#OpenLP: The internationalisation of venture capital: will this affect LP allocations?
This article originally appeared on SuperReturn365 in March 2019.
Venture capital is becoming increasingly globalised. The VC stronghold is said to be shifting to regions outside the US, and VCs are moving to make investments across multiple geographies. Is this really the case? And how does this affect investor allocations? Beezer Clarkson, managing director at Sapphire Ventures, shares her thoughts with us.
1. Leading the international fund investment programme at Sapphire Partners, which regions do you see the most opportunity? What strategies and geographies are you actively investing in?
At Sapphire Partners (the investment platform within Sapphire Ventures that invests in early stage venture funds) we currently focus on a handful of regions. We invest in the U.S., focusing on the Bay Area while also mindful of the strong technology ecosystems in New York and Boston as well as growing technology ecosystem in the greater LA area. For our investments outside of the US, we have focused our investing in early stage venture funds in Europe and Israel.
We believe innovation knows no boundaries. Great ideas can, and do, start anywhere. Further in our experience, the entrepreneurial ecosystem has become increasingly porous over time with companies starting in one location, say Israel or a European country and then moving to the U.S. or expanding into multiple European countries.
We also see U.S. tech companies moving to Europe to pursue European customers — both private tech companies as well as massive public ones like Google, Facebook, Cisco, eBay, etc. There are three European ecosystems we watch, in particular, and have focused our fund investment activity: the U.K. (London), Germany (Berlin) and the Nordics (Stockholm). We track them because of their high levels of new company formation, value creation and exits.
By investing in multiple geographies, we get a front row seat simultaneously to numerous high-tech markets. If we pay attention, we can see patterns emerging, trends in company formation, customer traction, valuations and the corresponding responses by venture capitalists. With this perspective, we believe we can be a more informed investor, and that much more valuable as advisors to our GPs as they compete on an ever-globalizing stage.
2. Venture capital is becoming increasingly globalised - is this a trend that you've observed or have experience in? Is it true that VC opportunities are moving out of the U.S. into other regions?
2018 was a strong year globally for venture with over $200BN being invested in over 14,000 venture deals. This was not just a US phenomenon. Of the 14k+ deals, just less than half were in the U.S. (almost six thousand), with another five thousand in China and almost 3 thousand in Europe.  And three of the top ten biggest venture-backed listings were European. The case can, therefore, be made that venture is by no means limited to the U.S.
3. How can LPs factor this movement into their portfolios? How do LPs consider their allocations when VCs are making investments across multiple geographies, or moving into different markets?
A fellow institutional investor once said to me “LPs are like snowflakes, each one is different”. It is therefore hard to generalize about what all limited partners do. Some LPs might prefer to invest in a firm that has multiple funds on its platform that cover various geographies – China, India and the U.S. for example run through separate local offices with their own pools of capital. Other LPs might prefer one fund that invests in a range of geographies out of one fund and yet other limited partners might prefer to pick ‘local champions’ in each market.
The range of LP interests and subsequent investment decisions reflects both the range of types of entities that are institutional investors (very large institutions who have tens of billions if not hundreds of billions under management all the way down to much smaller ones and everything in between) as well as the range of perspectives on what makes for a compelling investment. Different LPs also have different return targets for their investments. For example, some might be looking to underwrite their investment looking for a 10x fund return, others are happy with a 2x. And LPs might have their own internal perspectives on what geographies or markets might make for good investments as well as ones they do not want to allocate money to. All of these factors come into play when an LP is considering an allocation into a possible VC.
4. How do LPs conduct due diligence on global teams to ensure they have the right local connections when moving to new geographies?
What geographies or market a fund will be investing in is clearly a relevant conversation for a GP and LP to have and one typically covered during fundraising. If there are also changes mid-fund cycle this is also typically a conversation at GP will bring to the attention of their limited partners.
For us at Sapphire Partners diligencing a fund that is expanding its geographical or market focus can be covered as part of our typical diligence process. We always look to understand why a particular GP is focusing on a particular market (or geography), what makes them compelling to their target entrepreneurs as well as how they are perceived by their target entrepreneurs and co-investors. This is no different if a fund is expanding its scope or staying with what it has done before.
Disclaimer: Nothing presented within this article is intended to constitute investment advice, and under no circumstances should any information provided herein be used or considered as an offer to sell or a solicitation of an offer to buy an interest in any investment fund managed by Sapphire Ventures. Readers should not treat any opinion expressed on this blog as a recommendations to make a particular investment or follow a particular strategy, but only as an expression of an opinion. Information provided reflects Sapphire Ventures’ views as of a particular time. Such views are subject to change at any point and Sapphire Ventures shall not be obligated to provide notice of any change. No guarantee of investment performance is being provided and no inference to the contrary should be made. Investments referred to above do not necessarily represent investments made by, or all of the investments made or recommended by Sapphire Ventures and were not selected based on the performance of Sapphire Ventures’ investments have experienced, and are presented to describe investment strategy, or approach only. It should not be assumed that any investments mentioned within the article were or will be profitable or that any investments made in the future will equal the performance of investments identified herein. While Sapphire Ventures has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. Past performance is not indicative of future results.