Business Times - Asia (February 16, 2001)

HERE in Silicon Valley, the adopted home of many an Asian engineer, talk of Asia rolls easily off people's tongues. In conference after conference, news article after news article, Asia is cited as the next big thing, a huge market opportunity waiting to be "monetised".

Yet for all this hype, a closer look reveals that not everyone in the Valley is putting their money where their mouth is. The Valley's venture capitalists, who are so instrumental in driving the growth of new industries, are not quite flocking to Asia in search of the next market sensation.

Eager to cash in on 1999's dotcom boom, Asian countries have focused strongly on boosting their domestic entrepreneurial environment and encouraging the formation of venture capital funds, with limited success.

Perhaps, the most successful effort has been Singapore's US$1 billion (S$1.7 billion) Technopreneurship Investment Fund (TIF). The "fund of funds" attracted 46 venture capital firms, and was fully invested a year after its launch in April 1999.

The TIF managed to help draw one top-name Silicon Valley venture firm, Draper Fisher Jurvetson, to set up offices in Singapore. Other North American recipients setting up in Singapore include Ohio-based Crystal Internet Ventures and Canada's McLean Watson Capital.

Some recipients, including the blue-chip Sequoia Capital and fellow Silicon Valley firm Doll Capital, received funds but have not started up offices in Singapore. Other top-name VC firms, such as Europe's 3i, San Francisco-based Walden International and Connecticut's JH Whitney, were already in Singapore at the time of receiving TIF funds. There are other smaller US-based VC firms active in Asia, many run by Asians who have ties with their places of origin.

Distance is one key factor keeping the creme de la creme of Silicon Valley VCs from setting up offices overseas. Speaking to BT, Sequoia Capital founder Don Valentine said: "In 30 years we haven't convinced ourselves to set up a presence in Boston. It's a very difficult business to be good at consistently over a long period of time, and it requires a lot of thoughtful and integrated decision-making.

"We make enough mistakes on investments we make here (in Silicon Valley), that we're not comfortable we can (be successful) 3,000 miles away, never mind 8,000 miles away."

For a VC firm to be effective in a new foreign locale, it needs strong local networks that can benefit its investee companies.

Said Gary Morgenthaler, general partner of Morgenthaler Ventures: "Increasingly, our firm, and others like us, are obliged to choose markets to devote energy and capital to.

And our knowledge of markets, executive talent pools, networks of professional services...are not nearly as acute or complete in Asian markets as they are in North American markets."

Agreed Chua Joo Hock, who heads Singapore Technologies' Vertex Management Inc in Silicon Valley: "For foreign VCs in Asia, getting into a deal isn't difficult. How to help a company is the most difficult part."

A top Silicon Valley VC firm which chooses to set up an office overseas must also be prepared for lots of hands-on in-house training. Commenting on this, Walden International chairman Tan Lip-Bu, who travels to Asia nine times a year, said: "If a VC sets up a new office, recruits a local guy, and then leaves it alone, it won't work."

A lack of familiarity with Asian ways of doing business, as well as concerns about corporate governance, also cause hesitation for Valley VCs. "They don't know what kind of returns they will get overseas," said Mr Chua.

"Americans who bring an American process of doing business to an Asian environment will see a fairly severe cultural clash," said Kevin Randolph, chief executive of Randolphs.com and former CEO of Hongkong's AsiaOnline. "The work ethic is different, the management structure is different."

The lack of a strong track record in Asia for venture investments also serves as a deterrent. Observed Doll Capital partner Peter Moran: "The number of successful start-ups based in Asia has been quite low in proportion to the relative size of their countries' economies. For example, in Singapore, there may be only about six stocks in the Internet space."

And perhaps the biggest reason of all is the sheer quality of deals available in Silicon Valley. "The opportunities are so good here in North America that Asia needs to compete," said Mr Morgenthaler.

This is why, as Mr Randolph points out, there seems to be a "reverse flow" of foreign private equity capital into the US. Said Vertex's Mr Chua: "The returns here are much better than in Asia, where the market is not as developed. And you're never going to get the same kind of consistency in returns."

Little wonder, then, that top-tier firms such as Kleiner Perkins choose not to invest in any company outside of a 100km radius (about an hour's drive) from their Sand Hill Road headquarters.

That's not to say, however, that these firms have no involvement with Asia entirely. Several of these firms, including Sequoia, actively seek investment from select Asian parties into their funds; others have some limited investments in Asian companies; and almost all are interested in Asia as a market for their portfolio companies.

"We manage capital on behalf of various Singapore entities," said Mr Morgenthaler. "We are also introducing our Singapore investors to co-investment opportunities in our portfolio companies." The Government of Singapore Investment Corp (GIC) and Temasek Holdings are among investors in Morgenthaler's funds.

In the longer term, Morgenthaler is looking for opportunities to help take Singapore technologies to the US, "but that's going modestly well at this time. I think this is a process that requires time."

While Doll Capital has no plans to open offices outside of Silicon Valley, it has set aside 20 per cent of its current fund for Asian investments. Currently, it has one investment each in Hongkong and Japan; it is also a shareholder of Singapore's ECNet and helped the company move its headquarters to Silicon Valley. The firm also expects the 20 per cent portion "to go up slightly with each successive fund", said Mr Moran.

Doll, which has three partners with extensive business experience in Asia, focuses in Asian investment strategy around three tenets. The first: taking a successful US business model and replicating it in a large Asian market, such as China or Japan.

The second: building start-ups that serve an existing regional industry -- for example, Singapore's manufacturing industry.

Finally, the firm is also exploring the wealth of optical talent and technology coming out of China's universities.

All the VCs interviewed by BT cited Singapore as an easy place for doing business. "To me, Singapore is one of the world's greatest companies," said Sequoia's Mr Valentine.

Added Mr Morgenthaler: "I'm a huge fan of Singapore. Apart from the strong English-based business culture and a very strong set of Western values in business, we also feel that our business partners in Singapore are among the most reliable we have worked with anywhere in the world."

Are Silicon Valley VCs missing out on future returns by not laying the groundwork in Asia now?

"I don't think you can invest in Asia from Silicon Valley, or invest in the US from Asia," said Vertex's Mr Chua. "As a VC, you have to be close to the ground, and to be really active, you have to have a presence wherever you are."

Which is partly why Draper Fisher Jurvetson has opened offices in Singapore and London.

Viewing its move as a sort of pioneering effort for other VCs, the chairman of Draper's new ePlanet global fund, Asad Jamal, told BT: "Hopefully, it will act as a kind of draw for the other VC firms."

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