DECEMBER 22, 2000 VOL. 26 NO. 50 | SEARCH ASIAWEEK

Smarter Money
How to improve Asia's venture capital climate

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Let the Election Roll
In the process, Thailand can learn lessons

No one who has seen Hong Kong people line up around the block to buy shares in the latest public offering, or purchase an apartment that exists only as an artist's concept, need fear for Asians' enthusiasm for putting money into business propositions they fancy. Yet you don't need to be an investment analyst to know that vast amounts of money are sometimes misspent or just plain wasted. This is especially true of the Great Internet Bubble that burst earlier this year, leaving many struggling enterprises now starved for cash (see cover story, page 34). If there is a silver lining in the fiasco, it is that both providers and recipients of venture capital in Asia have been obliged to rethink their strategies. And that could augur well for the longer-term development of the new economy in the region.

The dotcom crash shows that investing successfully in start-ups demands more than just large sums of ready cash. It also requires the participation of professionals who have some understanding of the technologies and businesses in which they are investing. In retrospect, many of the mistakes were obvious. Too many people got into the market without knowing anything about the businesses they were funding. Many were motivated by a famous name, or simply because anything linked — or linkable — to the Internet was fashionable. Investors need to become more knowledgeable and develop more rigorous means to analyze companies.

Indeed, many venture capital companies lack not only the know-how to do their work properly, but also a clear investment philosophy and the ability to back projects they invest in. In the U.S., venture firms do more than just put up money; they become active partners, providing management and other support services so the entrepreneur can focus on developing his idea into a viable business. In Asia, very few venture capital firms provide such services. Those with the capability should start doing so, as the benefits will be mutual.

For their part, new companies seeking capital will have to come up with sharper ideas that distinguish them from a slew of lookalikes. Business plans will need to be more specific and detailed, yet flexible enough to shift with market trends. And start-ups will have to provide realistic roadmaps to eventual profits. Chastened by failure, some companies have begun to do all this. But have the lessons really been learned? Governments could consider helping ventures that observe these standards by providing tax and other incentives. But to avoid corruption or other abuse, the relevant yardsticks must be made open and transparent.

Venture capitalism, in the U.S. sense of companies that provide funds and business plans for new ideas from clients, is still relatively young in Asia. Traditionally, entrepreneurs tapped family or friends for the money they needed to start companies. Many Asian venture capital providers have been vastly under-capitalized. In South Korea, for example, 80% of the 170 companies set up in the past three years had less than $20 million to invest. One way to nurture and expand the region's venture capital market would be for Asian venture capitalists with surplus funds to form partnerships with Western counterparts. Such partners would also be a valuable source of professional know-how. Asia's new economy needs more seed money, to be sure. But what it really needs is smarter money.

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