Venture Capital: Funding Alternative for New Enterprises Presentation By Vincent Chan Director & Executive Vice President JAFCO Investment (Hong Kong) Ltd. Rom 201B, Level, 2, Hong Kong Convention & Exhibition Centre 11:15am-12:30pm November 29, 2001 11 ContentContent 1. Definition 2. Nature of Venture Capital 3. Source of Funding 4. Revenue Model 5. Stages of Investment 6. Geographical Preference 7. Industry Preference 8. Investment Process 9. Past Development 10. Competition 11. VC looking for in return 12. Classic Cases 13. Points to Take Home 14. General Information 15. About JAFCO 12 1.1. Definition:Definition: WhatWhat isis VentureVenture CapitalCapital ¾ U.S. – >30 years in existence ¾ Fairly new term in Asia (until the last 2-3 years) ¾ Earliest venture capital firm in Asia began in 1963 in Japan ¾ Refers to investments in young, rapidly growing companies (particularly high-tech related) in the U.S. ¾ Wider meaning in Asia ------- generally refers to equity investments in growing, unlisted companies. ¾ Private Equity ¾ Direct Investments ¾ Serves as an intermediary between investors looking for high returns and entrepreneurs in need of capital 13 2.2. NatureNature ofof VentureVenture CapitalCapital ¾ VS Debt Financing ¾ VS Public Market ¾ Objective: generation of long term capital gains ¾ Horizon: 2-7 years ¾ Liquidity: low ¾ Risk: High ¾ Instruments: shares, convertible bonds, options, warrants ¾ Critical factor(s): Management team and market potential, rather than collateral ¾ Impact on Profit, Balance Sheet 14 3.3. WhereWhere doesdoes thethe moneymoney comescomes from?from? ¾ Fund investors: ¾ Insurance companies ¾ Pension funds ¾ University endowment funds ¾ Family trusts ¾ Government Treasury / Agencies ¾ Listed corporations / Private companies ¾ Wealthy high net worth individuals (>US$1 million) 15 4.4. RevenueRevenue ModelModel ofof VentureVenture CapitalistCapitalist ¾ Formation of the Fund : closed-end, structure: L.P./L.L.C. ¾ The Appointment of the Investment Manager ¾ Remuneration: ◈ Management Fees ◈ Carried Interests – hurdle rate ¾ No e-commerce for us! 16 5.5. StagesStages ofof InvestmentInvestment ¾ Stage One: Seed / Angel Round ¾ Stage Two: Start-up / Early stage ¾ Stage Three: Expansion / Development ¾ Stage Four: Mezzanine / Bridge ¾ Stage Five: Buyout / Buyin ¾ Stage Six: Turnaround / Restructuring ¾ Stage Seven: Others (pre-IPO, Privatization, straight punt) 17 6.6. GeographicalGeographical PreferencePreference ◈ China ◈ Thailand ◈ India ◈ Hong Kong ◈ Malaysia ◈ Sri Lanka ◈ Taiwan ◈ Singapore ◈ Australia/New Zealand ◈ South Korea ◈ Indonesia ◈ Israel ◈ Japan ◈ Philippines Forbidden Land ◈ Myanmar ◈ Brunei ◈ Vietnam ◈ Pakistan ◈ Laos ◈ North Korea ◈ Cambodia 18 7.7. IndustryIndustry PreferencePreference // ClassificationsClassifications ◈ Telecom ◈ Construction/Mining ◈ Media ◈ Agriculture/Fisheries ◈ IT ◈ Infrastructure/ Transportation ◈ Leisure/Entertainment ◈ Financial Services ◈ Electronics ◈ BioTech/Life Sciences ◈ Travel/Hospitality ◈ Real Estates ◈ Manufacturing/ Consumer Products 19 8.8. InvestmentInvestment ProcessProcess ·¾ Sourcing/Marketing ¾ Exits: ◈ IPOs ◈ Sale back ◈ Trade sale to Strategic investors ·¾ Initial evaluation & terms ◈ Put Option ·¾ Due diligence ·¾ Monitoring ◈ viable business plan ◈ board seat ◈ proprietary technology ◈ financial performance ◈ enforceable legal structure ◈ accounting/financial integrity ·¾ Documentation/Completion/Funding ◈ legal structure ◈ valuation ·¾ Final negotiation/term sheet ◈ Shareholders’ Agreement ◈ Subscription Agreement 110 9.9. AsianAsian DirectDirect InvestmentsInvestments Development:Development: PastPast ¾ Excessive valuations ¾ Plenty of capital available ¾ Weak deal flow but aggressive competition ¾ Tightly - controlled enterprises → family business → allow only passive investments ¾ Limited Government support for foreign investors → legal reforms → → corporate governance (transparency) ¾ Risks associated with currency, political stability and credit 111 9a.9a. AsianAsian DirectDirect InvestmentsInvestments Development:PastDevelopment:Past (cond’t) Statistics: capital under Management Country % change % change As ian Venture Capital Pool 1991-1999 1997 1998 1999 Australia 2,721 3,062 12.5% 3,616 18.1% US$million Hong Kong/china 10,670 15,442 44.7% 22,288 44.3% 80,000 India 1,016 1,053 3.6% 1,826 73.4% 69,132 Indonesia 426 328 -23.0% 333 1.5% 70,000 Japan 7,722 12,513 62.0% 21,729 