Global Venture Capital and Revenue-Based Finance

The United States has a problem: entrepreneurs and venture capitalists are having trouble getting funded.  Less than 1% of startups attract equity-based venture capital in the US.  Making matters worse, the US venture capital industry posted negative 10-year returns as of 2010, with a 31% decline in first quarter dollars raised by VC firms (compared with the first quarter of 2009).  Times are hard.

What about other countries?  Does the US have it better?  Worse?  How do venture capital environments compare in BRIC nations, and how can revenue-based finance help?

1. Entrepreneurial Environment.  US startups bemoan excessive regulation, procedure and bureaucracy that add cost and generally frustrate innovation.  It’s a huge pain.  Yet painful as it may be, others have it worse.  As a rough proxy for national “bureaucratic-ness,” the time and procedure required to set up a foreign-owned business compare as follows:


At one extreme, it takes more than 15 times longer to set up a foreign-owned business in Brazil (vs US).  Another proxy for government-imposed burden is tax, for which Brazil gets more poor marks with taxes at a whopping 38.8% of GDP.


While China, India and Brazil have made varied strides to improve their business climates in recent years, Russia registered an actual decline in the 2009-10 Global Competitiveness Report.  Russia dropped 12 places to 63rd, largely because of a perceived lack of government efficiency, judicial independence and property rights.[iii]

2. Venture Capital Volatility.  The Great Recession vaporized almost a third of invested VC dollars in the US, with devastating effects for startups and fund managers.  Even today the effects of this funding volatility plague the economy.  However volatility was around three times worse in Russia, and twice as bad in India.


Compounding the issue, IPOs from Russian companies dried up in 2008 and 2009 while India’s IPO market crashed around 97% from Rs 922.18 billion to Rs 20.33 billion.

Venture capital has always had its challenges in emerging markets, even in the “good times” before the 2007 collapse.  For example, 20 venture capital funds investing in 74 Brazilian firms between 2003 – 2006 posted negative overall returns.[v] While overall US venture capital returns over the past decade have also been negative,[vi] one 2005 study showed that private equity funds across emerging markets (including a mix of venture capital and larger private equity transactions) similarly produced an IRR of negative 0.3% over 5- and 10-year horizons.[vii]

There are a number of reasons equity-based venture investing has taken such a beating throughout the world.  However when you ask VCs themselves, there is strong consensus around the single most challenging factor: a lack of exits.  Startups can be invested in easily enough, but monetizing  that investment (i.e. turning it into cash) is another matter entirely.

3. Future Outlook.  With thicker bureaucracies, greater volatility and historically challenging environments, one might expect the future of BRIC venture capital to be gloomy – at least gloomier than that of the US.  However, oddly enough, the exact opposite seems true.

In a recent survey of over 500 global venture capitalists, an overwhelming percentage of VCs predicted venture investing growth in Brazil, China and India (Russia was not sampled) over the next five years.  Meanwhile 85% of respondents predicted declines in US venture capital over the same period.


While growing investment in BRIC nations is encouraging (at least for those BRIC nations), there is cause for concern.  If the migration of capital takes the same form as in the past (i.e. equity-based venture capital), what reason is there to believe that future outcomes will significantly differ from the past?  If we keep doing the same thing, how can we expect a different result?

4.  Revenue-Based Finance. These global trends underscore the urgency and importance of revenue-based finance on a global scale.  Without revenue capital and other alternatives to traditional equity-based venture investing, entrepreneurs and VCs are increasingly subject to the familiar challenges, volatility and speculation that all too often thwart economic growth.

Revenue capital is not theoretically immune from boom and bust cycles, yet it contains two key substantive differences from equity investment that can buffer it from extreme volatility:

(1) Unlike equity-based investing and IPO markets, which derive venture valuations from perceptions of market value (i.e. valuation is driven by a company’s estimated potential), revenue-based investments are determined by actual market value (i.e. the actual revenue generated by a venture).  In other words, revenue capital is based on cash, not perception.  It is therefore more stable over time as market revenues tend to fluctuate less than market moods.

(2) Unlike equity-based investing, revenue-based finance does not depend on exits.  As investor returns come from a percentage of a venture’s revenue rather than the sale of its stock, revenue capital can profitably fund startups regardless of exit volatility.  No exits, no problem.

The past few years have been tough for everyone.  As such, going forward BRIC nations and the US would be well advised to avoid mechanically replicating VC behaviors of the past.  While revenue-based finance does not solve every problem and there will always be a critical place for equity-based investing,  revenue capital is essential to the global dialogue.  Otherwise investors and startups alike may be doomed to repeat past failures, no matter where they happen to be.


Thomas Thurston, President, Growth Science International, LLC

Bruce Pascoe, Visiting Researcher, Growth Science International, LLC

Mark Streich, Founder, Surxel Venture Advisors

[i] Investing Across Boarders 2010 Report

[ii] Organization for Economic Co-Operation and Development, Center for Tax Policy and Administration, Revenue Statistics 1965-2008, 2009 Edition

[iii] World Economic Forum, 2009-10 Global Competitiveness Report, (2010)

[iv] Dow Jones VentureSource

[v] International Journal of Entrepreneurship and Innovation Management 2006 – Vol. 6, No. 4/5 pp. 341-355

[vi] Cambridge Associates and National Venture Capital Association, Venture Capital Industry Saw Short Term Performance Improvements at the End of 2009, (2010)

[vii] Patricof, Apax Partners, Sunderland, Venture Capital For Development, Brooings Blum Roundtable: The Private Sector in the Fight against Global Poverty Session III: Does Size Matter?  SME’s, Microfinance & Large Nationals,, (2005, Accessed 9/25/09)

[viii] Deloitte & National Venture Capital Association, Results from the 2010 Global Venture Capital Survey, July 13, 2010.


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