Look Beyond Silicon Valley for Venture Capital Opportunity

Silicon Valley’s Sand Hill Road will forever be synonymous with venture capital. Yet the same forces driving the current innovation cycle have also democratized innovation itself, meaning that Silicon Valley no longer has a lock on the best new ideas. As innovation and entrepreneurship have become globalized, so too has opportunity — to the point where exciting venture-backed companies are emerging from cities such as Bangalore, Berlin, London and Shanghai.

Over the past decade, cultural shifts have led to what is perhaps the most disruptive innovation cycle so far. The rise of social media; the greater access to mobile computing, commerce and entertainment; and the move toward utility models such as SaaS for computing and the cloud for data storage and retrieval have all worked to change how people conduct their lives and how institutions of all varieties operate.

The low cost, speed, power and interconnectedness of computing have not only brought a wave of transformative consumer and business-facing tools and technologies but also altered the process of ideation. Today, an idea can be tested and disproved or validated on tens of thousands of dollars, rather than the millions of dollars it cost some ten or 15 years ago. Along with readily available angel and seed capital, this sped-up R&D is driving entrepreneurship at an unprecedented velocity — especially in segments that are only just beginning to take shape, such as bioinformatics and machine learning, with far-reaching implications for sectors that have been slower to innovate, such as transportation, health care, financial services and education.

Silicon Valley has had a long history of attracting the best and brightest entrepreneurs, thanks to the confluence of three factors: technology, academia and money. The democratization of innovation and the falling cost of technology, however, along with some region-specific macro dynamics, such as the rising middle class in emerging economies, have led to exciting developments in entrepreneurship around the world.

After nearly two decades, European entrepreneurship finally seems to have found its footing on a global stage. Activity has coalesced in several regional hubs, including Berlin, Helsinki, London, Paris and Stockholm, presenting venture capitalists with a much deeper talent pool in which to tap current innovation opportunities. Given a newfound cultural acceptance of risk-taking — in large part stemming from pressure facing Europe’s traditional manufacturing and service industries — the talent pool seems likely to grow. Furthermore, success begets success. Venture-backed companies such as Adyen, Skype Communications, Spotify and Supercell are testament to the ability and desire of European entrepreneurs to create global leaders.

Thanks to burgeoning tech hubs in emerging markets such as China and India, an entire generation of consumers will grow up with tech-centered businesses such as Hangzhou-headquartered Alibaba Group Holding and Bangalore-based Flipkart and largely bypass traditional offline, brick-and-mortar models of product and service delivery. Especially in China, structural economic tailwinds will remain in place and help to bolster tech entrepreneurship.

An October 2015 report from consulting firm McKinsey & Co. sums up the China VC situation: “[In order] to realize consensus growth forecasts — 5.5 to 6.5 percent a year — during the coming decade, China must generate two to three percentage points of annual GDP growth through innovation, broadly defined. ... China will have evolved from an ‘innovation sponge,’ absorbing and adapting existing technology and knowledge from around the world, into a global innovation leader.”

The geographic distribution of venture-backed unicorns, start-ups with valuations of $1 billion or more, as well as the distribution of venture investment, makes a top-down case for getting into Europe and Asia tech hubs.

For investors, the question is how to weigh these markets relative to the continued and evolving venture opportunity in the U.S. The European venture manager ecosystem has grown materially in the past five to seven years, particularly at the early stage. Many of these groups are less proven, however, making manager selection challenging — especially considering the risks presented by private equity investing, such as lack of liquidity and higher commitment requirements. Europe is also more dependent on venture capital from outside the region, particularly at the later stages, making it more vulnerable to capital flows at a time when companies are staying private longer. Although venture capital is more than a decade old in China, many venture managers there have seen turnover on their investment teams, making manager selection even more tricky.

Granted, each region has its own challenges, along with its own set of opportunities. The successful venture capital investor will be one who can combine local relationships with global perspective.

Peter Denious is head of global venture capital at Aberdeen Asset Management in Stamford, Connecticut.