Venture capital viewed as essential for promoting industrial innovation

Published on ShanghaiDaily.com (http://www.shanghaidaily.com/) http://www.shanghaidaily.com/article/?id=380670&type=Business Venture capital viewed as essential for promoting industrial innovation Created: 2008-11-15 Author:Winny Wang and Pan Xiaoyi VENTURE capital investment has become an essential tool to promote China's high-tech industries, especially during the global financial turmoil. The speed of development in innovative industries in the United States and Europe in the past 10 years proves that VC investment can enhance a nation's capabilities extremely quickly. Many developing countries are also embracing VC investment. "The government should help stimulate VC investment and guide capital into all types of innovative companies when the market is full of idle capital and companies don't have a quick channel to financing," said Song Dezheng, deputy director of the Facility and Finance Department under the Ministry of Science and Technology. "An improved VC investment system and a mature capital market can speed up the development of high-tech companies," Song said. On average, VC investments account for about 1 percent of gross domestic product in the US, while in China they account for only 0.025 percent. "China's VC market has a lot of potential but it is still short of an advanced legal system, local talents and self-regulated rules," Song said. He also stressed the need for more exit channels for VC cash -- ways in which investors can cash in their investment, such as IPOs. The ministry allocated 200 million yuan (US$29.2 million) in 2007 and 2008 to a guidance fund, which has attracted more than 4 billion yuan of VC funding. The fund mainly supports emerging small and medium companies. "Small and medium companies are more flexible and willing to undertake risks, but they always face a shortage of capital and it is hard for them to raise financing through normal channels," said Chen Gongmeng, director of the China Venture Capital Research Institute. "However, as technology improved in SMEs, both the supply and demand of innovative products boomed, which in turn reduced market risks, so VCs poured into the sector because of its high added-value," Chen said. Local encouragement "Local governments should offer stimulus services for VCs, banks and research agencies to attract them to set up offices in their local areas," Chen said. Municipal science and technology departments have followed the central government to create funds to support VC investments. Shanghai's Yangpu District recently issued stimulus policies in an effort to build itself up as a VC hub for Shanghai, including offering a 15-million-yuan subsidy for VC firms. The district has also set up a guidance fund to attract VC funds to invest in small and medium companies. On top of this, Yangpu has established the Knowledge and Innovation Community, a building complex housing a number of IT firms, to gather VCs, innovative minds and research agencies in the same area. Luring VCs is key to promoting technological breakthroughs, said Zhou Zhenhua, director of the Shanghai Development Research Center. "Many VCs focus on innovative projects and prefer gathering around universities and innovative communities," Zhou said. Fourteen colleges and more than 150 research organizations are located in the district. Pudong New Area has also made great efforts to enhance the development of small and medium-sized high-tech enterprises by expanding financial channels and creating a good environment for them. The district plans to expand its guidance fund, the country's first fund set up by a district government to attract venture capital, from 1 billion yuan to 2 billion yuan to help the development of high-tech enterprises. The government has contracts with world-renowned venture capital firms such as DFJ, Gobi Partners and BioVeda to bring 11 funds worth more than 14 billion yuan to Pudong. It also has pumped 620 million yuan into a guidance fund since 2006. It aims to attract venture capital worth more than 30 billion yuan into Pudong by 2010. Green technology "We have seen a strong trend in the past few years that an increasing amount of venture capital funds invested in America, China and global international markets have gone into green technologies," said Jim Wunderman, president and CEO of Bay Area Council, a business-backed public policy organization in the Silicon Valley area, in the US, during a recent green-tech summit. The venture capital community is not worried about a green-tech investment bubble, and expects investment in the green-tech sector to significantly increase in 2009, according to a report by the US audit, tax and advisory firm KPMG LLC. KPMG found that around 50 percent of respondents including venture capitalists, corporate executives, entrepreneurs and bankers thought investment activity in green technology will increase by 20 percent or more in 2009 over 2008 levels, while another 34 percent expected investment levels to increase 10 to 19 percent. Global venture capitalists have poured increasing amounts of money into China's technology development. Intel Capital has invested US$20 million in Trony Solar Holdings Co, one of China's largest solar energy and wind-power equipment makers. Amid the global economic slowdown, the Chinese government has tabled a 4-trillion-yuan stimulus package to shore up the domestic economy. Green tech and environmental protection are among the 10 top priorities in the government's plan. "In general, investors are cautious about everything (in the middle of a global financial crisis), but the record amount of capital for green technology and the rising awareness of the importance of environmental protection means this sector can weather the storm," Wunderman said. "Green-technology investment could be a haven for the storm." Venture capital firms raised US$492 million in the third quarter in China, 84 percent less than the second quarter, according to the Zero2IPO Research Center. The information technology industry continued to take the lead in attracting VCs in the third quarter of this year, followed by more traditional sectors such as services. Health care and clean-tech businesses attracted less investment. Copyright © 2001-2008 Shanghai Daily Publishing House

Is Venture Capital in Trouble?

