PACIFIC BASIN ECONOMIC COUNCIL
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Additional Info: Policy Statements Speeches Photos Speakers & Noted Participants Featured Biographies Registration Media Information Conference Statement Regional Vitality in the 21st Century April 6-10, 2001 — Tokyo, Japan Mr. Vijay Fozdar President and CEO Asia Demand, Inc. Thank you Mr. Chairman. Good afternoon ladies and gentlemen. First, I apologize in advance to the VCs present who may take exception to any comments I make about the industry. These are merely my opinions and observations. Besides, Bob Lees tells me PBEC IGM attendees are beyond reproach in all things and have received absolution prior to registration. So, any negative comments don't pertain to you anyway. Now, a little information about myself, my company and why I was asked to be here. AsiaDemand is a one-year old U.S. company providing Chinese industrial firms supply chain re-engineering, solutions and services. Most of our operations and staff are in China. AsiaDemand was an early-stage startup based on a 20-year old company which built a successful business in China selling processing equipment to large industrial companies. Pequot Capital Management, which manages about $3 billion in private equity, owns 60% of AsiaDemand and is the only institutional investor. I am the CEO. I built the business model and represent Pequot in the company. I also helped qualify the investment for Pequot and am here to see the investment through to success. So far, Pequot has committed over $10 million to the company. My role today is to share some challenges I've experienced in funding an early stage company. These challenges really confront any company looking for equity funding today no matter what size it is. The equity markets in the past year have turned the capital-raising process on its head in so many ways. If you have been funded, consider yourself lucky no matter how good you think your business is. Even good businesses with revenues and profits are finding it hard to get money. For now, we're one of the fortunate ones. Now a kind word about good VCs. I have experienced the benefits of what a good VC can bring to the party. It's not just money. Venture capitalism practiced well is a vital catalyst to invention and innovation. The business savvy and guidance contributed by an experienced VC combined with the entrepreneur's venture spirit and vision is the essential DNA to build a successful business. When allowed to reproduce freely in society, it creates the stuff which incubates the new building blocks for future economic growth. This is much more profound than merely marrying up money with an opportunity. Unfortunately, as we have seen many times over the past year, this ideal process has been diluted or subverted by VCs and entrepreneurs alike because of ignorance, greed, a herd mentality and arrogance. Often, more money than sense was at work. Venture capitalism as an institution has been around for a long time. Historically, it was one form of financial patronage practiced by governments, corporations, individuals, academic institutions, churches and others. It has always funded new, different and often speculative enterprises that couldn't be financed by conventional means. For example, we owe the discovery of the New World to an early entrepreneur, Christopher Columbus. However, the funds for his successful venture came from an early VC, Queen Isabella of Spain who was looking for a new way to shorten the supply chain to Asia where all the good trade was. As the saying goes, the more things change, the more they remain the same. Anyway, the venture required a fundamental change in the way we looked at the world. That ability to recast the way we do things is what both entrepreneurs and VCs must be good at doing and, most of all, good at doing together. If you look deep enough you will find that venture capitalists have played a key role in many of the historical events that we are familiar with. Unfortunately, as Columbus eventually found out, it is also not good to run afoul of your VC even if you meet your milestones. He died in poverty and relative obscurity after asking for a bigger slice of the New World profits. Let that be a lesson to all of you entrepreneurs in the audience. You might think that we entrepreneurs are a lot better off than Columbus these days. After all, we're living in an age which boasts the highest amount of venture capital ever and plenty of good ideas to go around. However, it's still not easy to get your hands on the money, despite popular mythology. There seems to be an inverse relationship between the availability of funding and getting funded. According to A4S, an equity advisory service, over 99 percent of ideas presented to VC firms are rejected, while thousands more fail to reach presentation stage. The whole process can make an entrepreneur hunting for money feel like a sperm in search of an egg. And it is hard to keep up with the rules. Pre-requisites to getting a check over the past year have gone from having a good idea on a napkin to now having to show a profit. It used to be that the grander the scheme, the greater the valuation. Not any more. It also seems entrepreneurs in search of money have to re-invent their businesses continuously to keep up with the latest VC flavor of the