The US Has Lost Its VC Crown to Asia

According to the National Venture Capital Association (NVCA), in Q2 2016, US VC firms raised $8.8 billion for 67 funds, which is more than a 26% decrease from the $12 billion raised in Q1 2016. However, the trend has been different for startup funding. The total venture dollars deployed to startup companies for the second quarter increased 20% (reaching $15.3 billion invested across 961 deals) with a total deal count down 5%, compared with the first quarter when $12.7 billion was invested in 1,011 deals.

The top 10 deals accounted for 39% of total dollars invested in the second quarter, up from 26% of total venture capital deployed during the first quarter, as reported in the official press release. As for the most attractive industries, NVCA reported that the software industry continued to receive the highest level of funding of all industries, receiving $8.7 billion across 379 deals for the quarter, a 70% increase in dollars versus the first quarter of 2016.

The increase in VC funding is certainly a positive trend for entrepreneurs looking to fuel their businesses. Both sides, however, should look beyond the numbers to understand underlying trends transforming the VC industry globally in order to determine the most suitable ties. In the report on alternative investments published on Thursday by WEF, the organization emphasizes three main trends powering the global VC industry transformation:

The funnel for startups is broadening as more startups seek and find funding in the early stages

One of the important reasons of startups funding growth is the fact that the number of wealthy private individuals increased dramatically over the past decade. In fact, data from WEF suggests that the growth in emerging markets generated enough private wealth to nearly triple the number of individuals worth more than $100 million from 2004 to 2014, from ~3,300 to ~9,800.

We have been emphasizing the importance of China as a source of private wealth before. WEF weighs in with estimations that China accounts for 33% of total private wealth generated around the world in the last decade. A significant amount of growth in private wealth in developing countries came at the same time when the technological developments have almost shed the barriers of market entry and reduced the cost of launching a business. WEF points at the software industry, where – thanks to cloud technology – it is now possible to start a business without even owning a server.

The time before a startup seeks an exit through an IPO or acquisition by a company is lengthening

The time a company remains private prior to becoming a publicly listed firm or acquired by another company more than doubled between 2001 and 2014. More recently, there has been a significant increase in the number and value of investments made in late-stage funding rounds, driven by some highly-valued deals in 2014, WEF reports.

Prolonged time between the launch and some sort of exit perpetuated the growth of unicorns. The phenomenon has been global, with 152 companies worth an estimated $532 billion passing this threshold (Figure 11), including 14 estimated to be worth $10 billion or more.

The factors driving the trend are related both to the growth of funding supply from VCs and increasing the desire of startups to remain private for a longer period of time. The regulatory authorities have played an interesting role in the extension of the time companies remain private. The Jumpstart Our Businesses (JOBS) Act passed in 2012 has reduced the cost of going public in addition to making it easier for companies and less costly to remain private as it boosted the maximum number of shareholders that a company can have from 500 to 2,000. As a result, companies were incentivized to remain private for a longer period of time.

As for the funds supplying side – new entrants have made a survival in private form even easier. VC funds found themselves in ‘competition’ with a variety of entities – banks, tech companies (Google, Microsoft, etc.), hedge funds, etc. Corporates have been pushing themselves into the space quite aggressively, broadening the stream of capital for large private companies. Unicorns are now able to attract capital from a wide range of investors (either directly or as a broker on behalf of clients). In fact, nearly half of the unicorns have received capital from non-traditional investors, the report suggests.

Asia is emerging as an important hub for VC due to the globalization and localization of venture capital and the scale of China as a new potential market for firms

The Western world has long been considered a flagship hub of VC funds with Silicon Valley being the biggest jewel in US’s crown. That time, fortunately for the global startup ecosystem, has passed and now multiple hubs around the world (Hong Kong, Singapore, Switzerland, etc.) are of equal strength and value. The trend can be attributed both to saturation of the asset class in developed markets and significant growth in emerging markets.

With regards to developed markets, institutional investors such as pension funds, endowments, and foundations – which have historically been a key supporter of venture capital and early stage companies – responded to poor performance and growing funding gaps by reducing allocations to early stage venture capital. <...> Meanwhile, the increase in the pool of high net worth individuals across the world has made it easier for entrepreneurs to start and grow businesses in their home region, rather than relocating to traditional hubs in California and Boston.

As expected, China and India are highlighted as new hubs for global venture capital. In fact, together they are reported to be attracting more investment than Europe. In addition, over a quarter of unicorns is not based in the US or Europe – half of those are based in China. What is even more impressive, almost 60% of angel funding in 2014 went to companies outside former leaders – California, New York, or New England, raising concerns of the US market participants.