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Venture Capital in Emerging Markets

With Silicon Valley dominating the venture capital arena,[1] it is easy to overlook the significance of investments occurring in smaller markets. In 2011, roughly $3.4 billion of venture capital investments were made in emerging markets such as Brazil and India[2] with many more made in more established, yet still relatively small, markets such as China and Israel.[3] In fact, despite remaining the world-wide leader in venture capital, the United States is no longer as controlling a market economy as it once was.[4] The move into emerging markets is attributable in part to troubles in traditional markets.[5] As pre-money valuations continue to rise due to increased competition,[6] fund managers are finding it increasingly difficult to realize returns that keep investors close to home.[7] Consequently, venture capital firms looking for the “next big thing” are making significant investments in emerging markets.[8]


While Brazil’s private equity market has seen significant progress in the past decade, venture capital seems to be lagging behind.[9] Due to illiquidity and a relative lack of exit opportunities, global funds are apprehensive about investing in Brazil.[10] Consequently, the venture capital market’s primary investors are local pension funds, the Brazilian National Development Bank, and other domestic institutional investors.[11] Moreover, the relatively long maturation period for most investments leads to a depressed internal rate of return, making investment in Brazil less attractive.[12] Nevertheless, a strong private equity market spells exit options for Brazilian companies and has helped attract at least some venture capital investors.[13]


In 2011, China surpassed its previous record in both dollar amount raised and number of investments entered into.[14] A variety of factors contributed to the country’s all-time highs, including government support for venture capital, a soaring GDP growth rate,[15] ample exit opportunities,[16] high price-earnings multiples, demand for shares in newly listed companies, and the overall strength of late-stage private companies looking for equity in preparation for an initial public offering.[17] The increasingly positive outlook of venture capital in China has not gone unnoticed, drawing the attention of global investment funds such as the Carlyle group and Sequoia Capital.[18] Despite this attention, domestic funds continue to spring-up and grow at very fast rates.[19] Like many other global venture capital markets, China exhibits a strong focus on cleantech, internet technology and e-commerce.[20]


Despite a historical focus on the internet and telecom sectors, India’s venture capital market over the coming decade is predicted to revolve around innovations in both technology and business models in areas such as e-commerce, mobile applications, health care, medical devices, clean-tech and IT.[21] However, the expected paradigm shift is not without its challenges. With roughly 400 funds in operation, valuations in India are growing fast and creating apprehension among potential investors.[22] Nevertheless, India’s rapid GDP growth, its proliferating middle class,[23] and its increased attention to early-stage investments is likely to continue drawing investors in the near future.[24]


Unlike China and India, the Israeli venture capital market is currently struggling.[25] The continued success of domestic firms will depend largely on their ability to raise follow-on funds in the coming years.[26] In 2011, 75% of capital invested came from United State funds, particularly for investments exceeding $50 million.[27] Exacerbating the situation is Israel’s relatively weak IPO market,[28] making acquisition the most practical exit option.[29] Notwithstanding the seemingly grim outlook painted by market analysts, at least one Israeli venture capitalist is optimistic about the near future of Israel’s venture capital market.[30] Daniel Cohen[31] predicts that the optimal Israeli fund over the next decade will most likely be “dedicated [to] health care, tech or cleantech” and will control between “US$100 million–US$200 million . . . with a strong local presence complemented by excellent global access.”[32]

As globalization flattens the investment playing field, venture capital is seeing a shift from traditional markets to emerging markets around the globe. With innovations in countries like China and India growing at astonishing rates, it may not be too long before Silicon Valley becomes an equal player in a truly global marketplace.


[1] See Ernst & Young, Globalizing venture capital: Global venture capital insights and trends report 6 (2011) [hereinafter Globalizing venture capital] available at$FILE/Globalizing_venture_capital_Global_venture_capital_insights_and_trends_report_2011.pdf; see also, WilmerHale, 2012 Venture Capital Report 6 (2012) available at

[2] VC Clone Home: Making money by bringing old ideas to new markets, The Economist (June 2, 2012), $3.4 .billion is over double the amount invested in 2008.

[3] Globalizing venture capital, supra note 1, at 6.

[4] Jennifer Kho, Following the Money: Venture Capital Flocks to Emerging Markets, Daily Finance (Mar. 28, 2011, 10:00AM),

[5] VC Clone Home: Making money by bringing old ideas to new markets, supra note 2.

[6] There are currently over 350 venture capital firms trying to raise $50 billion dollars in North America. Id.

[7] Id. See also, Vijay Govindarajan, What Venture Capital Can Learn from Emerging Markets, Harvard Business Review (Feb. 17, 2011, 3:10PM),

[8] Kho, supra note 4.

[9] See Globalizing venture capital, supra note 1, at 21 (interview with Clovis Meurer, Partner and Senior Executive at CRP Companhia de Participações). On the one hand, when asked to describe the history of venture capital in Brazil, Clovis Meurer paints a picture of a flourishing market starting in 2005, where “the Brazilian stock market was booming, with a lot of new IPOs and a very good exit environment.” However, when asked about the biggest obstacles in the path to a larger Brazilian venture capital market, Meurer notes that for global funds to “invest in Brazil they need to see more liquidity than there is currently” and that “exit opportunities, especially by way of the local stock exchange, are still maturing.” Id.

[10] Id. The stock exchange in Brazil is still developing leaving relatively little opportunity for domestic IPOs.

[11] Id.

[12] The average maturation period of venture capital investments in Brazil is between five and seven years. Id.

[13] Id.

[14] Id. at 22.

[15] China’s GDP growth rate surpassed that of the United States and Europe by over 400%. Id.

[16] Domestic IPOs comprise over 90% of venture capital backed exits in China. Id. at 24. Additionally, China has seen a rapid increase in the number of private acquisitions; up nearly 400% from 2008 to 2010. Id. Moreover, the median turnaround for a VC-backed company was just slightly over 4 years. Id.

[17] Id. at 22.

[18] Id. at 23.

[19] Id.

[20] Id. at 25.

[21] Id. at 26

[22] Id.

[23] India’s rapid growth in domestic consumption is leading venture capital firms to invest in “companies that are capitalizing on the proliferation of wealth.” Id. at 27.

[24] Id. at 26.

[25] Id. at 34.

[26] Id.

[27] Id.

[28] See id. at 35. A major contributing factor is low valuations for Israeli companies in foreign markets. Id.

[29] Id.

[30] Id. at 36

[31] General Partner of Gemini Israel Funds. Id.

[32] Id.

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Tomer Dorfan

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