Far Eastern Economic Review

by Murray Hiebert/Palo Alto and San Francisco

The avalanche of money going into Internet companies in the United States and Asia continues, despite the drubbing the Nasdaq stock market has endured since April. But the types of projects that cash-rich venture capitalists are investing in these days have undergone an abrupt shift: E-commerce and business-to-consumer ventures have fallen out of fashion, while Internet infrastructure, electronics services and business-to-business links are all the rage.

Even though the Nasdaq has shed more than 25% of its value since its high early this year, venture capitalists' enthusiasm for Internet companies hasn't been dented. Although separate figures for Asia aren't available, venture capitalists in the U.S. - where many of Asia's investors are based - ploughed $24.6 billion into hi-tech ventures in the second quarter of this year, double the amount invested a year earlier and almost equal to the $24.8 bilion invested in the first quarter, according to the U.S. National Venture Capital Association.

Venture Capitalists, in fact, see the Nasdaq meltdown and the collapse of high-profile dotcoms like British fashion retailer Boo.com as a disguised blessing. "A lot of dotcoms are a lot of hype," says John-Paul Ho, founder and managing director of U.S.-based Crimson Ventures. Many start-ups hoped to go public quickly without bothering to develop a business model and building value. "The bubble meant that everything was overpriced. If there's too much money, companies hire too many people. This creates a culture of excess."

But Ho is convinced that there are still great companies to build. Although Crimson suspended all new investments last November, the company has returned with a bang since the correction of Nasdaq, committing $135 million over the past two months. About half of this money was put into ventures in Asia. Many of the investments went to e-business software-development firms and e-service companies that are helping firms improve their supply chain with factories in Asia. Overall, Crimson has tripled its investment pace and doubled its staff since last year.

Crimson, which manages $500 milion, recently invested $10 million in eSP Solutions, a Taiwan-based company that helps link multinationals to complex supply chains in Asia. Crimson has also invested $6 million in SPI Technologies, a Philippines-based company that exports information-technology services to customers such as Microsoft and the U.S. Department of Justice. The new investment is expected to propel SPI Technologies into call-centre management allowing U.S. companies to use the Philippines' English-speaking workforce to provide customer service.

New Focus

Lip-Bu Tan, chairman of Walden International Investment Group, which invests 55% of its funds in Asia, says venture capitalists are increasingly shying away from e-tailing, or on-line selling to consumers. "You need $100 million to build a brand," says Tan. "I'm not convinced that it will ever work." Instead Walden focuses on Internet infrastructure, including telecoms and wireless communications. "The bandwidth demand is unlimited now," Tan says. Walden recently invested about $8 million in InnoMedia, a Singapore-based firm that provides Internet-telephony products and services.

James Yao, executive director of AsiaTech Ventures, which has investmetns in both Asia and Silicon Valley, says recent stockmarket turbulence has shown many start-ups that it will be difficult to go public quickly. "This is a wake-up call to Internet companies that business is not really about stock prices, but about building a solid business," says Yao. "Before, they'd come with two pieces of paper and demand $20 million-$40 million. Today, the valuation of projects is back to low single digits."

Venture capitalists are once again emphasizing old-fashioned hard work, guiding new firms through the difficult early stages, refining their business plans and helping them find experienced managers and build profits. "Venture capitalists are long-term investors whose invesment strategies aren't driven by short-term market fluctuations," says National Venture Capital Association's research chairman, Steve Lazarus. "What has changed in recent months is the shift of Internet from e-tailing to other technologies that will move the new economy to the next level."