Venture capital and angel investments are rapidly becoming less of a niche and more of a widely valid investment option. While traditionally a choice reserved only for those already with wealth, it is becoming a full-fledged industry in itself and actually a source of wealth for many HNWIs. However, it may have come at the wrong time as the industry attempts to develop while suffering setbacks from the 2008 financial crisis. Private Banker International and sister company, WealthInsight, takes an in-depth look at the wider issues, its trials and tribulations to gain stability.
Nowadays, around 64.8% of the global VC/AI population belongs to the lower wealth bands. While lower-tier millionaires account for 33.5% of the global HNWI population, mid-tier millionaires account for 31.3%. Affluent millionaires form the next largest group in terms of wealth band accounting for 16.3% of the VC/AI population. Centimillionaires and billionaires account for the remaining 18.8%. These figures show that the VC/AI industry is not one simply for breaking into the HNWI population, but now a way for HNWIs to support their position and generate even more wealth.
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Regional differences
One of the most highly developed areas on entrepreneurial culture is in the United States. While it is on the mend from the global financial crisis, and the regulatory environment can be off-putting to investors, it still accounts for the largest number of VC/AIs globally and remains an attractive market. On the other hand, Canada is beginning to relax its regulatory and immigration barrier which is beginning to attract start-ups and become a widely considered area for investment. Many of these changes have been put in place to attract investors to help develop their relatively underdeveloped business culture. In addition, their aging population, at least in comparison with other developed economies, puts them at a slight disadvantage; another reason why attracting new VC/AIs is crucial. The Jumpstart Our Business Startup (JOBS) Act is another new development which should drive US and North American markets over the next few years.
Latin America may not fare as well. The market constantly fluctuates between negative and moderate outlooks. Many countries in the region are hindered by strict and stringent regulations that prohibit entrepreneurial growth. Inaccessibility to education and weak infrastructures are two weaknesses that act as deterrents to an already underdeveloped business culture in the region.
Another key area is Europe. Most countries in the continent, similar to the rest of the world, have been put under considerable pressure after the 2008 and eurozone debt crises. Markets such as the United Kingdom and Germany have been able to offset a majority of the side-effects by relaxing their respective business environments. 2012 saw significant investments due to regulatory changes and WealthInsight forecasts this to continue. One major advantage this region has over a large chunk of the world is their highly developed entrepreneurial cultures, which are trained to deal with such setbacks and allow them to continue as attractive markets. The situation will only improve further as economic stability increases.
When considering improving situations, another key area is the Asia Pacific. Markets such as China, India, Singapore and Indonesia are expected to be the world’s highest gainers of investment capital in the near future. After ten years of impressive growth, China and India have shown signs of stabilising growth since 2012. Both governments are attempting to promote entrepreneurship with carrying levels of success. China has introduced a wave of legislation that frees up business and banks in the country, while India’s increased focus on innovation and R&D is expected to help the country grow. In contrast, Australia has a developed economy with an attractive regulatory system for VC/AIs, but investment attractiveness is currently declining. This is not forecast to end anytime soon with the economy expected to continue slowing down.
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By GlobalDataEmerging markets enter the fray
While generally utilised in developed markets, with 63.6% of VC/AIs taking place within said developed markets, the VC/AI market is growing in emerging markets. This is a result of declining opportunities in developed regions. Moreover, the rapid pace of growth in emerging markets is encouraging investors to seek opportunities in these regions in a variety of fields including technology, healthcare and media.
Two emerging markets that are high on many VC/AIs’ agenda is the Middle East and Africa. Currently, it is a very complex situation. After the ‘Arab Spring’ in 2011, a large chunk of these regions are undergoing eras of extreme transition. Oil proved to be a huge factor in the short term sustainability of countries in the area as those who export oil fared better than the countries that generally import oil. Economic growth is expected to be moderate in the next five years. The regulatory situation is far less developed than the emerging markets in Asia and Latin America and, as a result, the entrepreneurial culture is also lagging behind. One exception is Israel, which holds the second largest share of VC/AIs in the world, which is expected to continue their attractiveness among investors.
Moreover, an amount of African countries, including Ghana, Nigeria and Kenya, are recording economic growth, higher incomes and increased consumer spending. These economies are the ones able to gather interest from venture capitalists and angel investors, particularly in technology. This has also resulted in the rise in incubators and accelerators to assist business start-ups within these countries. The main problem is, unlike developed economies in Europe and North America, as well as developing markets in Asia-Pacific, the VC population’s contribution to the SME sectors in these countries has been limited. Local VC/AIs are also generally more conservative in these developing markets than in others around the world.
New trends and new setbacks
However, a conservative attitude, even in an industry as adventurous and risky as venture capitalism, is not a new development. VC/AIs typically invest in start-ups operated by family and friends. While this alleviates some risk, it also creates a more relaxed environment and, more importantly, less legal requirements. The lesser risk also leads to lower returns. VC/AIs also prefer to invest closer to home for many of the same reasons. If the investor is located closer to their investment, it becomes exponentially easier to control and support. In addition, start-ups prefer to search for local investors rather than go abroad, so it appears to be a win for all involved. The local strategy also greatly enhances success rates and investment returns.
In terms of trends in investing, technological innovation is a key driving factor. Innovation and distribution within technology are both expected to gain significant investment from VC/AIs in the near future. Investments in the information, communication and technology (ICT) industry are looking to be especially interesting to investors with significant capital. Also, mobile technology and related innovations are expected to account for substantial funding, more from venture capitalists than angel investors due to the different scale of wealth. While technology looks to be an increasingly important driving factor in the market, it is not expected to be the only one. Healthcare, retail and education are also expected to rise within WealthInsight’s forecast period.
While areas develop, the entire process of angel investing and venture capitalism is also progressing. The early stages of business propositions are usually handled by venture capitalists due to the large amount of wealth involved, which leaves angel investors to only get involved at later seed stages. As a result, the AI market has a total lower share of the overall investment market than the VC market. On the other hand, since the global economic crisis in 2008, the confidence exuding from venture capitalists has dramatically fallen. This is understandable considering the negative economic environment and tight credit availability seen in the majority of the world around the time. As a consequence, angel investors are beginning to form angel groups, which bypasses the venture capitalists and allows them to compete on a financial level. More and more AIs are exploring into early-stage investing and providing expansion financing to entrepreneurs, a level of investment previously unavailable to them. This trend is expected to continue over the next five years.
Overall, the angel investment and venture capitalist markets are both experiencing a time of turmoil and adjustment. While it remains strong in developed markets and continues to grow in the developing markets, it is fair to say that they both have their troubles. The economic climate worldwide has been shaky for over five years now. While many are beginning to stabilise, with varied levels of success, the ramifications can still be seen today. One of the key factors is the lack of confidence held by many investors, which has led to a drop in investment and a strong fear of risk. Whether angel groups’ stepping up to handle some of the VCs’ share will benefit or hinder the market is hard to say, but it is a major change. In addition, the global economic crisis led to the development of new regulation, both economical and concerning immigration, which have led to costly and time-wearing changes. These changes have seen focus shift away from the AI/VC industry, another burden which is yet to be dealt with.
While this period of upheaval has dealt some slight damage to the sector, it still carries the allure of old-fashioned risky investments. Whether investors will be still be as excited to experience the adventure of angel investing and venture capitalism, only time will tell.
