South China Post - Business (Monday, December 11, 2000)

America's worst nuclear disaster was responsible for getting Lip-Bu Tan into the venture capital business.

In 1979, Mr. Tan was studying for a PhD in nuclear engineering at the Massachusetts Institute of Technology (MIT) when the Three-Mile Island accident intervened in his plans for a career in the nuclear energy industry.

"That pretty much killed the industry in the US," Mr. Tan recalled.

He abandoned the programme, graduating with a master's degree, and went to work in Silicon Valley.

Twenty-one years later, Mr. Tan is regarded by many as the pioneer of venture capital in Asia.

Walden International Investment Group, the Silicon Valley-based company Mr. Tan founded in 1987, today manages about US$1.1 billion of assets across 33 funds focused on the Asia-Pacific region.

Its success stories read like a roll-call of Asia's technology stars: Creative Technology, Premisys Communications, GVC, Centillium Communications, MediaRing, and Sina.com, to name just a few.

A glance at Walden's list of investors gives a hint of the cachet Mr. Tan's name holds. Global investment banks such as Morgan Stanley and Goldman Sachs rub shoulders with corporate blue chips such as IBM and Sumitomo, top-tier US universities such as Harvard and Stanford, and multilateral institutions such as the Asian Development Bank and the International Finance Corp.

A pretty solid vote of confidence, particularly considering Mr. Tan is only 40. Still, not everyone is impressed.

"My mother was surpised that I didn't finish my PhD. To this day, she still complains about it," he said.

A master's degree at age 19 from one of the world's best universities would please most parents, but Mr. Tan comes from an exceptional family.

His brother is one of Britain's leading heart specialists, a Rhodes scholar with a PhD in medical engineering, while one of his sisters is a Harvard professor who speaks 15 languages fluently.

Education featured prominently in the Tan household. Born in Malaysia but raised in Singapore, Mr. Tan was the youngest of five children. His mother was a secondary school teacher and his father chief editor of Malaysia's leading Chinese-language newspaper.

After completing a bachelor's degree in pure physics at Singapore's Nanyang University, Mr. Tan headed for MIT on a scholarship.

As he prepared to move on after Three-Mile Island (until Chernobyl, the world's worst nuclear accident), he received some telling advice.

"The dean said to me, Lip-Bu, go out to the world, keep your eyes open and take some calculated risks."

Mr. Tan has excelled at taking calculated risks ever since. He moved to San Francisco, where he helped to build a successful software start-up business with friends, before selling out to complete his MBA at the University of San Francisco.

That was followed by a spell in investment banking with London-based Gartmore, helping high-tech companies raise finance.

Everything came together in 1984 when he joined Walden Group. Mr. Tan realised that venture capital enabled him to combine his experience in engineering, finance and building companies.

Venture capital has long played a significant role in nurturing new businesses in the US, but remains relatively underdeveloped in Asia. Sensing the opportunity, Mr. Tan suggested setting up an Asian arm and Walden International was established in 1987.

Asia appears to have welcomed him home like a long-lost son. Walden moved into Taiwan first, on the personal invitation of senior government minister K.T. Lee, the man behind the island's famous Hsinchu science park.

Singapore soon followed suit, offering tax incentives to attract Walden. The island state provided the company's most famous deal, Creative Technology, which listed on Nasdaq in 1992. Creative became the world leader in PC sound cards and achieved a US$2 billion market capitalisation.

Now, Walden International has 11 offices in eight countries. Two years ago, it was selected as one of the managers of Hong Kong's Applied Research Fund.

"When I started in Singapore, Taiwan, Malaysia, some people complained I'd never worked or invested in these countries. [They said] how do you know how to invest in those countries? I'm a very fast learner."

Mr. Tan believes he benifited by joining the venture capital industry at a low point, during the 1980s, which meant he had to concentrate on the basic building blocks of how to create a profitable business.

Mr. Tan believes inadequate returns have been behind the underdevelopment of Asia's venture capital industry. In the US, venture capitalists can expect an internal rate of return (a financial measurement that takes account of time value of money) of 80-100 per cent. In Europe, returns have been in the 50-60 per cent range. But in Asia, returns are "in the single digits or lower."

"That is not acceptable, so a lot of venture funds are not coming in. So the pressure is on us to demonstrate that we have a solid return."

In the past couple of years, Walden's returns have been "comparable to the US side, close to 100 per cent," according to Mr. Tan.

