Eric Buatois, General Partner at BGV shares his perspective on the influx of capital from International Limited Partners to Silicon Valley.
The early stage venture capital industry has been enjoying some very healthy returns over the past several years. Limited partners were primarily large financial institutions such as endowment, pension funds, insurance companies in the USA Europe and China. Many large technology corporations have also set up corporate venture funds and today corporate venture capital represents 1/3 of all venture capital deployed in Silicon Valley – this trend has been driven by the desire to get access to new technologies and products. . Large corporations in every industry want to have access to innovative start ups to understand and experiment with new business models and or new forms of customer engagement. The strategic intention is to identify the new “Ubers” of their industry before it is too late.
We are now entering the phase of the digital transformation of the enterprise after the digitalization of the consumer experience. The creation of Internet consumer leaders has been largely a regional phenomenon. (I.e. Aliabad in China, Amazon,, E bay in USA) Limited partners willing to participate in the build up of these new companies were also investing at a regional level.
In contrast, the digital transformation of the enterprise is developing on a global level. Investors willing to participate in the companies building the future of the enterprise have to invest in Silicon Valley. The venture capital funds with an enterprise IT focus such as Benhamou Global Ventures can not only invest in companies born in Silicon Valley but also in companies built in Europe, India and Israel, and help them set up their US operations as well as connect them to the Silicon Valley industry eco-system.
Large corporations based outside Silicon Valley, Limited Partners with a limited exposure to venture capital in the enterprise space, large government funds willing to support the set up of bridges between Silicon Valley and their own country are all seeking capital allocation from Silicon Valley based venture capital firms. They are not only aiming for top quartile returns but also for several key strategic benefits such as:
- Corporations seek to gain privileged access to innovative business models and technologies.
- Government funds are seeking access to new technologies and innovative companies to either complement their national industry or create more jobs at home
Large inflows of capital are coming from China and Europe for the following reasons:
The past ten years has seen the development of a strong and successful private equity and venture capital market predominantly fueled by the explosion of consumer demand and the creation of e commerce and social networks. The Chinese government is now keen to create a innovative domestic technology industry generating IP instead of relying solely on being the low cost supplier. As a consequence sectors such as semiconductors have seen large government investments but the results are unlikely to become clear before more time passes. Other technology sectors such as robotics and drones are clearly successful and Chinese companies in these sectors are likely to become world leaders. The Chinese automotive market (the largest market in terms of units shipped) is hungry for new technologies and innovation to build the transportation of the future…. The majority of the innovation and entrepreneurial talents required to address the above challenges are in Silicon Valley and are often built by entrepreneurs from Chinese descent and culture, if not from Asian descent and culture.
As a result Chinese private equity groups, regional and central government funds, successful entrepreneurs who want to continue to grow their business all want to have access to Silicon Valley B to B company fueled innovation through venture capital firms. Furthermore the wealth generated by the middle class needs a new generation of financial products, ones that the traditional central and regional banks cannot provide. This coupled with the desire of wealthy individuals to diversify their asset between RMB and Dollar denominated investment is also creating a demand for investments in the US based Venture asset class.
Europe and Israel have also created a solid private equity and venture capital industry during the last 30 years, although significantly smaller than China and North America. Traditional European Limited investors have diversified their investment between the USA, Europe and Asia. The lack of a strong public equity market for young companies has compressed the returns and pushed successful companies to list on the Nasal ( i.e. Criteo ). More recently a healthy consumer Internet and media sector has delivered strong returns. While the old continent with 400M plus inhabitants is still an enormous consumer market, the mediocre economical environment pushes young talented entrepreneurs to come to Silicon Valley to build their companies thereby limiting the growth potential for companies serving only the European market.
The recent Brexit event has created a shockwave. It is too early to predict the outcome with precision as the separation negotiations have not yet begun. But several large foreign financial institutions have already announced the relocation of some of their UK operations to other European cities. The Fintech industry in London, that was second in size and innovation to North America is already seeing a capital pull back. Fintech entrepreneurs are looking to China or Silicon Valley as their best alternatives.
Limited partners from the continent that were investing in UK funds are also pausing. The European Investment Fund (EIF) in particular, which provides funding for 30 to 40% of the venture capital in Europe will not be able to fund venture teams in UK as it will not belong to the EEU any more. Furthermore UK based entrepreneurial talent will face several limitations:
- Talented UK entrepreneurs will be concerned about their future mobility across Europe. The free movement of workers across the EEU will not be guaranteed. Foreign engineers and entrepreneurs living in UK will be worried about their future work permits and visas.
- Following the Brexit referendum, the demand of Irish nationality by UK citizens has increased significantly since Ireland being part of EEU can guarantee full mobility across Europe to its citizens.
European Limited partners will have to move their venture capital allocation to funds in North America as there will be fewer opportunities in Europe.
Large European corporations building airplanes, automobiles, communication equipment as well as service companies like Insurance, Banks and consumer product companies are looking to Silicon Valley to build their future digital enterprise. Finally the high labor costs in Europe incentivizes them to use leading edge automation and artificial intelligence technologies in order to stay competitive.
We are entering a new era in the evolution of the enterprise as it engages in a deep digital transformation, perhaps deeper in scope and impact than the 19th century industrial revolution. This is driven by technological trends such as cloud computing, the Internet of things, Robotics as well as a new wave of customer engagement with AI and augmented reality. These shifts are likely to make Silicon Valley even stronger, due to increased startup creation and the influx of international capital. Agile and adaptive venture capital firms with a strong international and cross border experience will be natural choices as long term partners for these international corporations, government funds and limited partner getting their first exposure to the Silicon Valley ecosystem.
- 7 Nov, 2016
- Posted by Anik Bose
- 0 Comments