[tamil] Asian Internet High Rollers (Asiaweek fw)

[Bala Pillai <bala@tamil.net>]

Internet High Rollers, Asiaweek July 23 

http://www.pathfinder.com/asiaweek/technology/990723/venture_cap.html
   
  As Internet stocks boom, capital floods Asia's high-tech start-ups

By Jim Erickson Hong Kong

Here are three indications that you made an excellent career choice when
you quit the consulting business to start an Asia-based Internet company.
No. 1: You and some of your geek pals periodically meet to drink beer and
talk shop. But at recent gatherings, more investment bankers in suits have
been showing up than 20-year-olds in sneakers. The suits want to help you
get rich by taking your company public. No. 2: You are forced to change
your telephone number because too many strangers are cold-calling you with
investment offers. No. 3: You hand in your resignation at the consultancy,
but before you make it to the elevator, a colleague races up from behind -
not to say goodbye, but to ask you if you need help raising cash for your
new website. "I know some people," he whispers.


The greed in his voice comes from a glittering dream like the one that came
true last week for investors in China.com. Despite minimal assets and no
profits to speak of in its five years of existence, the Hong Kong-based
website operator was able to sell shares at $20 each. The lucky subscribers
then saw their investment gain 235% on the stock's first day of trading on
Nasdaq, the U.S. over-the-counter market favored by small companies. That
propelled the company's value to $250 million. No wonder China.com, which
also owns the Hongkong.com and Taiwan.com sites, got keen backing from the
likes of America Online, the largest online service in the U.S., Hong
Kong's mammoth New World group, and China's state news agency Xinhua.

As Asia shakes off the Asian Contagion, a new fever is in town. Across the
region, small Internet start-ups that once couldn't raise cash for a new
mousepad are finding themselves awash in proposals from investors desperate
to catch a ride on the next available Web rocket. With stock prices for
Internet companies soaring, those who control Asia's money pots -
governments, venture-capital funds, investment bankers, real-estate
tycoons, industrialists, mega-corporations - have emerged from their
recession bunkers and concluded that technology companies, especially those
with "dot-com" in their names, are the future. If there is money to be
made, real money, it will be made betting on the Internet revolution.

What a relief for struggling entrepreneurs like Micah Truman, a 28-year-old
American who over the past two years has built up a 25-employee website
design and Internet marketing firm in Beijing called Madeforchina.com.
Truman, a former school-teacher, used to share a cramped back alley office
and a single desk with his British partner. For capital Truman borrowed
from his Citibank credit card - the only financing he could get. Things are
different now. When he visited Hong Kong in June in search of backers to
expand his company, Truman left town with a fistful of business cards and
five solid offers. "Two years ago, no venture capitalist in Asia would look
at any investment under $3 million," Truman says. "Now people are starting
to understand."

"In Asia it has been very, very difficult to find private equity funding
for start-ups," says Hanson Cheah, executive director of Hong Kong-based
AsiaTech Ventures Ltd., one of the region's few venture capital firms
specializing in technology. There was little interest from venture funds
(professionally managed capital pools that invest in young companies before
they go public) and wealthy individuals known in the finance industry as
"angels." They have typically favored grander investments with more
predictable returns: restructuring plays, mergers and buyouts, investments
in companies building dams or roads.

The free-wheeling style of California's Silicon Valley, where venture
capitalists and angels zealously court embryonic tech firms with little
more than promising ideas, was considered too risky. "Investors [in Asia]
have been more interested in assets, whether in breweries or pig farms or
cement plants," Cheah says. And opportunities for high-tech investment have
been few, due in part to a business climate that discourages entrepreneurs
(click here for story). For example, Vertex Management Inc., a venture
capital fund of the government-linked Singapore Technologies Group, made
just six deals at home from 1988 to 1994, five of which fizzled. Today
three-quarters of its investments are in the U.S. and Europe, with the
remainder in Singapore and Taiwan.

But the Internet, with its relatively easy entry and global market reach,
is opening up new start-up possibilities. Certainly the growth potential
for Asian Internet players appears large. The region's online population,
excluding Japan, is expected to expand from 12.9 million currently to 57.5
million by 2003, according to International Data Corp., a U.S. market
research firm.

What has galvanized investors more than anything else has been the
spectacular stock-market returns of U.S. Internet companies. Asia boasts
only a handful of publicly traded firms earning Net-related revenue, but
those in existence have enjoyed a knock-on effect. The China.com IPO is
just the latest in a regional high-tech bonanza. Japan's Softbank Corp.,
with an aggressive Internet strategy, is up nearly 400% since late
February. In Hong Kong Tricom, a tech holding company for tycoon Richard
Li, jumped 10-fold in one day.

The combination of high perceived growth potential and soaring stock prices
has clanged like a dinner gong for investment banks, private investors, and
venture capitalists. "I knew this place was happening when Citibank came
out to talk to a couple of my little companies about second-round
financing," says Cheah. "There's a real herd mentality thing happening."