Is Venture Capital in Trouble?

Silicon Insider: The Venture-Capital Industry, Once the Pride of American Entrepreneurialism, May Have Reached a Tipping Point

COLUMN By MICHAEL S. MALONE

Nov. 14, 2008, 2008 —

Is the venture capital model "broken"?

If so, heaven help us. Because if it is, the recession we're sliding into will prove to be even deeper and darker than we imagine.

Venture capital's troubles have become a popular subject of conversation in recent weeks, not least because of the recent announcement that so far in 2008 only six venture-backed companies had managed to "go public" with their first sale of stock. That compares with 86 a year ago, and 265 during 2000, the last dot-com bubble year.

The venture-capital industry has been in trouble for most of this new century, never achieving more than a fraction of its success of the '90s. But this new figure -- and it is unlikely to improve by even a single IPO between now and year's end -- is devastating. And has led to growing speculation that the venture-capital industry, once the pride of American entrepreneurialism, may have reached a tipping point on the way to oblivion.

The two most recent advocates of this pessimistic perspective are the Web site VentureBeat, run by the former venture capital industry beat reporter for the San Jose Mercury-News, Matt Marshall, and TheFunded, a site to rate venture capitalists, run by Adeo Ressi.

Ressi apparently stunned, and angered, an audience at Harvard Business School recently with a slide show, "The Canarie is Dead" (see it here), that (bad spelling aside) argued that something is fundamentally wrong & perhaps fatally wrong with the venture-capital industry.

The HBS audience was stunned because Ressi finally said publicly what many in the audience had probably been thinking, and was angered because he claimed one of the causes of the VC's predicament was the "Old Boy" network that the Harvard Business School specializes in.

Still, there was one devastating slide in Ressi's presentation that no one could refute. It showed that for the first time in the half-century history of high-tech venture capital, two curves had crossed & and now VCs were taking in more money from investors than they were returning to them. Venture Capital, the jewel of American finance, the dynamo behind the high-tech revolution, had now, shockingly, become a loss leader.

Pretty scary stuff.

Now it was VentureBeat's turn. Wednesday, Marshall published a story that put it in the simplest terms: "The VC Model is Broken," the headline read. And although he didn't agree with many of Ressi's premises (neither do I), he did agree with the conclusions, and was prepared to take them even further.

Marshall offered three reasons for Venture Capital's current woes:

1. Early VC successes -- Companies like Intel, Cisco and Genentech were so hugely successful that they drew huge sums of money from investors around the world anxious to get into the VC game . . . over-stressing what should have remained a niche industry.

2. Established companies have gotten smarter -- Firms like Google and Microsoft snatch up hot new startups before they can become serious competitors, taking them off the market before they go public.

3. "Greed. Pure and simple." -- Those are Marshall's words, and by them he means that VCs have continued to raise ever-larger funds, even in the face of low returns, because the administrative fees are a major source of revenues to their own firms.

This all sounds reasonable, but I think that Marshall, surprisingly, has it exactly backward. Perhaps it's because he hasn't been around long enough to see an earlier slowdown in the Venture Capital industry -- and, thus, has no standard by which to compare the current one.

Sure, venture capitalists are greedy -- but they always have been. It's greed that makes them try to make investments with the greatest possible return (and, unfortunately, also makes them sometimes run in blind herds). And, yeah, big companies have gotten smarter about their mergers and acquisitions. But the main reason they are able to snatch up hot young start-ups is because those young firms cface no real alternative but to get bought.

That's why every business plan in Silicon Valley seems to end with the phrase, "And then we sell to Google."

What Ressi and Marshall see as a structural failure is, in fact, the result of external forces largely beyond the control of the venture-capital industry. What these two gentlemen don't realize is that we have seen this happen once before.

During the late '70s and early '80s, venture capital in Silicon Valley was also largely frozen. New companies weren't getting funded and few were able to go public.

