David G. Mclntyre - Black Star for Asiaweek. Kwik (right) explains to Chan that AsiaTech won't be able to decide on an investment in B2Infinity for at least two months.

Finding Capital
When stock markets won't stop falling, VCs and start-ups find it hard to come to terms
By TIM HEALY


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The three founders of the fledgling Internet firm B2Infinity had been hoping to hear the word "yes." Some four months ago they partnered up to start a consultancy that would help Asian companies use the Internet. The trio — Warner Zee, Johnson Chan and Bruce Wu — had solid professional backgrounds and what they believed was a realistic business plan. What they lacked was seed money to grow. After pitching several venture capitalists, they were now awaiting an answer from the most likely backer, Derek Kwik of AsiaTech Internet Group. In a September meeting at AsiaTech's Hong Kong headquarters, Kwik delivered his verdict: "There are a lot of variables in any investment we make," he said to his supplicants. "Valuation, timing, terms. But I can say this: we're interested. I'll speak with my colleagues here and get back to you on where we go next."

Not exactly "yes." But a lot better than "take a hike." And under the circumstances, a Maybe might be the best any would-be Internet entrepreneur could hope for. Ten months ago, almost every rainmaker in Asia would have been jostling for the opportunity to sink money into B2Infinity. A seemingly insatiable and indiscriminate demand by stock-market investors for shares of Internet companies turned the VC game into a race to see who could fund and take dotcoms public in the shortest timespan. The reward was IPO-day returns of 10, 20, 100 times initial investments. Cash was plentiful; ideas were scarce.

But the world has changed. A grinding global market correction that began in the U.S. has been slashing stock prices since March, especially in Internet plays. The bust has transformed VCs from Yes-men into No-men, making them much more skeptical about who gets funded. The fact that B2Infinity was able to give its PowerPoint presentation — a computerized shorthand business plan that is now symbolic of dotcom superficiality — without being shown the door represents something of a victory.

"Early this year, it was all about money for a lot of entrepreneurs," says James Yao, who co-founded AsiaTech with Hanson Cheah in 1997. "I'll bet 80% of the PowerPoint presentations I saw back then had as the second slide, right after an introduction to the company, something that said 'We expect to go IPO in nine months.' At AsiaTech we were shaking our heads and thinking, 'get real.' "

In most ways, venture capitalists have done just that, returning to a set of tried-and-true rules of engagement that had been all but suspended in the early part of 2000. For entrepreneurs seeking funding, a flash sales pitch is now less important than balance-sheet fundamentals. If you think you can make money from the Internet, business models must be based on realistic projections and defensible growth estimates. Who are your customers and can they pay? Will you be swamped by look-alike competitors? Are you nimble enough to change strategies if your company becomes suddenly obsolete? And then, if funding is approved, entrepreneurs can expect much closer ongoing scrutiny by venture capitalists wary about how their dollars are deployed.

AsiaTech, the region's first indigenous venture capital firm focused on high-tech investment, never strayed far from basic investment guidelines. During the boom, AsiaTech largely refrained from backing Internet content companies and portals, believing them to be too risky and the market too crowded. They were accustomed to taking a skeptical view. Cheah, who was born in Malaysia, and Yao, from Taiwan, decided to start the group three years ago because of their shared belief that the technology mania sweeping the U.S. in the mid-1990s would be repeated across the Pacific. The pair, former classmates and friends at Massachusetts Institute of Technology, found at the time there were almost no Asian Internet companies worth investing in. Yao says that, in their first months of operation, more than three out of four AsiaTech deals were sealed by the company's Silicon Valley office — they were investments in U.S. companies that could expand in Asia.

That changed as the dotcom frenzy reached the region and start-ups began forming in droves. But at the same time, the market value of new-economy wonders began to soar. That made a difference to Cheah and his partners. Establishing what a company is worth in the present and what it could potentially be worth in the future is a crucial step in the venture capital vetting process — it determines the percentage of the company the VC will own in exchange for a given amount of funding. Normally, valuations are based on profit projections. But during the dotcom boom, venture capitalists were examining companies so wet behind the ears that estimates were little more than guesses. There were no track records to go by.

To make matters more troublesome, the Nasdaq stock market in the U.S. — the benchmark against which tech companies throughout the world are measured — was headed for the moon. With each 10% climb in the Nasdaq composite index, Asian Internet start-ups got another valuation boost. "We were seeing multi-hundred-million-dollar valuations," says Yao. "Often we had to just walk away" because deals were priced too high for AsiaTech to stomach the risk.

Yao says that in four out of five presentations he saw early in the year, a company would introduce themselves in the first slide and then give their expected IPO date in the second. That isn't as common since the market for new listings died.

A company that can show a venture capitalist that is strong enough to succeed without their help is more likely to get it. If the VC doesn't commit right away, have a plan B. "I always come up with doomday scenarios," says Chan.

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