It's a stampede. Several global investment banks, including Lehman Brothers
and Goldman, Sachs & Co., have in the past year formed special Asia-based
high-tech and Internet investment teams. They are scouring the region in
search of start-ups which their parent banks can help to find financing
and, ultimately, to go public, for lucrative fees. "It's palpable out here
how excited people are about the Internet," says Brooks Entwistle, a
Goldman Sachs high-tech banker who moved from San Francisco to Hong Kong in
August. "This is going to be a very important part of our franchise in the
future."

Also joining the fray: corporate investment funds and established venture
capital managers. Softbank, in partnership with Rupert Murdoch's News Corp.
and French media and utilities conglomerate Vivendi SA, is setting up three
venture capital funds worth $1.7 billion to plough into Internet plays in
Japan and the U.S. W.I. Harper Group, a U.S.-based venture capitalist that
began Asian high-tech investing earlier in the decade, joined with Beijing
Enterprises, a municipal government arm, and Hong Kong property giant Sun
Hung Kai in a $50 million fund concentrating on electronic commerce and
wireless telecommunications. "Venture capital in the traditional sense is
coming to China," says Victor Koo, a 33-year-old Chinese-American who is
chief financial officer for Sohu.com, a leading Chinese-language search
engine. "Bridges between China and Silicon Valley are starting to emerge."

Asian governments, anxious to rebuild Crisis-hit economies, are earmarking
astounding sums to kindle tech businesses. In June, China's central
government announced the establishment of a $121-million fund to finance
small high-tech companies. Hong Kong launched a $640-million fund to help
service and manufacturing companies incorporate technology into their
businesses; the government is seeking to establish another capital pool for
young entrepreneurs. Meanwhile Singapore is planning a huge, $1-billion
"Technopreneurship Investment Fund." Details on how it will be managed and
who will be eligible are expected in August....

For many promising high-tech firms, it would appear their once-frustrating
search for liquidity is over. And now they can drink from a fire hydrant.
"The same groups that would not touch technology companies a year ago are
actively searching them out today," says Jonathan Hakim, director of
business development for online stock broker Boom Securities Ltd. Hakim
organizes a group of Hong Kong Internet entrepreneurs who have been meeting
every month or so since 1997. Calling themselves the I&I (for Internet and
Information) mixer, the gatherings started with perhaps a dozen people. By
May, attendance had grown to more than 100. "Bankers looking for deals
outnumber [entrepreneurs] looking for money three to one, and most people
are in suits," Hakim says. Some newcomers "did not care what the Internet
was a year ago."

Being based in Asia, once considered a dark Internet backwater by American
investors, has become less of a disadvantage. Leslie Kenny, a former
investment banker and business development executive for the Disney
Channel, earlier this year founded DotMedia and launched a dating and
relationships website (www.dotlove.com) from her Hong Kong home. The site,
available in English, Chinese, and Japanese, proved easy to finance - Kenny
and her partner landed several million dollars from Chicago and Palo Alto
investment funds, among others, after a conversation with a former Swiss
Banking Corp. colleague. "We didn't have to pitch," says Kenny. "People
came to us."

Ilyas Khan, managing partner of techpacific.com, a new high-tech investment
bank based in Hong Kong, says the ease with which financing is now being
obtained is nothing less than a "cultural change. For many years, you
knocked on a door and [financiers] would pour hot water on your head to get
you to go away. Now you get a hearing." In the past, most high-tech funding
in Asia came from governments, with a trickle from a few big U.S. venture
funds, says Allen Lee, associate editor of Asian Venture Capital Journal in
Hong Kong. Today, even risk-averse local investors are stepping up.

Consider Outblaze, which helps other businesses set up and run their own
Internet "portal" sites, which offer free content and often e-mail service.
Although Outblaze is among a handful of Hong Kong Internet start-ups with
appreciable revenue, no one was willing to provide funding - least among
them local investors, who didn't understand the company's business
strategy. "They were interested," says Outblaze founder Yat Siu, "but when
we didn't have money and needed it, they tried to squeeze us for every last
dime. Now, the same people are coming back to me and offering the best
possible deal. I've had to change my phone numbers. It is just so crazy."

Outblaze located backers, but not through conventional channels. Earlier
this year, Vienna-born Siu was helping Hong Kong property and construction
conglomerate China Rich Holdings Ltd. create a corporate website as a favor
to a friend recently hired there. Siu, 25, then got to know Kelly Cheng,
China Rich's chief financial officer. Cheng, who has a degree in computer
science from the University of Toronto, was looking to diversify.

"Hong Kong has always been a center of finance and real estate, but ever
since the Crisis it has become really, really hard to make a bundle," she
explains. "So where else can investors go to? We felt there was a market
niche [in technology] and we wanted to be one of the players." China Rich
invested $4.5 million in Outblaze, for a 50% stake. The move had one
immediate payoff. In the days following an announcement of the deal, China
Rich's stock price shot up 50%.

