U.S. VC Firms Betting Big on Asia

By Allen Wagner
May 29, 2014

Asia is diverse, both in terms of culture and economy, and, overall, it’s probably the most mature private capital market outside of North America and Europe. But one thing ties this largest of continents together: U.S. venture capital firms are betting big on its success.

Since 2011, U.S.-based VC firms have invested more capital in more startups than ever before in Asia. In the four-year period from 2007 to 2010, U.S. venture shops invested $4.3 billion across 417 financings, according toPitchBook data. Compare that to the period since 2011 (about 3 ½ years), when they collectively invested $9.7 billion across 617 venture rounds in Asia, and you’ve got a pretty clear picture of how U.S.-based firms see the continent.

VC investment in Asia by U.S.-based firms shot up in 2011 and has remained high. | Source: PitchBook

VC investment in Asia by U.S.-based firms shot up in 2011 and has remained high. | Source: PitchBook

Granted, financing activity and capital invested have stalled somewhat since a record in 2011, possibly due to a pull-back in investments in China, but the overall story of VC investing in Asia hasn’t changed. That’s largely thanks to an impressive showing from India, which has collected more than 70 financings from U.S.-based firms in each full year between 2011 and 2013, with 2014 on pace for 80. Much of the growth in India has come from investments in retail (particularly e-commerce), B2C services and commercial services companies. This makes sense, particularly as India grows and new companies form to meet the needs of a growing middle class. Retail and B2C services companies will need to pop up to cater to new consumers and commercial services companies will form to keep up with India’s emergent business community.

China, meanwhile, has seen declining deal flow from U.S-based VC firms since 2011. Since collecting 89 funding rounds in 2011, only 55 closed in 2013 and 2014 is on pace for even fewer VC financings. This development potentially reflects maturation of the Chinese economy and local venture community, as opportunities to invest in local early-stage companies that are first in their industry (think Alibaba Group) begin to diminish and competition intensifies from Chinese VC firms. Some U.S. VC firms may also be shifting attention from China to India and Southeast Asia (where PitchBook has also observed increases in VC financing counts) as the GDP growth rate in China begins to come down to more Earth-bound levels.

India has overtaken China as the most-active location for U.S.-based VC firms' financings, while seed financings now make up more than 15% of U.S. VC firms' deals in Asia. | Source: PitchBook

India has overtaken China as the most-active location for U.S.-based VC firms’ financings, while seed financings now make up more than 15% of U.S. VC firms’ deals in Asia. | Source: PitchBook

Interestingly, most VC investment in Asia over the last few years has been at the early and later stages, with very few seed financings. That, however, is beginning to change with new U.S.-based entrants into the Asian market. While heavyweights like Sequoia Capital, Intel Capital and Accel Partners have dominated the Asian VC market for some time, the most active investor since the beginning of 2013 has actually been 500 Startups, the Mountain View, CA-based incubator and seed-funding firm. 500 Startups has completed 28 financings on the continent from 2013 to May 27 this year, and has helped seed/angel rounds grow its share of overall VC activity in Asia from less than 5% in 2009 to close to 15% in 2013. So far this year, seed financings have comprised 16% of U.S.-based VC firms’ financings in Asia, a record that should only grow as the Asian market continues to mature.

This is undoubtedly an interesting development, as it shows that U.S. firms may be beginning to truly identify Asian startups at the earliest stages, rather than after they have generated some publicity or raised initial local financing. Region- or country-specific funds have a lot to do with this development, as U.S.-based VC firms set up shop in China and India to make investments across the entire venture capital lifecycle. Some, such as Sequoia, have been doing it for some time—it just raised $530 million for its fourth India-focused fund. While others, such as 500 Startups, which closed its 500 Durians $10 million micro-fund for Southeast Asia last year, are only recently setting up shop on the continent.

It’s clear that U.S. VC firms are well-established (or are currently establishing themselves) in Asia and are taking advantage of growing economies, a booming middle class and inventive entrepreneurs in countries like India and China, to not only bring in hefty returns over the long haul, but also build impressive businesses on a continent a world away from North America and Europe.

Source: PitchBook

Source: PitchBook

Featured image courtesy of Wikimedia Commons user J. Patrick Fischer.

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