Why? One answer was that the VC firms had grown so quickly in the years -- and had responded with rapid hiring -- that many of the partners and associates were now out of their depth and doing a lousy job of advising the companies in their portfolio. Another reason was that the then-current crop of new companies weren't that interesting (which would change a few years later with the rise of the Internet).

But the real reason, as I discovered at the time, was that the high capital-gains rate was keeping investors out of VC funds, which, in turn, made venture capitalists more conservative with their investments. When President Reagan cut the cap-gains rate, we had the greatest new business boom in history.

I believe we are seeing the same thing now. We are looking at the current crisis in Venture Capital and assuming that it is self-inflicted. But the more likely reason is that the industry has taken so many external shocks in the past seven years -- Sarbanes-Oxley (which has killed new IPOs because of its onerous costs to young companies), full disclosure laws (which have driven smart people away from serving on corporate boards), and options expensing (which has all but erased the prime motive for people to join new start-ups) -- that it can't help but be in bad shape, a once-robust industry reduced to a sick, shrunken shell. [And now, of course, there's talk of raising the capital-gains tax rate again, which will be the final nail in the coffin of venture capital.]

In their blind frenzy to punish perceived evil-doers of the dot.com bubble seven years ago, government regulators and boards have taken the most efficient new company and wealth-creation process ever devised and set up roadblocks all along its path.

And the biggest roadblock of all is that they have taken away the all-important liquidation event -- the IPO -- to which VCs, their investors and their companies aspired. With that gone, these players have no choice but to opt for the earlier, and lesser, liquidation event of acquisition.

But if Ressi and Marshall have the causes wrong, they're dead-on about the consequences. Kill the venture-capital industry and you kill most new company creation (angel investors and corporate capital won't adequately fill the vacuum). Kill new company creation and you starve the single most important source in the economy for new wealth and new job creation.

And if that new wealth and those new jobs disappear, how are we ever going to cover the credit crunch and pay for all of the new social services promised by Congress and the new president-elect? For that matter, how are we ever going to get out of this global recession?

This is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNews.com "Silicon Insider" columnist since 2000.

Copyright © 2008 ABC News Internet Ventures

Valuation plan key to selling businesses for top dollar

Valuation plan key to selling businesses for top dollar
http://www.canada.com/northshorenews/news/story.html?id=b839bcc1-1171-4fdc-9a76-3a593de27e7d

Manisha Krishnan

North Shore News

Wednesday, November 05, 2008

As the boomers retire over the next decade or so there's going to be plenty of businesses up for grabs, but whether or not owners can successfully pass the baton depends on the steps they're taking now -- steps that many haven't really given a second thought.

"A lot of people think succession planning is hiring someone to do what they do, but we're saying 'no, no, no' you've got to do way more than just hire somebody," says North Vancouver's Lorraine McGregor, co-owner of Spirit West Management, a consulting company.

According to McGregor, the huge surplus of companies on the market combined with the dismal economic situation is bad news for boomers who aren't adequately prepared to sell.

So, what exactly does being "prepared" mean?

McGregor believes the only way to get top dollar for a business in such a competitive climate is to go through a two-three year process of valuation planning -- examining the company from top to bottom to ensure that it's maximizing profits -- in addition to succession planning, which is leaving behind a strong management team to take over.

Currently there are 1.7 million businesses in Canada, half of which are owned by people who are turning 65 within the next few years and plan on funding their retirement through the sale of their businesses.

"If you think about this in the same way you think about real estate -- those houses that have been improved for street appeal and have been remodeled . . . those houses sell first.

"If an owner wants to attract an investor they've got to make sure the investor knows there will be certainty of profitability going forward, because what an investor is going to buy is the future of the business not the past," says McGregor.

That means cleaning up legal agreements, implementing a growth strategy, showing steadily increasing profits, ensuring a tax benefit for the next owner and cutting out non-business related expenses.

"Owners typically fund their lifestyle from revenue of the company and that is a real negative. . . . In order to be attractive to investors you have to have only the business costs because you want to show the business produces a lot of cash," says McGregor, explaining anything that doesn't make sense to a buyer will reduce the amount they're willing to pay.

Leaving behind a team that is well-connected to key industry contacts is very important but sometimes overlooked, she adds.

"(Some owners) don't pass on their knowledge or their relationships to their management team or they don't even have managers, they do the work themselves."

And that's a definite deal breaker, according Jeremy South, a West Vancouver corporate finance partner at Deloitte.

