Monday, September 29, 2003

Immature Venture Capital Industry in Asia

My Experience as an Entrepreneur in Asia

During the time of my first startup with Jimmy and Peter, we envisioned starting an early-stage venture capital fund 7-10 years down the road. Especially because we already enjoyed helping friends and other entrepreneurs in their startup efforts while we were involved with our own. By the time of our second startup, the desire became a little more focused towards helping entrepreneurs in Asia because our experiences on both sides of the Pacific showed us the differences in being an entrepreneur in Asia versus the U.S. We realized we were serial entrepreneurs and enjoyed working on the early stages of company growth. We also knew Asia didn't have the best elements or culture to start a new company, so we eventually wanted to be in a position to help new entrepreneurs in Asia achieve their goals and vision.

We thought about doing another startup and then raising a fund several years down the road, but an opportunity came up last year to try to start a fund so we went forward with it. Everyone didn't need to take the risk, so I volunteered to start the process and if it succeeded the other four would quit and join. If it didn't succeed, which was almost expected, we would just try again five or more years down the road. Failure was expected because we went through the process of fundraising in the U.S. and Asia. 1% of all startups receive venture capital funding in the U.S., and this was during the booms times when money was supposedly being thrown around. I'm guessing this figure is higher in Asia, but still a difficult road. Even though we were successful in raising capital for two companies, the road for raising a fund was more difficult and the odds were worse, so we were confident but realistic in our expectations.

The economic conditions were horrible in trying to raise capital, especially for a new fund, but we thought the other factors were good... lower company valuations, continuing innovation coming out of Korea and China, and a shortage of early-stage capital. We tried for a year, but it didn't work out so we'll just regroup a few years down the road and try again. The following are excerpts from our PPM, or prospectus, explaining the landscape of the venture capital industry in Asia:

"Members of our team were former entrepreneurs in Asia and much of our company’s vision was cultivated from numerous meetings with almost every venture capital and private equity firm in the Pacific Rim. From our encounters, we noticed that the majority of the professionals in Asia were former bankers versus experienced entrepreneurs or managers from corporations as in the U.S. We noticed the distinction from U.S. firms, especially in our meetings since firms in Asia would focus more on the financial projections, which were crafted from part research and part dreams. Also the outcome, whether good or bad for our fundraising goals, infrequently provided benefits in terms of business insights or advancement of our business model. While our discussions with U.S. firms tended to challenge our thinking and assisted in us improving our business model. In the end, we successfully raised capital from some of the top firms in Asia, but the seeds had been planted to change the processes that we experienced.

One explanation for this difference is the venture capital industry’s brief history in Asia. The cycles of entrepreneurship and high-tech innovation have been relatively short resulting in a lack of infrastructure ideal for entrepreneurs, whether legal, financial, or cultural. Additionally, this has resulted in a smaller pool of experienced entrepreneurs and managers from larger corporations entering the venture capital industry creating a distinction with U.S. firms. Whether from the venture capital industry or entrepreneurs working on their second or third venture, fledging entrepreneurs in Asia do not have easily accessible role models or guidance in creating new businesses due to the small pool they can draw from.

Another resource that is not readily available to all entrepreneurs is a strong personal network. In Asia, family, educational, and other personal relationships are essential for doing business. In the past, some great entrepreneurs did not succeed due to the lack of these types of relationships needed to create partnerships with larger entities, fund-raise, or deal with bureaucratic issues. Additionally, bad ideas received funding due to a founder’s status within the social ladder.


In Asia, there is little distinction between private equity and venture capital firms. While in the U.S., the former traditionally tends to be more conservative, diversified in old and new economy, maintains investments that range in both public and private entities, and commonly evaluates a company on the financial data and potential returns. Generally, venture capital firms are less risk adverse, more focused on private technology companies, and strongly weighs softer issues towards a company’s potential, such as the management team and strength of technology.

The composition of their teams also greatly differs. Private equity professionals generally come from the financial service industry since many funds are related to an investment bank and this prior experience matches the nature of their typical investment. Venture capital firms differ since they are composed of former entrepreneurs, experienced managers from larger corporations, and some professionals from a financial service company. One reason for this difference is that technology has been a cornerstone for the venture capital industry and disregards conventional financial analysis. The short and long-term marketability of a technology can be difficult to predict and derivative ideas and products are challenging to discover at any stage, whether it is an older existing technology like telephony or cutting-edge nanotechnology. For practical purposes, a mixed team is needed for a firm to better assess investment opportunities in technology-related, early growth industries, or really any industry. Additionally, these types of companies undeniably need assistance beyond financial support. Only 25% of startups successfully achieve the second stage of growth and financing. The success rate increases to 80% when the venture capitalists supporting the company has prior experience from running a startup and working at a larger firm.

In Asia, most venture capital firms are primarily composed of individuals from the financial service industry. This has limited the ability for these firms to effectively evaluate an investment opportunity and the scope of impact it can have towards the company’s success. We believe this homongenous grouping of financial professionals is a contributing factor to the overall lack of success in Asia for venture capital firms."

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