Insights from Four Silicon Valley’s Venture Capitalists

Venture capital is no longer a Silicon Valley affair. It may still be the heart of the industry, but VC resources are these days stretched far beyond Sand Hill Road and its immediate environs.

Venture firms are increasingly setting up both funds and offices on multiple continents, in the process continually eroding the conventional wisdom that a good investment is one that can be reached within 30 minutes by car from Menlo Park.

“Good capitalists are Darwinists: they evolve quickly and react to the environment they’re in,” says Steve Foster, managing director at TPG Growth, which manages roughly $2 billion (€1.4 billion) and began exploring international investment opportunities about five years ago.

Foster was one of four venture capitalists who discussed the globalisation of venture capital at a recent roundtable organised by Private Equity International. Held at Battery Ventures’ office on Sand Hill Road, the conversation included two VCs from traditional, technology-focused early-stage venture firms, Battery and BlueRun Ventures (formerly Nokia Ventures), and two VCs from the venture arms of large private equity firms, The Carlyle Group and TPG.

Though the size, strategy and structure of each firm represented are different, the views shared by the four VCs were in many respects strikingly concordant. The conversation revealed how crucial it is for venture firms to scour the globe for growth, innovation and talent in order to make their funds thrive and portfolio companies succeed. It also exposed some of the cultural challenges faced as venture firms expand their reach.

AROUND THE TABLE

HEAVY BRICS
Asked to discuss emerging markets and the globe’s hottest VC opportunities, the assembled venture capitalists repeatedly return to these two countries: India and China.

“People often mention India and China in the same breath, but they are actually quite different,” Buch says, and asks his colleagues whether they feel the same way.

While their economic growth patterns and rise in populations and living standards are similar, Grady says, “I think everything, from the business environment to the regulatory environment, to the risks to the way to do business, to even the specific sectoral opportunities, are quite different between the two markets.”

All heads nod in agreement with Grady’s assessment. “The one thing I would say is the same,” Foster adds, “is they’ve both gone through a very similar experience about a year’s phase from each other, which is they’ve seen their stock markets rise by 3x or 4x. And at the same time you’ve seen a tremendous amount of private capital formed and put to use.”

Foster continues: “So a year ago, in India, people were throwing up their hands and saying these deals are just too expensive. I think in China you’re starting to see the same phenomenon. And you’re seeing prices starting to creep up very quickly.”

That is one of the arguments in favour of having local teams on the ground, rather than affiliate networks or conducting fly-in venture capital, Grady says.

“I think the next wave of growth in India, it’s in Pune and Hyderabad, and in China it’s in Chengdu and Xian – it’s not necessarily in Shanghai and Beijing, it’s not necessarily in Bangalore,” Grady says. “And so who’s going to meet and work with and cultivate the entrepreneurs in that next tier of cities? And frankly, when those cities are overbid, then it’ll move to the next tier of cities. And who’s going to be on the ground enough to even know where those businesses are and have credibility?”

This becomes particularly important as an increasing number of deals stem from businesses built by locals as opposed to “returnees”, or “people that had one foot in Silicon Valley and one foot in either India or China”, Grady adds.

Local teams in foreign markets are vital, Foster agrees. “If you’re really going to see opportunities, it’s going to be because you have great relationships and you see enough things to know which are the good teams.”

The quartet believes the talent pool in Asia to be deep and attractive, as well as cost-competitive. And some of that may be attributed to the trend for Western-educated foreigners to return to their countries of origin rather than remain in the US, Grady says. “I don’t think it’s a trivial point that as recently as 30 years ago, about three-quarters of the PhD – and even Masters – in engineering [students] that came to the US from other countries to get their degrees at our great universities stayed here. And now it’s pretty much the opposite ratio – about two-thirds leave and only one-third stays,” Grady says. “In part, that’s because of tremendous explosion in opportunity from places from which these people originally came: China, India, Eastern Europe, elsewhere. But it’s also in part because of some foolish policies on the part of our government and our country to exclude people who we should be begging to stay.”

Sherman: “If you contrast the [mantras repeated in the] venture industry today to mantras that people would use in 1998 and 1999, I’m not sure ‘global’ was as critical a word.”

GO EAST
Brazil’s growing economy and Mexico’s untapped resources are briefly mentioned as future fertile ground for venture capital, but aside from Asia, this gathering of VCs pinpoints only Eastern Europe as the next hotspot to watch.

The region enjoys “high quality to low cost talent”, says Sherman. And the alleged “snobbery” of Western European fund managers towards Eastern Europe has left a vacuum of sorts in terms of starring funds and backing companies, Grady adds.

Traditionally, Western European fund managers have regarded the East’s growing economies as too small to be interesting, he says. “So I think that presents an opportunity because I think there are some interesting entrepreneurs there. There’s obviously perfectly good universities, and talent being developed,” Grady says.

TALENT TURMOIL
While the overriding sentiment around the table is that talent runs deep in Asia, the newness of the region’s venture capital industry presents unique human capital challenges that don’t exist in more established markets, they say.

“While there is lots of talent emerging in India, senior managers are still reluctant to move from stable business to riskier entrepreneurial opportunities,” Sherman says. “This is changing, but it will take some time for there to be as much management ‘liquidity’ as there is in other parts of the world.”

Making changes to a company’s management structure can also be particularly challenging in China, India and Korea, Buch points out.

“When we do a CEO transition in the US, it’s fairly seamless,” Buch says, prompting a bit of gentle protest from his colleagues, who quickly concede that it’s much trickier to do in Asia.

Several of BlueRun’s efforts to remove CEOs in Asia have turned into firm-wide efforts, Buch says. “It was mobilizing forces worldwide to change one CEO.”

And it isn’t just that they don’t want to hand over the reins to a company they started, but that they haven’t even considered the concept, Buch says.

“I’ve actually had discussions with people where I’ve had to say, ‘You do understand if we get a good offer, we would like to sell the company? And it won’t be your company anymore.’ That’s something they’ve actually not thought about.” Buch says. “It is a revelation.”

His experiences aren’t singular, and can be attributed largely to cultural differences, his neighbours around the table say.

“It’s a matter of personal pride,” in terms of a CEO stepping down, Grady says. In the US, he continues, it’s long been accepted that if an entrepreneur fails once, it’s not a black mark against the person’s reputation.

“All of us have backed entrepreneurs who have failed once or twice, been seeded three or four times, and if they have a pretty good batting average you’re willing to back them again,” Grady says. “But I think that level of acceptance of failure or even a CEO change is not that commonplace [in Asia].”

Experiences such as these underline that, for all the dismantling of barriers that has occurred in recent years, there is some way to go before venture capital investment around the world becomes a uniform phenomenon. One thing is for sure, though: for the four venture capitalists around the table, the world is indisputably becoming a smaller place.