This week's jolt on global stock exchanges is a reminder of how events on the other side of the world can affect U.S. investors. Americans have looked abroad in recent years for new places to put their money. Not just day traders or mutual fund managers have bet on foreign markets. Venture capitalists also have gone abroad, and little foreign start-ups have gotten their share of the wealth, says Terri Forman of the Silicon Valley law firm Cooley Godward Kronish. Until 2000, venture capital generally looked only at domestic companies, she says. Then, as U.S. tech stocks tanked, they began to turn elsewhere, including India.
Many Indian immigrants had learned the tricks of entrepreneurship working at U.S. companies and went home to start their own enterprises. Meantime, in India many engineers picked up business skills at the growing number of outposts set up by American companies. As India's economy grew more friendly to business and markets opened, "they began realizing they don't need to come begging to the U.S. market," says Forman. Suddenly, going public on Indian markets seemed a viable strategy.
Venture capitalists once invested only indirectly in India by requiring companies to have U.S. operations. But they started "going to the source," says Forman. They advised Indian entrepreneurs, meeting them on their own turf. Airlines inaugurated direct flights from Chicago and New York to Bombay and New Delhi. So far, Forman says, venture capitalists have gravitated mostly to high-tech companies in India, which shares a common language and legal system with the United States. Venture capitalists have been more hesitant to invest in China, where Tuesday's global sell-off started.
Indian markets also fell, and analysts expect markets there to remain bumpy until the government sets an inflation-curbing agenda. Still, Forman doesn't see the flow of venture capital to the country slowing anytime soon. With India's expertise in medicine, Forman thinks that life sciences will generate the next big wave of start-ups there. "That market has been getting warmer," she says.