Southland’s Attraction Grows for Large Internet Venture Firms
In a move that signals an increased focus on Southern California, Softbank Corp., the world’s leading venture capital Internet investor, is expected to announce today that it has invested $30 million in LRN, a Los Angeles-based legal knowledge company with an expanding Internet presence.
More local deals are expected to be announced this spring, sources at Softbank said, noting such lucrative earlier Southland investments as GeoCities, which was bought by Yahoo Inc., and Aliso Viejo-based Buy.com, which plans to go public soon.
“Clearly, Los Angeles is at ground zero of this convergence of media and the Internet,” said Gary Rieschel, executive managing partner of Softbank Venture Capital, based in San Jose. “We are looking closely at what’s happening there.”
Softbank, the Japanese software giant, has two U.S. venture arms: Softbank Venture Capital, a $600-million fund targeting early-stage Internet companies; and Softbank Capital Partners, a $1.2-billion fund focusing on later-stage Net firms.
Through these two funds, Softbank has become a monster in the Internet community, with stakes in more than 100 Web companies through $1.5 billion of investments so far, now with a conservative estimated value of $7.5 billion.
Softbank is the largest shareholder in Yahoo, the Santa Clara-based portal, and E-Trade Group Inc., the Palo Alto online brokerage, both of which it bought pre-IPO. Other early investments include Cisco Systems, Critical Path and TheStreet.com.
“When they come into your company, you know it,” said Peter Wendell, general partner and founder of rival Sierra Ventures in Silicon Valley, one of the oldest and largest venture firms. “They tend to have an agenda.”
Indeed, Softbank is no passive investor. The company has an eye for the global picture, often getting firms to focus internationally. It also encourages its companies to take advantage of the strengths of other companies in the Softbank portfolio, a synergistic business model the Japanese call “Zaibatsu,” named for the conglomerates that helped fuel that nation’s war efforts in the last century and fed business to each other. Softbank calls it “NetBatsu,” a play on its Internet dominance.
“It’s a very powerful strategy if you do enough companies, and there are very few [venture firms] that are the scale we are,” said Bill Burnham, a former analyst with Credit Suisse First Boston who joined Softbank Capital Partners in August. “This larger vision of Softbank as a global participant in the Internet market is what I bought into.”
Softbank’s broad strategy is to take the most successful Internet concepts in the U.S. and adapt them for the Japanese and other international markets. For instance, last year Softbank announced a joint venture with Yahoo Japan to sell toys over the Internet, called EShopping Toys Corp. Also in 1999, Softbank announced it would join with Nasdaq to help set up an all-electronic market focusing on tech stocks in Japan.
Softbank has taken 19 of its portfolio companies into joint ventures outside the U.S., mostly in Japan and Europe.
The company has aggressively recruited Wall Street types and successful entrepreneurs. Along with Burnham, recruits include entrepreneur Mark H. Goldstein of the Impulse Buy Network, an online merchandiser bought by Inktomi Corp. last year.
Softbank’s Los Angeles “entrepreneur in residence” is Monica Dodi, founding chief executive of Entertainment Asylum, a Culver City-based Internet company started by America Online.
“Los Angeles is just now starting to happen,” said Dodi, also a founder of MTV Europe before coming to Southern California. “Hollywood and Silicon Valley are finally going to meet. And I am the facilitator for Softbank to help them make investments here.”
“She’s going to help us increase our knowledge of the area and help us find convergence opportunities,” said Softbank’s Rieschel. Working from her home office, Dodi scouts start-ups for both venture funds.
Formed in 1994 to create a network of attorneys linked by computer to do legal research for a fee and copyright the results, LRN has recently expanded into Web-based learning products and software that educate employees about antitrust, discrimination, securities, trade secrets and other legal areas.
“Companies are purchasing from us the knowledge to educate employees as to the legal basics of their actions, together with a Web-based technology or software platform,” said founder and chief executive Dov Seidman, 35, noting that LRN owns all the legal research it does for its clients. “Softbank is both a terrific financial and strategic model. They know how to navigate the Internet.”
Of course, not all of Softbank’s deals are winners. In 1996, the company agreed to pay $1.5 billion for an 80% stake in Kingston Technology Corp., the Fountain Valley maker of computer memory boards. When Kingston’s earnings failed to meet expectations, its two founders agreed to forgo the final $333 million in payments Softbank owed them and revised the terms of the acquisition.
While Softbank doesn’t release its U.S. returns, the average one-year performance of all venture funds was 62.5% through the third quarter of 1999, compared with 45.5% at the same time the previous year, according to Venture Economics, a research partner with the U.S. National Venture Capital Assn., a trade group. Seed funds such as Softbank Venture Capital, which invest in early stage companies, reported an average return of 92%.
With that kind of performance, it’s no surprise that U.S. venture capital spending doubled to more than $40 billion last year, according to Venture Economics.
There are more than 1,200 U.S. venture capital and buyout funds, many of which are simply arms of large corporations, such as the Softbank funds.
“Like a lot of quasi-independent venture groups, these Softbank funds started out with a strategy that was good for the corporate parent,” said Jess Reyes, managing director with Venture Economics. “Then they decide, ‘Hey, we’re good at this, we want to own the world.’ ”
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Times wire services were used in compiling this report. Remember that initial public offerings are highly speculative and not suitable for all investors. Debora Vrana covers investment banking and the securities industry for The Times. She can be reached at debora.vrana@latimes.com or at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
