Foreign Exchange and the Global Capital Markets
Read this chapter to learn about currencies, foreign exchange rates, and global capital markets. It gives us a real-world example of a company that has to deal with different currencies. Small changes in the daily foreign currency market can significantly affect a company's costs and profitability. At the end of the chapter, read the ethical dilemmas. What would your responses be? Would you recommend that Walmart set up an offshore company? Why or why not?
Venture Capital and the Global Capital Markets
Learning Objectives
- Understand the impact of the global capital markets on international business through the expansion of international venture capital.
- Understand international venture capital.
- Understand the perspective of international venture capitalists.
Every
start-up firm and young, growing business needs capital - money to
invest to grow the business. Some companies access capital from the
company founders or the friends and family of the founders. Growing
companies that are profitable may be able to turn to banks and
traditional lending companies. Another increasingly visible and popular
source of capital is venture capital. Venture capital (VC) refers to the
investment made in an early- or growth-stage company. Venture
capitalist (also known as VC) refers to the investor.
One of the
unintended benefits of the expansion of the global capital markets has
been the expansion of international VC. Typically, VCs establish a
venture fund with monies from institutions and individuals of high net
worth. VCs, in turn, use the venture funds to invest in early- and
growth-stage companies. VCs are characterized primarily by their
investments in smaller, high-growth firms that are considered riskier
than traditional investments. These investments are not liquid (i.e.,
they cannot be quickly bought and sold through the global financial
markets). For this riskier and illiquid feature, VCs earn much higher
rates of return that are sometimes astronomical if the VC times the exit
correctly.
One of the factors that any VC assesses while
determining whether or not to invest in a young and growing company is
the exit strategy. The exit strategy is the way that a VC or investor
can liquidate an investment, usually for a liquid security or cash. It's
great if a company does well, but any investor, including VCs, wants to
know how and when they're going to get their money out. While an
initial public offering (IPO) is certainly a lucrative exit strategy,
it's not for every company. Many VCs also like to see a list of possible
strategic acquirers.
Did You Know?
Many large global firms
also have internal investment groups that make corporate venture
investments in early-stage and growing companies. These corporate VC
firms may actually be the exit strategy and eventually acquire the young
company if it fits their business objectives. This type of corporate VC
is often called a strategic investor because they are more likely to
place a higher priority on the strategic value of the investment rather
than just the pure financial return on investment.
For example,
US-based Intel Corporation, one of the world's largest technology
companies, has an internal group called Intel Capital. The vision of
Intel Capital is "to be the preeminent global investing organization in
the world" and its mission "to make and manage financially attractive
investments in support of Intel's strategic objectives".
Intel
Capital makes investments in companies around the world to encourage the
development and deployment of new technologies, enter into or expand in
new markets, and generate returns on their investments. "Since 1991,
Intel Capital has invested more than USD 9.5 billion in over 1,050
companies in 47 countries. In that timeframe, 175 portfolio companies
have gone public on various exchanges around the world and 241 were
acquired or participated in a merger. In 2009, Intel Capital invested
USD 327 million in 107 investments with approximately 50 percent of
funds invested outside the U.S. and Canada".
Table 7.2 "Intel Capital Investments Announced in November 2010" shows a sample of the global investments made by Intel Capital.
Table 7.2 Intel Capital Investments Announced in November 2010
Company | Country | Business |
---|---|---|
Althea Systems | India | Makes a cloud-based video platform to find and share online videos across devices (Shufflr is its social video browser) |
Anobit | Israel | Memory signal processing technology |
Boo-box | Brazil | Software-based ad system for social media |
De Novo | Ukraine | Provides enterprise-class data centers and services in Ukraine |
Iptego | Berlin | Makes software to optimize Next Generation Networks |
Layar | Netherlands | Reality platform available on Android, iPhone, and Bada mobile devices |
Rock Flow Dynamics | Russia | Makes modeling software that simulates fluid and gas filtration |
Select-TV | Malaysia | Makes set-top boxes for IP TVs |
Taifatech | Taiwan | Fabless semiconductor company that makes wireless system on a chip |
WinChannel | Beijing | Makes software that manages replenishment orders, sales, inventory, and other activities in near-real time |
Did You Know?
A July 2010 research survey conducted by Deloitte uncovered the following sentiments among VCs from around the world.'Traditionally strong markets like the U.S. and Europe will continue to be important hubs despite consolidation in the number of venture firms,' said Mark Jensen, partner, Deloitte & Touche LLP and national managing partner for VC services. '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'.…
Overall, only 34 percent of all respondents indicated that they expect to increase their investment activity outside their own country….The countries with the most interest in cross border investing include: France (56 percent), Israel (50 percent) and the United Kingdom (49 percent). Countries indicating the least interest in outside investing were Brazil (19 percent), India (15 percent) and China (11 percent).
'The Asian markets, in particular, are abundant in entrepreneurial spirit, energy and a dedication from both the private and public sectors to push the economic growth pendulum as far as possible,' said Trevor Loy, general partner of Flywheel Ventures. 'The continued rapid growth of emerging markets is also creating a new source of customer revenue, investment capital, job creation, and shareholder liquidity for U.S. based technology start-ups, particularly those leveraging America's deep research and development (R&D) resources to address critical infrastructure needs in energy, water, materials and communications'.…
Top challenges varied in countries around the globe with the exit market being cited the most in the United Kingdom (80 percent), Canada (75 percent), India (71 percent) and Israel (70 percent). Eighty-one percent of respondents in Brazil cited unfavorable tax policies as being a hindrance. An unstable regulatory environment was the most common factor cited by respondents in France (72 percent) and China (62 percent).
'The challenges for a U.S. venture firm trying to do business in Europe include the current weakness in the euro-zone economy, language and cultural differences, and the tendency towards inflexible employment regulations,' said Bruce Evans, managing director of Summit Partners. 'On top of this, U.S. firms have to fund their European expansion from their own profits, and the proposed U.S. tax changes to carried interest - and the taxation of equity interests in fund managers more generally - would serve as an impediment to U.S. venture funds' growth aspirations'.
Key Takeaways
In this section, you learned- VC is the investment made by an investor in an early- or growth-stage company. Venture capitalist (also known as VC) refers to the investor. Typically, VCs establish a venture fund with monies from institutions and individuals of high net worth. Venture capitalists, in turn, use the venture fund(s) to invest in early- and growth-stage companies.
- VC investments are characterized primarily by the fact that they invest in smaller, high-growth firms that are considered higher risk than traditional investments and that the investments are not liquid - that is, they cannot be quickly bought and sold through the global financial markets. For this riskier and illiquid feature, VCs earn much higher rates of return that are sometimes astronomical if the exit is timed correctly.
- One of the key factors that any VC
assesses while determining whether or not to invest in a young and
growing company is the exit strategy. The exit strategy is the way a VC
or investor can liquidate investments, usually for a liquid security or
cash. As a result, the expansion of the global capital markets has
benefited VCs who now have more access to the following:
- New potential investors in their venture funds
- A wider selection of firms in different countries in which to invest
- More exit strategies, including IPOs, in other countries outside their home country and the opportunity for their portfolio companies to merge or be acquired by foreign firms
Exercises
(AACSB: Reflective Thinking, Analytical Skills)- Why do VCs benefit from increased globalization? List three reasons. If you were a research analyst at a US-based VC firm, what would you recommend to your senior partners about the global market opportunity?
- What is an exit strategy? Why is it so important to a VC?