Asian Firms Venture Into Capital Market
For years Japanese companies have poured money into U.S. industries ranging from real estate to automobiles to computer chips. Now a new wave of Asian capital is washing over California’s Silicon Valley, flowing into an area that such conservative investors have traditionally ignored: risky start-up companies focusing on multimedia and the Internet.
Taiwanese, South Korean and major Japanese corporations are finally catching up to their U.S. counterparts and investing in venture capital funds as a way of getting close to young technology companies that might grow up to be the next Apple Computer or Netscape Communications.
“The Japanese are very interested in finding ways to establish relationships with innovative companies that have unique strengths for business opportunities,” says Masa Ishii, a Silicon Valley business management and investment consultant with a number of Tokyo clients interested in venture opportunities.
The Asian interest in corporate venture investing follows an overall trend by U.S. corporations, according to Rolf Selvig, director of business development at Venture One in San Francisco.
“Corporate investment activity is becoming increasingly important,” says Selvig, whose company tracks data on venture investing. And the reasons are the same: U.S. companies want to speed up the technology market and establish distribution channels and other business relationships early with hot, young entrepreneurs.
Intel Corp., Cadence Design Systems Inc., Cisco Systems Inc. and Adobe Systems Inc. are among the technology firms stepping up their venture investment activity, according to Andy Rachleff of Benchmark Capital in Menlo Park.
Big technology corporations are “sitting on a lot of cash, and they think the money can be used strategically to further their agenda” as well as earn a high rate of return, Rachleff says. And when corporations see other companies doing it, they want to join the venture bandwagon, he says.
Intel has made more than 50 investments in venture companies, says Kirk Walden, national director for Price Waterhouse’s quarterly venture capital survey. In February, the company invested $15 million in Avid Technology, an Internet company in Massachusetts, he says.
Traditionally, Japanese companies have waited for the third and fourth round of financing before making an investment. But in recent years, many big companies have opened their own corporate venture funds as a way of institutionalizing venture development.
Figures showing specifically how much Asian money is helping fuel Silicon Valley’s $2-billion venture capital industry are unavailable. But Daniel Quon, senior vice president and manager for Silicon Valley Bank’s Pacific Rim practice, and several other top local investment professionals are seeing growing numbers of overseas corporations clamoring for a piece of the action.
On June 5, a bevy of venture capital stars will address a conference in Redwood City called “The Asia-Silicon Valley Venture Capital Highway,” and organizers from the Asian American Manufacturers Assn. are expecting 300 people.
Quon says Asia’s investment appetite is changing: “It used to be semiconductors and peripherals; now it’s been broadened to include communications, software, the Internet and even a little biotech.”
Last month, two of Japan’s biggest business players, NEC Corp. and Sumitomo Bank, sank $60 million into Convergence Partners, a new Menlo Park venture capital fund focused on communications, interactive media, information technology and global computing. The fund’s first investment was in Decisive, a Santa Clara start-up whose products let companies do market research over the Internet.
NEC, a $45-billion computer maker that casts a big corporate shadow both at home and in the United States, is expanding its multimedia business and sees this venture investment as a way to build early strategic alliances with industry innovators.
Like many other big Asian high-tech firms, NEC has made a number of direct investments in U.S. companies, typically in conjunction with research and development agreements. But NEC executive Harumi Kato says venture capital is a phenomenon the company can’t ignore. NEC provided 75% of the seed money for Convergence Partners’ new fund and Sumitomo provided 25%.
“More and more venture businesses are coming up with new ideas and opening up a new market, and it’s very important to be able to have access to these companies so we can collaborate if possible,” says Kato, general manager for NEC’s corporate planning and multimedia development office.
The company is so committed to the idea of venture businesses that Kato, currently based at the company’s U.S. headquarters on Long Island, N.Y., is moving to Silicon Valley this summer to set up a venture liaison office for NEC. The office, which will operate independently of convergence partners, is intended to provide another window into California’s entrepreneurial culture, Kato says.
Although Japan’s high-tech companies fared better than many other industries after the collapse of the bubble economy, the country’s current deregulation efforts and slow-growth economy are forcing a lot of the old-guard monoliths to take a hard look at how they do business.
Russ Irwin, a partner in Convergence Partners, says Asian as well as European companies want to learn how the successful entrepreneurs work in Silicon Valley, and “the only way to do that is to get close to it.”
And Kato says small start-ups may provide some interesting lessons. “Because of the size of the company, they can move very quick,” he says. “That’s another area where a large company has to learn. The market is changing rapidly, so companies have to be moving fast as well.”
On the flip side, foreign firms can provide some strategic benefit to the venture companies as well. Veteran venture capitalist Paul Dali, a managing partner in Convergence, says that in addition to the Japanese money, a major European corporation is expected to make an investment in Convergence within a few weeks. “Our whole strategy is very global,” Dali says. “What’s important is to add value to these young companies.”
Convergence isn’t the first venture fund with Asian money. Although NEC’s investment may be the largest single amount from a Japanese manufacturer, other corporate giants are also hedging their bets with investments in venture capital firms.
For example, Fujitsu and Sega were among the companies that helped put up the $15-million fund launched in 1995 by Asia Pacific Ventures of Menlo Park. WebTV, a hybrid technology that allows viewers to surf the Internet from a TV set, is among 12 investments the fund has made. In addition to Japanese investors, the fund attracted money from Taiwanese and South Korean corporations.
“Historically, strategic investors have come in and out” of venture capital investing, says Asia Pacific partner Helen Ingerson. “Businesses are now seeing it as a sensible way of keeping their pulse on the” high-tech industry.
And some companies are creating smaller in-house venture funds to focus on technology. Itoshu Technology, a subsidiary of a large Japanese trading company, has a corporate venture fund based in Silicon Valley that invests about $20 million a year in start-ups. Itoshu is also a limited partner in the $100-million Java Fund launched by Kleiner Perkins Caulfield & Byers to invest in companies developing products related to the Java programming language.
“The end result is not a financial return,” says James Chandler, a manager of new business development for Itoshu’s export division. “The target we hope for is strong relationships with small venture companies who have products and technology that are in some way useful to the Japanese companies.”
