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US venture capital industry to shrink while emerging markets grow

Venture capitalists in the US expect their industry to contract while those in emerging markets, including China, India and Brazil, expect to see their ecosystem expand over the next five years, according to the 2010 Global Venture Capital Survey by Deloitte and the National Venture Capital Association.

According to the survey results, more than 90 per cent of US survey respondents expect the number of venture firms to decrease between now and 2015, while a majority of venture capitalists in China, India and Brazil anticipate adding more venture firms in their country during the same time frame.

Venture capitalists in Europe and Canada also expect an industry contraction in their respective countries though to a lesser extent than in the US.

The survey, which measured the opinions of more than 500 venture capitalists worldwide, also examined the factors contributing to each country’s outlook. The US respondents feel the industry has suffered from a weak IPO market and unfavourable tax and regulatory policies. More than half the US respondents also believe that limited partners will be less inclined to invest in US venture capital funds in the next five years.

Despite the challenges, US venture investors remain optimistic regarding the quality of the opportunities in the US, with most predicting a stable or improving environment for valuations and deal flow.

"Traditionally strong markets like the US and Europe will continue to be important hubs despite consolidation in the number of venture firms," says Mark Jensen, partner, Deloitte & Touche and national managing partner for venture capital services. "However, the stage has now been set for emerging markets like China, India and Brazil to rise as drivers of innovation as they are increasingly becoming more competitive with the traditional markets."

Mark Heesen (pictured), president of the National Venture Capital Association, adds: "This year’s survey results underscore the importance of market and political environments to the future of global venture capital ecosystems. It comes as no surprise that optimism abounds in geographies where venture investment is well supported by sound public policies, stable capital markets and entrepreneurial energy. Yet, it is ironic that the more optimistic environments are now outside the US."

Sixty-two per cent of all respondents globally expect the number of venture firms in their country to decline in the next five years. This figure is driven largely by the US where 92 per cent of US venture capitalists expect the number of venture capital firms to decline, followed by France (83 per cent), Israel (80 per cent) and the UK (70 per cent).

Conversely, 99 per cent of respondents in China expect the number of venture capital firms to increase in their country, followed by Brazil (97 per cent) and India (85 per cent). The predicted amount of venture capital available for investment in the next five years followed similar trends by country.

Overall, only 34 per cent of all respondents indicated that they expect to increase their investment activity outside their own country, suggesting that cross border investing activity has reached a plateau for the time being. The countries with the most interest in cross border investing include France (56 per cent), Israel (50 per cent) and the UK (49 per cent). Countries indicating the least interest in outside investing were Brazil (19 per cent), India (15 per cent) and China (11 per cent).

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