Global Venture Capital: Ernst & Young Reports on Important Trend

In order to succeed in an increasingly competitive global environment, startup companies are making more use of venture capital funding and global VC funds are being used more often to provide these startups with the financial support they need. The most recent report by Ernst & Young on this trend is a major step towards understanding how these funds work and which industries they work best for. Ernst & Young has detailed the evolution of VC funding and provided five key trends about international investors, VC funds, and the evolution of company financing. This report offers valuable insights into where this industry is headed going forward.

Global Venture Capital: Ernst & Young Reports on Important Trend

SPRING 2015 – Ernst & Young was the first major global financial services firm to identify the trend of VC funding becoming more international. In a report released in March 2015, "Global Venture Capital" showed that investment trends were shifting as newly formed venture capital firms expanded their reach and international investors were drawn to take advantage of these new sources of potential funding.

"In the last seven years, we have seen more than 40 new funds established globally, crowding out established incumbents and creating new competition," said Stephen Petermann, director of Venture Capital Intelligence at Ernst & Young LLP. "New venture investments peaked in 2013 and we now see a slower pace of fund formation."

The report takes a closer look at the following five trends:

1. Companies are raising $6.8 billion – more than double what was raised in 2011 and nearly six times more than was raised in 2004.

2. Global Venture Capital has expanded to $52 billion – up from $17 billion 10 years ago, and far exceeding the amount reported by the VC International Association last year. While a number of factors are contributing to this trend, it is also noteworthy that these funds are investing domestically as well as internationally.

1. Fast-growing companies are more likely to tap VC funding – the more mature a company, The less likely it is to seek venture capital funding.

2. Investors are increasingly global – there are now 353 active venture capital funds around the world, up from 203 in 2003, Ernst & Young estimates.

3. North America and Europe still dominate venture capital – but Asian investors account for 22 percent of new deal activity in 2014 and Chinese investors accounted for 12 percent of new deals in 2014 alone, according to Ernst & Young data. As a result, non-US VC firms raised 41 percent of funds that closed in 2014.

4. Venture capital is getting smaller – companies that raise less than $10 million in a round of funding now account for 78 percent of all deals. Larger rounds are less common.

5. The biggest trend is that new VC funds take time to become established – only 11 percent of venture capital funds raised in 2014 have been active for five years, according to Ernst & Young's analysis. At the same time, the average size of new deals reached $99 million this year, up from $65 million annually over the past four years and $19 million in 2004.

Fund raising has been heavily concentrated with fewer than 10 firms having raised more than half of all venture capital investments since 2011, Ernst & Young reported. By 2014, 25 funds raised more than $1 billion in deals.

The largest VC fund in 2014 was the US-based Accel Partners with $7 billion raised, followed by Sequoia Capital with $3.3 billion and Texas Pacific Group with $2.7 billion.

Petermann noted that Chinese firms have invested heavily in the US and international markets – for instance, KPCB invested about 30 percent of its global venture capital dollars outside of the US between 2009 and 2013.

"We are seeing a shift from direct to indirect investments," Petermann said. "There has been a big surge in middle market companies being acquired by well-capitalized private equity firms to raise their funding. In the US market, a lot of growth equity companies are being acquired by PE firms and being taken public. It's very similar in China."

This trend points to growing competition among investors for the best deals, Petermann said. "You have more players, more players from outside North America and Europe, and the capital is becoming more global," he said. "All these things make competition for investment greater."

A company that successfully raises VC funding can expect a serious uptick in its business, Ernst & Young reports. "VC-backed companies are growing faster and typically deliver a higher revenue growth than companies that do not take VC funding," said Petermann.

"Venture capital investors also continue to find areas of opportunity in the market," Petermann said. "We're seeing increased activity in healthcare and life sciences, software, and data analytics."

About Ernst & Young

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com .

1 https://newsroom.ey.com/news-releases/ey-global-venture-capital-report/

2 http://www.worldventures.org/Pages/default.aspx

3 https://venturebeat.com/2016/05/17/openair-launches-with-3m-in-funding-to-help-startups---angelosantacruzsantiago/#_ga=1.118309048.1985829606.1459628683

4 https://techcrunch.com/2015/11/08/the-venture-capital-conundrum-is-fundraising-fever/

5 http://www.dontbreakthepromise.org/content.asp?PageID=1907&PageName=understanding_v3_2pg1

6 http://www.dontbreakthepromise.org/content.asp?PageID=1907&PageName=understanding_v3_2pg1

7 https://www.pwc.com/en_US/insights/reports/global-venture-capital-investment.pdf

8 http://www.pwc.com/en_US/insights/reports/global-venture-capital-investment.pdf?ft=xmlformats

9 http://www.pwc.com/en_US/insights/reports/global-venture-capital.pdf?ft=xmlformats

10 http://www.terrapinpartnershipgrp.com/?page=PressRelease&q=Terrapin+Partnership+Group+inclined+to+raise+more

11 http://www.terrapinpartnershipgrp.

Conclusion

Since the rise of venture capital, we have seen the exponential growth of venture capital. The amounts invested in new funds has increased every year after establishing a base from which to grow.

Venture capitalists are now aiming for a particular quality that is often missing from companies that do not receive funding: maturity. This is why many VCs are putting more effort into their investments, particularly with those that come from Asian investors.

What is the best way in order to get funding? It is important to think about what you want to achieve with your company and having the knowledge of what should be done in each area: management, marketing and productivity; hardware and software; business model, etc.