The US venture capital industry is not flocking broadly to global investment opportunities, according to the 2007 Global Venture Capital (VC) Survey sponsored by Deloitte & Touche LLP in cooperation with the National Venture Capital Association (NVCA).

US VCs are instead investing cautiously in countries such as Canada, China, India and Israel, saying they prefer to play globally by investing in domestic companies with significant operations offshore vs. directly investing in foreign entities.

“US-based VCs are essentially dabbling in global markets, with the majority of US VC respondents indicating that less than 5% of their capital is invested overseas, generally in less than three deals per fund,” said Mark Jensen, national managing partner of Deloitte’s Venture Capital Services.

“VCs are making the majority of their foreign investments in areas with higher quality deal flow, entrepreneurial environments and access to foreign markets, as well as places where they have experience and thus greater comfort levels.”

Some findings from the study:

• Direct global investment strategies adopted by minority of US VCs:
  • Some 46% of US VC respondents said they are investing abroad
  • 54% said they expect to expand their international investing during the next five years, up slightly from 53% in 2006.
  • 73% of the US VCs who are not investing globally don’t intend to invest globally anytime soon.
  • Of US VCs with capital deployed in foreign locations, 66% said they have less than 5% of their capital under management deployed in those regions, and 78% said they have less than 10%.
  • Almost two-thirds (64%) of these VCs expect to deploy at least 6% to 20% of their capital under management in foreign locations in the next five years.
• Canada, China, India and Israel are top global targets for US VCs:
  • Of US-based VCs investing globally, the primary regions are Canada, China, India and Israel.
  • Israel, China and India are cited for high-quality deal flow, while India and China are attractive because of their emerging entrepreneurial environments.
  • China is also noted for access to its vast market, and the fact that China and India are lower-cost locations appears to be a secondary consideration.
  • US respondents cited China as the country of choice for manufacturing and India as the choice for research and development (R&D) and engineering.
  • For non-US respondents, the United States is a primary choice for R&D and engineering.
  • European respondents preferred Central and Eastern Europe for manufacturing as well as R&D operations.
• Global investment concerns shrinking, but still prevalent:
  • Although concerns about investing globally - particularly in China and India - have declined over last year’s survey, several factors are likely reasons for slower global growth:
    • The primary concern about investing in China is lack of intellectual property laws.
    • For India, the primary concern about investing is lack of deals that fit the VCs’ investment profile.
    • The top two concerns regarding investing in Israel are the unstable political environment and personal safety and security.
  • One way US VCs are investing globally with less risk is by doing it through US-headquartered entities with significant portions of their operations outside the United States: 88% and 82% of US respondents and non-US respondents, respectively, said some of their portfolio had significant operations outside their headquartered country.
• Local presence key to successful overseas VC investment; VCs focusing investment primarily at home:
  • US venture capitalists require a local presence in target countries that enables them to be close to their investments.
  • Strategies to achieve that local presence include requiring partners to travel more, developing strategic alliances with foreign firms, co-investing with firms that have a local presence and opening foreign offices.
  • Almost half (46%) of US-based VCs do not intend to pursue global expansion in the next five years, instead focusing their investments at home.
  • Among non-US VCs, European respondents favor European investments (67%) over the United States (17%), and Asian respondents favored Asia (78%) over the United States (18%).
  • Non-US VCs who selected the United States as their top destination did so because of higher quality deal flow and access to quality entrepreneurs.
• Limited partners expanding globally:
  • The US VC industry’s limited partnership (LP) base is expanding overseas: 60% of US respondents said their foreign LP base would increase, with more dollars going to European countries and to a lesser extent to Asian countries.
  • 63% of Asia Pacific respondents said their LP base would expand to the United States and to a lesser extent to the United Kingdom and Ireland.
  • 53% of European respondents said their LP base would increase primarily from the United Kingdom and Ireland and to a lesser extent from the United States.
• US regulatory pressures threaten continued leadership:
  • While the United States has the fewest impediments to investing in all regions worldwide, some 58% of US respondents see the US litigation environment as an additional financial risk associated with doing business here.
  • 46% of US VCs cited the challenges of the US regulatory environment, saying the cost of complying with corporate regulation is too high.

About the survey: The 2007 Global Venture Capital Survey was sponsored by Deloitte & Touche LLP in cooperation with the National Venture Capital Association in the United States and numerous other venture capital associations around the world. It surveyed venture capitalists in the Americas, Europe and the Middle East and in Asia Pacific. Deloitte & Touche received 528 responses from general partners with assets under management ranging from less than $100 million to greater than $1 billion.  The survey was conducted in the second quarter of 2007. Of the total number of respondents, 54% were based in the Americas, 31% in Europe, 13% in Asia Pacific and 2% in the Middle East. Of US firms, 86% were venture capital firms, while 14% were exclusively private equity firms. Of non-US firms, 64% were venture capital firms, and 36% were private equity firms.