China Rich's investment is part of an incongruous rush by Hong Kong
property giants into high tech. The most visible example is the ambitious
and controversial Cyber-port project, a partnership between Richard Li, son
of multi-billionaire Li Ka-Shing, and the Hong Kong government. Other
developers are trying to get in on the action, by refurbishing and
re-wiring existing buildings and presenting them as smaller, cheaper
"cyberports" for start-ups. Some are offering tenants free rent in exchange
for equity.

The scramble by real-estate companies to "dot-com" themselves may be a sign
that Asia's Internet boom is getting too hot. Some say too much money is
chasing too few legitimate business ideas. "All the developers are
investing in high tech, not because they understand it or are interested in
it, but because they want to boost their share prices," says Danny Cheng,
executive director of Timeless Software Ltd., a Hong Kong computer software
company. "You don't look forward to investment money from Hong Kong,
because it is just speculation." Timeless this month secured about $12
million in capital from Crimson Asia Capital, a $385-million private fund
affiliated with The Koos Group, a Taiwan conglomerate with interests in
banking, telecommunications, semiconductor manufacturing, and other
businesses.

"The question is," says David Porter, managing editor of Asian Venture
Capital Journal, "where are [financiers] going to find the [worthwhile]
investments? There aren't any ideas here, frankly. When was the last
brilliant tech idea that came out of Hong Kong?" Sums up Cheah of Asiatech
Ventures: "There is a lot of dumb money chasing Internet deals just because
they are Internet deals."

Adding fuel to the blaze is the new funding binge by governments. With
private capital rushing in, some Singapore venture capitalists question the
need for state involvement. "We are a bit concerned," says one, "about this
$1-billion [government] fund. It may compete in a way with the private VCs
[venture capitalists]." The fund, adds Kenneth Koh Chi Kian of UOB Venture
Management, "is a double-edged sword. On one hand, they [authorities]
create more awareness. On the other, they have all the muscle and can
squeeze everybody out."

Then again, Asia could be on the verge of a golden age of entrepreneurship,
helped along by the creative destruction of deep recession. Jane Crawford,
Southeast Asia managing director for 3i, a British venture capital firm,
says cultural biases against small business existed in Europe in the early
1980s. Then a wave of corporate restructuring swept the continent, forcing
people accustomed to lifetime employment to look for new ways of making a
living. Crawford sees the same phenomenon occurring in Asia. "People who
are good start thinking about taking their skills and putting them to work
for themselves," she says.

Chong Lit Cheong, managing director of Singapore's National Science and
Technology Board, says there are roughly 80 tech startups every year in the
Lion City. He wants that number to climb tenfold, with the government's
help. Lee Kheng Nam, president of the Vertex venture fund, says there are
already more opportunities for investment. "They are being driven by the
Internet and e-commerce, which are creating a lot of new companies."

"Arguably, the Asian Internet scene lags the U.S. by 12 to 18 months," adds
Johnny Chan, managing director of equity capital markets for Bear Stearns
Asia Ltd. "But we're seeing mature business models from the U.S. being
applied in Asia. It might require a lot less time [to form companies].
Besides, because of the region's population and penetration level, this is
a huge growth market - particularly the Chinese-language market, including
overseas Chinese." By some projections, people accessing the Internet in
Chinese will reach 52 million in 2003.

The Internet and electronic commerce are not only fertile markets, but
agents of change that are lowering longstanding obstacles to business
formation. Online stock trading is making it possible for investors to buy
shares of companies all over the world, blurring geographic trading
borders. More and more Asian technology companies are skipping home stock
exchanges for the tech-heavy Nasdaq market, where it is easier for young
companies to list. For example, Pacific Internet, a Singapore-based
Internet service provider, could not qualify for a Singapore Stock Exchange
listing because it was less than five years old. The company went public on
Nasdaq in February. Many Asian bourses also require profits before listing
- something even the largest Internet operators may not have.

In response, Asian markets are forming "second boards" for smaller tech
companies. Malaysia recently opened a Nasdaq-like exchange; Hong Kong plans
to launch one later this year. The upshot: more choices for start-ups, and
greater confidence among venture capitalists, who can cash out sooner if
listing requirements are relaxed. The latter usually stand to make 30 to 60
times their original investment.

"These additional options are encouraging people to be a lot braver and to
put money in start-ups a lot earlier," says Chan of Bear Stearns. But some
believe it may take several years before the region produces a bonafide
Internet winner on par with supersites such as Yahoo. "In spite of all the
buzz, no one has figured out a successful Asian venture capital play," says
Eli Zelkha, managing partner in Palo Alto Ventures. Zelkha, a former vice
president for strategies and ventures at Compaq Computer, was in Hong Kong
last month looking to establish ties to the region. "There's a tremendous
prize waiting for that somebody who does figure it out," he says.

It may take even longer if the Internet boom subsides and market punters
lose their taste for high-risk, no-profit Net plays. As for those
daydreaming about starting the next Yahoo, one piece of advice from
journalist Porter: "If you have an idea, go out and do it, because there's
never been a better time to get money for it." Belly up to the fire hydrant.

     With reporting by Andrea Hamilton / Singapore, Yulanda Chung /
     Hong Kong and Kazuhiko Shimizu / Beijing 
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