"For the most part most businesses are sold with management team in place and the most important thing to that business is the management," says South.

"It's critical because no one is going to buy a business without management already."

When Ralph Turfus, a Horseshoe Bay resident, sold his computer software company in 2004 he had someone ready to fill his shoes.

"He had been there for 18 years and he stepped in immediately and took over and that's what the buyer wanted," says Turfus, whose company Class Software Ltd. is used for all parks and recreation departments in North America.

With the company bringing in $20 million in revenue, Turfus knew he had enough to retire if he sold, but he still had to give it a couple of tries.

"I had four runs at selling and the fourth time I went to sell I was successful. I tried to sell in 2000 which is right the bottom of the tech bubble, the very bottom it turned out and that was just terrible," he says.

"I think that time is like right now."

South agrees timing is an important consideration.

"You wouldn't want be selling a business right now that has a significant concentration in U.S. housing market or the Canadian housing market for that matter," he says.

"You can't always time it but certainly there are better times to sell certain businesses than others."

Although this is all pretty much common sense, South says there are a number of owners who don't consider their exit strategy until late in the game.

"Often we'll get calls from business owners that say 'I want to sell my business' because of events that happen or . . . they suddenly realize they're getting old or getting sick but they haven't done all this preparatory work," he says.

"People don't think about it until they get an approach from a buyer, which is not the time you should be thinking about it."

For owners looking to sell within the next few years, the time to start planning is now, says McGregor.

"If owners can't extract the wealth from their business that has huge impact for their own retirement and also for the economy," she warns.

"They can close the doors, which would result in people losing their jobs, local economies losing their tax base and towns losing places people love to go and shop."

Spirit West will be hosting a seminar on valuation planning, How to Maximize Your Company's Worth: The CEO's Guide to Becoming Prepared for Investment on Nov. 20 at the Eaglequest Coyote Creek Golf Club in Surrey. For more information go to

www.spiritwest.com.

© North Shore News 2008

Five tips for startups to secure capital funds

By Vivian Yeo, ZDNet Asia
Monday, November 03, 2008 06:58 PM

Even in the face of the global financial meltdown, investors are still on the lookout for innovative technology to pump resources into, according to a venture capital (VC) expert.

Giza Venture Capital, for example, has plans to accelerate its level of investment in the region from early 2009 onwards. Headquartered in Israel, the venture capitalist specializes in the communications, IT and life science sectors.

Yishai Klein, Giza's managing director for the Asia-Pacific region, told ZDNet Asia in a phone interview that the company has a "very interesting agenda" in the next few months. Within the region, Giza is currently active in markets such as China, Japan, Singapore and Taiwan.

Klein outlined five tips for promising startups in the Asia-Pacific region to consider before knocking on doors of investors, in order to pitch the right business proposal.

1. Address a market need
Companies have to be able to demonstrate they are answering a need, addressing pain points or inefficiencies, or filling a current gap in the market. "Companies that want to attract VC funds have to demonstrate they can address an issue in the marketplace," said Klein.

Apart from articulating the innovation and uniqueness, the startup must also address how its product or service can scale.

2. Ensure the market for your product or service is not too niche
Some companies offer a product or service that may be very effective in addressing a market need, have the right people to manage and execute, and could deliver reasonable revenues, but still fail to attract investors' attention because the market is too niche and therefore, small.

3. Work those sums
Companies need to be prepared to show that "there is a clear path to revenue" and eventually, profit, as investors are looking for "a significant return".

While the timeframe for profit realization depends on the industry and region or country, VC firms typically expect a player in the mobile content or Internet space to execute its strategy within two years, while a company in the chip sector could take up to four years to roll out an actual product.

4. Have the right leadership and vision
Investors want to be assured that the startup's leaders are able to execute the vision. Even if the leadership is not in place, the company should acknowledge the management gaps it has, and indicate its plans to recruit the right leaders on board.

"Investing in a company is essentially investing in the people," Klein pointed out, adding that the right leadership plays a part in the company's realization of its vision.

VC firms typically also look out for "entrepreneurial residents"--individuals with a track record of founding new companies or developing new technologies.

5. Have a unique strategy, or identify barriers to entry for competitors
Of Giza's funding portfolio in Israel, "many of the companies have an inherent uniqueness" about them, said Klein. The companies are either able to demonstrate that they have a significant first-mover advantage, or possess a special business formula to succeed in the market.