Venture capital markets in mature economies are expected to shrink over the next five years while those in large emerging countries are expected to continue growing, according to a global survey of more than 500 venture capital firms.
The decline of independent venture capital firms in the US, Canada and Europe comes against the rise of in-house VC divisions at large companies round the world.
The 2010 Global Venture Capital Survey by accountants Deloitte and the US trade body National Venture Capital Association found 92% of US survey respondents expected the number of local firms to decrease by 2015, while a majority of VCs in China, India and Brazil said there would be more venture firms in their country during the same period.
The US respondents said the local industry had faced a weak stock market for floating their portfolio companies and unfavourable tax and regulatory policies.
More than half of the US respondents (56%) also said limited partners – investors in VC funds – would be less inclined to commit to new vehicles in the next five years, although there would be a stable or improving environment for valuations and deal flow.
Last year, 18% of US-based VCs surveyed said they expected fund sizes to shrink with 43% expecting them to remain the same size, a prediction which has proved over-optimistic as the NVCA said in the second quarter only 38 funds raised an aggregate $1.9bn (the lowest total since the third quarter of 2003).
Last year, more than half of the VCs surveyed said they would hold their investment levels in North America the same or increase them over the three years to 2012.
Mark Jensen, US national managing partner for venture capital services at Deloitte, said: "Traditionally strong markets like the US and Europe will continue to be important hubs despite consolidation in the number of venture firms. 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, president of the National Venture Capital Association, said: "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."
Exit markets were seen as the biggest challenge in the most number of countries; UK (80%), Canada (75%), India (71%) and Israel (70%). Eighty one percent of respondents in Brazil cited unfavourable tax policies as being a hindrance. An unstable regulatory environment was the most common factor cited by respondents in France (72%) and China (62%).