When VC Firms Go Global

Baldwin Louie — Fri, 13 Apr 2001 15:00:00 -0700

It makes sense that venture capitalists hang around their turf. The early stage, high-risk companies they help build rely on their mentoring, technological expertise and network of connections. It's what Anil K. Gupta, professor of strategy and global e-business at the Smith School of Business at the University of Maryland and a visiting faculty member in Stanford University's Technology Ventures program, calls "domain capital." Typically, domain capital doesn't scale well or hold up over great distances.

But that might be changing. These days, VC firms aren't just pitching their connections in Silicon Valley, Boston or Austin. They are telling entrepreneurs what they can do for them in Hong Kong, Singapore and London. Benchmark Capital, which helped build eBay, announced a new general partner in its London office this week, and Bruce Dunlevie, one of Benchmark's Valley stalwarts, will move to that office for a year. Also, Crescendo Ventures, a leading VC firm that focuses on communications, is ramping up its international presence. The company will be opening up a business development office in Singapore.

So why are venture capitalists, who have so far worked with companies in their own backyard, setting up shop elsewhere? Gupta, whose new book, The Quest for Global Dominance (co-authored with Vijay Govindarajan) will be published this summer, says a number of factors are driving the trend toward VC firms increasing their global presence.

"First, the wholesale transformation in ideologies and regulatory regimes over the last decade has finally begun to unleash entrepreneurship all around the world," Gupta says. "This creates opportunities for seasoned VCs to leverage their expertise over a larger market base. Second, VC firms' portfolio companies are eyeing international markets at increasingly early stages; a VC firm that can facilitate a transition into foreign markets can add a lot of value.

"Infrastructure companies face much stronger imperatives to globalize their market presence earlier and at a faster pace than do application companies," he says. "This is because infrastructure products generally require little, if any, localization for different geographic markets; in addition, infrastructure companies are generally far more R&D intensive, and early globalization helps in spreading this fixed cost over a larger revenue base."

Publicly traded network infrastructure companies clearly demonstrate this. An upstart like Juniper Networks said 35 percent of its revenues came from international sales last quarter. And a giant like Nortel Networks received 43 percent of its revenues outside the U.S. in 2000.

The opportunities might be big outside the United States, but getting to them isn't easy. Draper Fisher Jurvetson was rebuffed in its Asian efforts after a partner in the Asian office left the firm. Chase H&Q also has had difficulties.

That is why Worldview Technology Partners, a firm that invests mainly in communications companies, has made this angle its main selling point. Other firms are scrambling to evolve a global presence. But Worldview, which started in 1996, had this in mind since its inception. The firm, which has offices in Singapore and Tokyo, isn't scouting out companies to invest in. They are providing support infrastructure to help their portfolio companies tap global markets. "Hence the name Worldview," says Michael Orsak, a general partner at Worldview Technology Partners.

Oslak points to Ciena, one of their portfolio companies, as an example of how his firm adds value beyond capital. Ciena was a pioneer in wavelength divisional-multiplexing technology, which allows more data streams to run over a piece of fiber, thus expanding its capacity. The technology wasn't understood in Japan at first, and Worldview played an integral role in convincing Japanese carriers to purchase Ciena's products, says Oslak.

"A company called Japan Teleway had laid a single strand of fiber along a railroad track, and we explained to them how they could enhance its capacity by using Ciena's products," says Oslak. "We got Ciena its first contract with the company, which was for $80 million dollars." He says his business development staff was so adamant about pushing the technology that "when it was time to sign the contracts, they came to us because they thought we were Ciena representatives."

Other portfolio companies that his firm has worked with in a similar fashion include Corvis, Triton Network Systems and CoSine Communications.

"Telecom equipment companies have a natural fit," Oslak says. "There are large carriers worldwide, and the Internet is worldwide. These established players have to learn to figure out how to deal with the surge in data traffic. It is easier for us to introduce our companies to them because we can leverage our existing relationships with NTT or Hong Kong Telecom."

Worldview's international teams provide a host of business development assistance, including fundraising, recruiting and incubation. These processes can be daunting, especially to those who aren't familiar with the intricacies of international scenes. For example, Worldview's incubating facilities can be much more valuable in Tokyo than in the U.S.

"Getting office space in Tokyo is incredibly hard, much more so than even the South of Market area in San Francisco," Oslak says. "A company has to have a good balance sheet and put down a deposit that is two or three years' worth of rent. We let them use the space we have available until they are ready to make a commitment and spread their wings."

Recruiting top talent in Japan is also more difficult than it is in the United States. "A lot of people there don't want to leave the security of a big company, which is very important in Japan. We help convince them that the company is promising and well-financed. We help make them comfortable by providing assurances," he says.

Oslak says the firm also has helped companies in manufacturing their product. "In Taiwan, it is tough to get access to leading-edge semiconductor manufacturers," he says. "Startups need the best technology if they are going to compete with the big guys, but only select people can get access. We help elevate companies to that status."

But whether developing a global presence - a costly and risky venture - will apply to firms that don't emphasize telecom remains to be seen. Oslak says health care and financial services companies, for example, have a much tougher time translating their success overseas. The jury is still out on whether globalization becomes a trend that incorporates the vast majority of venture capital firms, as it has already been for consulting and investment banking firms. Perhaps it will be the domain of a few niche players, and most VCs will keep concentrating on areas in driving distance.

Other News

Security firms had an active week. NFR Security Locks received $22.3 million in its second round from lead investor Digital Bandwidth and new investors J. & W. Seligman & Co. and Intel Capital. Previous investors in the maker of information-security products include Blue Ridge, Lazard Capital and Allen & Company.

Qualys, a firm that monitors network security, said it raised a $20 million second round from lead investor Trident Capital. Bessemer Venture Partners, ABS Ventures and VeriSign also contributed, bringing the company's total amount raised to $28.4 million.

NetVmg said it raised $57 million in a round of funding. The company is a provider of intelligent IP traffic-monitoring services. Accel Partners led the round, which also included Duff Ackerman & Goodrich LLC. Previously, Comdisco Ventures, Bank of America and Cisco Systems have funded the company.

Vigilante, a security assessment firm, decided to acquire Network Vigilance, a subsidiary of publicly traded Cyrano, which makes network and firewall assessment tools. According to terms of the agreement, Cyrano, which currently owns 56 percent of Networks Vigilance, will own 11 percent of the combined company and take a seat on the board.

In fundraising, private equity firm Trimaran said that it closed a $1 billion fund, Trimaran Fund II, and will make a variety of private equity investments in the U.S. and Western Europe. The fund is the successor to CIBC Merchant Funds, which was the first investor in Global Crossing.

International Data Group launched IDG Ventures Europe, a $100 million fund that will invest in a wide range of technology and services sectors. The firm will provide seed capital to companies in the wireless, networking, content and services field. (IDG is the majority investor in Standard Media International, the parent company of TheStandard.com.)

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When VC Firms Go Global