The industry also needs government encouragement to flourish, in the form of stock exchanges such as Mothers in Japan or Hong Kong's Growth Enterprise Market, to provide an "exit" mechanism for venture capitalists.

The second challenge for Asia is to move beyond contract manufacturing into the more creative area of brand development.

"You need to have the killer application, something that's unique, scalable and can address the global market."

To achieve this, Asian entrepreneurs must broaden their horizons and plug into global trends.

"You have to travel to the US a lot. Take Creative [Technology], they almost live in the US."

However, it does not make sense for Hong Kong or Asia to try to copy the Silicon Valley model, he believes.

"The weather you cannot copy, and the infrastructure is sometimes difficult. You just have to cater to what makes sense for Hong Kong and identify industries in which Hong Kong has a unique value proposition."

The education system is key to creating a pool of talented individuals capable of nurturing entrepreneurs. Here, Mr. Tan echoes frequent criticisms of Asian education, charging that it stifles creativity compared with its US counterpart - telling comments from a star pupil of the strait-jacketed Singapore system.

He believes Hong Kong was right to turn down the proposed Silicon Harbour project proposed by rival Hambrecht & Quist Asia-Pacific. The project decamped to Shanghai, which offered land and tax concessions.

"I don't think it makes sense for a very small location where land is precious, and then you have the pollution, water, all those issues. I think it makes a lot more sense for Hong Kong to focus on other areas, new areas, like software."

Hong Kong should try to "migrate up the curve" into high-end software design in the communications industry, or business-to-business software, capitalising on its status as a port.

Walden is also active in China. It is the lead investor in Sina.com, which listed on Nasdaq earlier this year and which is rated by some surveys as the mainland's most popular Internet destination. Walden helped to create the company, bringing together the Beijing and California companies that merged to become Sina.com.

Given the confusing and sometimes contradictory statements coming out of Beijing on investment in the Internet sector, Mr. Tan's comments are unsurprisingly hedged and diplomatic.

"I think we have to continue encouraging them to reform and modify and open up, and it's just a process we have to be patient with. We want it to be a win-win situation. We want to protect the country, the political system, we don't want to disrupt that."

Venture capitalists are often portrayed as vultures, the hard-headed money men who cheat unworldly entrepreneurs out of the just rewards of their creative endeavours.

"Some entrepreneurs have bad experiences and then some have good ones. I think, again, there are many different types of venture-capital firms, some of them like what you describe. Some of them are financial-oriented."

Walden, by contrast, has an engineering culture, with most of its personnel having operating experience of companies.

"We take a very different approach. When we are committed to an investment, it's a partnership with the enterprise. It's almost like a marriage."

Mr. Tan is still on the board of Creative Technology after 10 years. Many venture capitalists sell out after a company goes public: having got in at pennies during earlier rounds of financing, they have already made handsome returns if a company gets that far. But academic evidence shows that companies do much better after listing when the venture capitalists remain involved.

"I think we believe in value, in building companies. We call it venture capital, but it is really business creation."

Nevertheless, by definition, there must be many businesses that do not make it. Venture capitalists invest at the very early, very high-risk stages of companies. They rely on a few big hits to compensate for the failures. Surely, it must be hard to pull the plug on an entrepreneur whose business is clearly failing?

Mr. Tan points out that the end of a company does not necessarily mean the end of the business relationship.

One of Walden's "biggest flops" was a pen-based computer company in the early 1980s, he said. That company's chief executive, Kamran Elahian, is now chairman of broadband solutions provider Centillium, one of Walden's biggest successes. Centillium, which listed on Nasdaq this year, has gone from start-up to a US$3 billion market capitalisation in just three years.

"As long as you're honest and upfront, direct, people appreciate that. The moment you fire him he may not appreciate it, he may be in turmoil. But later, he may come back and say you did the right thing, his shares are worth a lot, and you've done well for him."

BIOGRAPHY

Lip-Bu Tan, 40, is a founder and executive chairman of Walden International Investment Group, a Silicon Valley-based venture capital firm that invests mostly in Asia. Born in Malaysia, Mr. Tan studied pure physics at Nanyang University in Singapore and nuclear engineering at the Massachusetts Institute of Technology, from which he graduated with a master's degree at the age of 19. He also has an MBA from the University of San Francisco. Mr. Tan lives in San Francisco with his wife and two sons.