day. We've heard them all. B2c, b2b, infrastructure, optical networks, telecom, m-commerce, ISP, ASP, BSP. They've all had their consecutive 15 minutes of fame during which you had to be one of those to get money. It can seem that what you really needed to get funded is ESP. Yet, as I said earlier despite all these hurdles there is more VC money out there than in any time in history. According to Venture One, "In 2000 limited partners contributed a record-breaking $69.1 billion to 249 funds. Double the amount contributed the previous year. An astounding 18 funds hit or exceeded the billion-dollar mark in 2000, compared to only three in 1999." Big fund closings have continued into 2001. So what gives? Where is all this money going? To figure it out let's start by looking through the eyes of VCs today. It's easy to forget that VCs are fundraisers, too. They just raise hundreds of millions of dollars, instead of the measly 10 or 20 you or I need. However, their investors, known as limited partners or LPs, are just as much a pain these days any investor can be. If the VC is really lucky, the companies he took public aren't all trading below their IPO price and his LPs are still talking to him. Today, LPs don't like Internet investments and are more conservative. This is also a time when VCs have been coming back to LPs for money more frequently. The Crossroads Group says that five years ago, venture funds lasted VC firms an average of 50 months. Two years ago it was 39 months, and last year it was just 18 months. According to Red Herring, "VCs are suffering the same affliction as the entrepreneurs they fund. In other words, the easy money is gone." Another big damper on VC investments these days is that they simply don't have the time to manage anything but their existing portfolios. Their portfolios are bulging with start-ups that were expected to be trading publicly by now. Instead of the good old days when a VC could take a start-up public in six months, now they expect to have to hang on and continue funding it for three years before seeing liquidity. If the VC is lucky, the company survives. The result of all this is that VCs are making larger and later-stage investments. It is easy to understand. There are so many revenue and even profit-generating deals out there today at great valuations that investing in early stage companies almost doesn't make sense. The rule of thumb is that early-stage investments require five times more attention than later-stage investments. So the smaller, often eclectic early deals are being left to angels and incubators who have less money to spend on each deal, but can devote more time. Large VCs are still funding some early-stage companies. In general, what separates those who get from those who don't is pretty simple I think. It boils down to a few "Gottas." It's gotta be BIG! It has to be paradigm-shifting technology, a huge protected market opportunity, a key proprietary component in a vital process or some other similar element. Preferably a combination of all of these. And it needs to create a clear path to repetitive income. In other words, an annuity. You gotta be GOOD! You've got to have a world-class management team that is committed to sticking it through together to the end. VCs are also paying a lot more attention to the internal management chemistry. They've gotten burned a lot lately by investing in a collection of prima donnas who ultimately can't work together, even though they may be the best in their fields. You gotta work SMALL! Every VC wants to balance the big opportunity with bench tests to work out the kinks and mitigate risks. Essentially, you have to convince them that the model works at a scale where the risk and consequences of failure can be minimized and tolerated. It's gotta SCALE ­ and FAST! The half-life of new ideas is now almost being measured in nanoseconds. So, you have to show that you get up, running and capturing customers before the next new thing blows you away. The web world is littered with the remains of many companies with great ideas, but horror stories of products that have failed to scale quickly. Their customers and the financial markets immediately and permanently punished them. You gotta MAKE THE NUMBERS! Establishing and meeting clear and agreed upon milestones has become par for the course in getting funded these days. VCs often stage their investments according to quantifiable milestones. While these can feel more like millstones than milestones, the process forces companies to continuously conduct variance analyses on their plan. It's a great disciplinary process and ensures that you don't fool yourself about the business. If more companies did this there would be less dead bodies out there. So that's it. Being in an early-stage start-up is still a non-stop, exhilarating, frustrating, incomparable and sometimes scary experience that keeps your adrenaline at a high pitch. The feeling reminds me of an African story about the antelope and the cheetah. Every morning the antelope wakes up. It knows that it must run faster than the fastest cheetah or it will get eaten. Every morning the cheetah wakes up. It knows that it must run faster than the slowest antelope or it will starve. The bottom line is that whether you're an antelope or a cheetah, at dawn you'd better be up and running! Thanks for your time.