All the world's a venture capital stage

Venture capital was once a tiny niche of private equity, the purview of very few risk takers, but those days are gone.

Jan. 12, 2002 5:23 p.m. PT

4 min read

Venture capital was once a tiny niche of private equity, the purview of very few risk takers. This tiny niche of private equity corresponded to a tiny niche of the country: Most of the investors and mavericks were concentrated in Silicon Valley, and to a lesser degree in the Boston area.

Those days are gone.

Today, not only is venture capital a significant portion of private equity activity, but it is branching out globally: VCs from Minnesota are backing companies in Israel, while the Israelis invest in Europe, and the Europeans are on the lookout for U.S. portfolio companies.

So what's behind this globalization?

Fostering high-growth companies has always been and will continue to be a three-way partnership, between venture capitalists and their limited partners and between venture capitalists and entrepreneurs. But the nature of these partnerships is evolving.

Before 1978, limited partners were a limited crowd indeed, with high-net-worth individuals and foundations contributing the bulk of the dollars to venture capital funds. But with the adoption of the "Prudent Man" rule, which cleared the way for pension funds to invest in venture capital and other high-risk activities, dollar amounts became significant, and the returns on venture capital investment began to make waves in the financial community.

The influx of dollars pushed these waves out from the nucleus of venture capital--Sand Hill Road and Route 128--and into additional areas long on entrepreneurial-minded technical folk: New York, the Potomac, Research Triangle in North Carolina, Austin, Southern California and Israel. And in all these regions, the partnership flourished. Local VCs devoted to cultivating their respective entrepreneurial communities spent time mentoring their companies: sitting on boards, pinch-hitting in unfilled management positions, even giving entrepreneurs temporary space in their offices. Physical proximity was of the essence.

But external forces are changing this aspect of the partnership as well. Corporations are now a major investment force as well as a source of potential liquidity through acquisition. And although as recently as two years ago Cisco Systems declared that acquisition targets had to be within 50 miles of San Jose, look who they're acquiring now: Everyone from Amtera (Glen Allen, Va.) to Monterey Networks (Richardson, Texas) to Calista (Bucks, England).

Other U.S.-based corporations' investment and acquisition habits have followed the same pattern. Conversely, foreign corporations' commensurate need for international distribution has drawn tech giants like Nokia and Siemens to co-invest in American start-ups.

This spirit of global cooperation has rubbed off on venture capital investors as well, with European powerhouses like 3i investing in Silicon Valley and a slew of U.S.-based VCs moving into Europe. In fact, VentureOne's latest quarterly survey showed that U.S. venture capital firms had 183 existing or planned investments in Europe, Asia, Latin America and/or Israel, and firms either had or were planning to open 45 offices in those locations.

Furthermore, VentureOne Israel's quarterly investment figures show that Israeli venture capitalists are investing ever-greater amounts in non-Israeli-related foreign companies--four times as much in the first half of 2000 as in all of 1999.

Where does that leave the traditional VC-entrepreneur partnership?

Obviously, physical presence is a necessity for active investors, and international travel can't be the only solution. More and more, it's about co-partnering. This phenomenon first gained acceptance in the early '90s, when established VC firms such as Mayfield Fund began partnering with regional firms like FBR Technology Venture Partners in the Potomac region, and locally focused firms like Intersouth Partners brought everyone from Institutional Venture Partners to Intel in on their North Carolina-centric investments.

Now this practice has become business as usual, and its latest incarnation is the international partnership, with firms such as Patricof & Co. Venture Partners co-investing with Apax, another European private equity titan.

It's not that this rosy picture isn't tempered a bit by residual skepticism. While countries such as Japan have recently adopted measures corresponding to the Prudent Man rule, and individual foreign pension funds have dabbled in U.S. VC funds, the overriding sentiment among European pension fund managers is one of "wait and see." In that respect, European private equity parallels that of the United States pre-1978: The majority of investment in entrepreneurial companies is still coming from wealthy families and their trusts, and, ironically, from U.S. pension funds.

Nevertheless, foreign investors have a burning interest in the American VC model--and American VCs have a reciprocal interest in foreign entrepreneurs. We can only expect that this interest and the dollars that accompany it will intensify as time goes on. Despite the obvious hurdles of local mannerisms and idiosyncratic tax laws, we'll continue to see additional players on the global venture capital stage.