Stanford Business magazine

Economic Growth

 

Prospects for Venture Capital in Asia

By Faruq Ahmad, MBA ’76

My father became a reluctant entrepreneur in 1965 at age 60, the mandatory retirement age for government civil servants. As the most prominent surgeon in Pakistan, he had played a key role in building the medical infrastructure of the country after partition from India in 1947, and had no intention of mothballing his scalpel. Instead, he mortgaged the family home to build and run the premier private hospital in Karachi. He practiced well into his 80s, and I watched his entrepreneurial instincts flourish as necessity inspired him to transcend convention, run a business, and continue to innovate and publish.

Eventually however, his business faced issues of succession planning, growth financing, and the lack of an exit strategy. When he stopped practicing, the hospital shut down, and the building was sold. Pakistan, and the rest of Asia, was in the doldrums.

Fifty years later, Asia is front and center. The wave of outsourcing and offshoring of the past few years has been accompanied by a sharp increase in investment. Private equity investors are rescuing family businesses, and providing financial exits. Perhaps most important, venture capital is being invested in innovative new companies. Some expect that this industry will migrate to Asia just as rapidly as manufacturing and software development. However, as we have seen from our experience here in Silicon Valley, venture capital continues to be an apprenticeship business, and it takes time to season a VC team. Further, while things move quickly in India and China, key underpinnings necessary for a domestic venture capital industry are still being put into place. I expect it will take five to ten years for venture capital in Asia to reach maturity, a remarkably short time considering what needs to happen.

Asia iventure capital in China, and $1.1 billion in India, both record amounts, and these amounts are slated to grow in the coming years. (By comparison, $30 billion was invested in the United States.) Silicon Valley VCs are moving to Asia: Dick Kramlich of New Enterprise Associates recently announced a move to China, and Vinod Khosla, MBA ’80, of Kleiner Perkins Caufield & Byers has rebased to India. Firms I was involved with in their early days, such as Golden Sands River in China and Chrys- Capital in India, are now established franchises. Even in my native Pakistan, the IT industry is ramping up steadily, and start-up companies are attracting venture capital.

VCs invest in start-ups, often that set out to commercialize new technologies. There are many ways for things to go wrong, and it may take five to seven years for a VC to find out whether a company investment was a hit or a write-off. For a VC fund with a portfolio of such investments, the planning timeframe needs to be at least 5 to 10 years. And, investors in VC funds would like to see a new firm succeed with a couple of funds before making major bets. In Asia the following additional factors are particularly important in gauging the timeline:

• Venture capital investments require clarity in laws and regulations. Both India and China have opened their economies by taking steps to remove major impediments; however, such changes are still taking root. These countries see innovation and entrepreneurship as stimulating a virtuous cycle of growth and prosperity, and today, a company can be formed, raise capital, grow, and go public (or be acquired) in Shanghai or Mumbai. This is a dramatic change from just six years ago, when I was investing in China with Mingly Capital.
• At its core, venture capital depends on company formation or people to create investible “deals.” An entrepreneur must translate an invention into a defensible and practical business plan, something that Silicon Valley does uniquely well. Such an entrepreneurial culture takes time to mature. To catalyze the process, experienced, savvy, and successful ethnic Indians and Chinese are returning home to accelerate company formation, mobilize educated workforces and motivated entrepreneurs, instill best practices, and bridge the experience gap.
• As domestic markets in India and China grow, a domestic venture capital industry will increasingly focus on local and regional needs. We are seeing this start to happen. However, local VCs will need access to global markets for their companies, and investments by global investors in Asian VC funds will provide a vital link. U.S. investors continue to be most interested in such investment opportunities.
• Venture capital is about great success, but also about learning from failure, and it is a cyclical business. So far, Asia has been on the rise. It remains to be seen how Asian VCs and entrepreneurs will weather the stresses of a down cycle.

While this will indeed be the Asian century, it is links to the United States, and to Silicon Valley in particular, that will be vital to growing the pie and to globalizing the benefits of innovation. At the end of the day it is about the movement of people and ideas, and the alumni of institutions such as Stanford will play a key part. l

Faruq Ahmad, MBA ’76, founded PenWare, a venture-backed software company, before becoming a VC in Silicon Valley and China with Mingly Capital and an institutional investor in venture capital funds with C.M. Capital. He currently advises institutional investors, venture funds, and companies. He can be reached at faruq@paloaltocap.com.

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