision making?
- Who mentors the younger investors?
- Give them their own checkbook or have them second
a senior partner? - What is the sharing of fees and carry like?
32Decision making processes
- How is the decision making process codified and
analyzed both ex ante and ex post? - Who participates?
- What is the approval/rejection rule?
- Unanimity?
- Majority?
- Significant minority?
33Managing the Portfolio
- Portfolio management as an area of expertise
- What are the key risks in the portfolio?
- How are they managed?
- How does portfolio management relate to deal
selection and exiting?
34Overall
- Venture capital will always be a craft business
- But
- The Israeli venture capital community can learn a
lot from experience of the best in breed - In order to sustain itself, the Israeli venture
capital community will have to adapt and
professionalize - Not institutionalization!!!
- The seeds of success have been planted