India, China in focus as VCs look beyond Valley for global play

SAN FRANCISCO: Faced with mounting pressures of doing business in Silicon Valley, the venture capital industry is going global, albeit in stops and starts that reflect the risks of doing business in foreign lands. Gone are the days when local venture capitalists could say with a straight face: “I don’t invest outside my (telephone) area code,” or “I don’t invest in companies that I have to drive more than 45 miles to visit.”

“Technology is a much more mature industry than it was as recently as the 1990s,” said Bob Grady, chairman of the National Venture Capital Association. Spending on computers and software is growing around 10% a year, only three times the rate of growth of US gross domestic product and far short of the 100%-plus growth rates VCs enjoyed in the go-go days of decades past.

China and India are the focus of most such investment abroad. Silicon Valley VCs are setting up offices in Shanghai and Bangalore, hiring local deal-makers and creating regionally-focused funds.

Claude Leglise embodies the push to find Silicon Valley-like returns in Asia. French in origin, Mr Leglise spent 25 years with Intel Capital, the chip-maker’s venture capital arm. San Francisco-based, he is now managing director of WI Harper, where he focuses on investments in China-based companies, or in US companies that need to expand into Asia.

“It is impossible to do good investments by remote control,” Mr Leglise said in a telephone interview from Beijing. “You have to be on the ground. Clearly, you need to adopt the VC model to local cultures and regulatory environments.”
Europeans, long laggards in the venture capital game, are active partners in many Silicon Valley-style deals, as a risk- taking culture takes hold.

The VC industry has been slow to follow the logic of the high-tech businesses it invests in, many of which are designed to go global from the start.

Many bright ideas these days in Silicon Valley typically come with a plan to outsource software development to India or hardware manufacture to North Asia as soon as possible. “Today, our young companies from the time they have 15 employees are forced to become 100% global,” said Mr Grady, MD of the venture capital arm of private equity firm Carlyle Group.

In its basic outline, Storm Ventures is just another Valley VC firm built on local successes. Entrepreneurs made rich by creating the network company StrataCom and selling it to Cisco Systems in the mid-1990s, they pooled their gains to start Storm.

They represent a new generation of VCs who are globally integrated from the outset. One founding partner is from South Korea, a second from India, another from China and the fourth is a US native.

Tae Hea Nahm, a founder and general partner of Storm, says that while 80% of the start-ups his company funds are based in Silicon Valley, fully 70% of these companies are founded by immigrant entrepreneurs.

Mr Nahm focuses on South Korea, where modern VC investing only became possible in the aftermath of the Asian economic crisis of 1997, when the massive family conglomerates known as chaebol that dominated the South Korean economy were dismantled. Early-stage investing can succeed there, but returns must improve, he said.

“The question I am asking is, can Korea succeed globally?” Mr Nahm says. “Korea seems to be creating lots of new categories. They do well in Korea. But they don’t do well internationally.”

He draws a chart that compares returns in Silicon Valley with those in South Korea. Many US firms lose money and die. But a steady number earn 10 times and even 1,000 times a venture backer’s original investment.

His picture of the South Korean market is a bell curve where half of venture-companies fail to make back their original investment, while the other half offer modest returns. A typical IPO on the Korean stock market, Kosdaq, brings just $50m to $60m to early investors, he said.