73.7% 60,000 Korea 1,857 2,995 61.3% 4,986 66.5% Malaysia 45,785 406 460 13.3% 667 45.0% 50,000 Myanmar 113 83 -26.5% 36 -56.6% 40,000 33,791 New Zealand 110 186 69.1% 413 122.0% 30,951 33,433 32,136 26,222 Pakistan 6 15 150.0% 57 280.0% 30,000 21,925 23,431 Philippines 169 224 32.5% 292 30.4% 20,000 Singapore 4,468 5,258 17.7% 7,791 48.2% Sri Lanka 71 68 -4.2% 68 0.0% 10,000 Taiwan 1,913 3,598 85.4% 4,447 23.6% - Thailand 177 242 36.7% 265 9.5% 1991 1992 1993 1994 1995 1996 1997 1998 1999 Vietnam 292 258 -11.6% 318 23.3% Total 32,137 45,785 42.5% 69,132 51.0% Source: AVCJ 2001 Directory 112 9b.9b. FundFund RaisingRaising ScoreboardScoreboard Funds closed from January to September 2001 US$M 8,000 7,000 $6,520 6,000 5,000 $4,184 4,000 43 3,000 Funds $2,006 $2,178 33 2,000 Funds 2000 16 1,000 17 2001 Funds Funds Initial Close Final Close Total Funds Raised to Date to date to date 113 9c.9c. FundFund RaisingRaising ScoreboardScoreboard Distribution of Private Equity Funds (Jan-Jun 00 & 01) Jan-Jun 2000 Jan-Jun 2001 Amount Surveyed: US$5.3 billion Amount Surveyed: US$6.8 billion Technology Technology 53% 58% Conv'l Conv'l Re- Private Private structuring Equi ty Re- Equity 18% 29% 23.6% structuring 18% Note: Survey excluded Australia & New Zealand's fund pool and Global Funds Source : ASIA PRIVATE EQUITY REVIEW 114 9d.9d. FundFund RaisingRaising ScoreboardScoreboard Regional Private Equity Firms’ Investment Profile Industry Breakdown by Amount Industry Breakdown by Amount Amount: US$1.7b (Jan-Jun2000) Amount: US$1.82b (Jan-Jun2001) Banking & Food Finance 0.7% 3.3% Banking & Others Semiconduct- Finance 5.5% or 23.16% 31.93% Manufactur- Ing Telecommun- Internet 31.4% Others ication 44.4% 5.45% 19.26% Biotech 0.27% Reverse Internet Auto Takeover 2.02%Consumer IT Industry IT 8.2% Goods 6.59% 7.11% 6.5% 4.22% 115 10.10. ExtremeExtreme CompetitionCompetition ¾ Too many players: Local & Foreign/Domestic & Regional ◈ HSBC Private Equity ◈ ABN-AMRO Asia ◈ JAFCO ◈ PAMA ◈ ING/Barings ◈ Walden ◈ AIG ◈ Citicorp ◈ Transpac Capital ◈ Morgan Stanley ◈ China Assets ◈ Tech Pacific ◈ Merrill Lynch ◈ ChinaVest ◈ Intel Capital ◈ Golden Sachs ¾ Value-added services/advantages ◈ Financial and strategic planning ◈ Recruitment of key personnel ◈ Access to international markets and technology ◈ Introduction to strategic partners and acquisition targets ◈ Obtain a public listing 116 10a.10a. ExtremeExtreme CompetitionCompetition (cond’t) ¾ Statistics: No. of Venture Capital firms Country 1997 1998 % change 1999 % change Australia 66 85 28.8% 124 45.9% Hong Kong/china 107 129 20.6% 190 47.3% India 42 41 -2.4% 44 7.3% Indonesia 46 46 0.0% 44 -4.3% Japan 210 231 10.0% 221 -4.3% Korea 128 123 -3.9% 131 6.5% Malaysia 19 20 5.3% 28 40.0% Myanmar 3 2 -33.3% 1 -50.0% New Zealand 7 13 85.7% 16 23.1% Pakistan 3 3 0.0% 4 33.3% Philippines 8 10 25.0% 14 40.0% Singapore 59 64 8.5% 85 32.8% Sri Lanka 10 12 20.0% 12 0.0% Taiwan 74 124 67.6% 132 6.5% Thailand 7 8 14.3% 15 87.5% Vietnam 7 7 0.0% 7 0.0% Total 796 918 15.3% 1068 16.3% Source: AVCJ 2001 Directory 117 11.11. WhatWhat areare VCVC lookinglooking forfor inin return?return? ¾ Big equity upside from appreciation in the value of the Company. ¾ Return target – normally in the range of IRR 15%-25% in Asia. ¾ Exit for VC to take place either before or at the same time with the entrepreneur. 118 12.12. ClassicClassic CasesCases inin HongHong KongKong ¾ Sing Tao Holdings – Lazard Asia Investment ¾ Siu Fung Ceramics – Peregrine & Consortium ¾ Cheung Wah Development – Softbank ¾ Acme Landis Holdings (i100) – H & Q “Can you think of any other case in Hong Kong?” 119 13.13. PointsPoints toto TakeTake HomeHome ¾ Venture Capital has become an alternative class of assets on its own ¾ Extremely competitive marketplace ¾ Useful conduit of capital between those who need and those who have ¾ High risk – high returns (Universal Truth!!!) ¾ Tough but fun career for those in it! 120 14.14. GeneralGeneral InformationInformation ¾ Industry Associations ◈ Asian Venture Capital Journal/AVCJ Holdings http://www.asiaventure.com mail: [email protected] ◈ Hong Kong Venture Capital Association http://www.hkvca.com.hk mail: [email protected] ¾ Book Recommendation ◈ Title: Fundamentals of Venture Capital ◈ Author: Joseph W. Bartlett ◈ Publisher: Madison Books ◈ ISBN# : 1568331266 121 ◈ 15.15. AboutAbout JAFCOJAFCO ¾ JAFCO Co. Ltd. – largest venture capital manager in Japan ¾ Founding shareholders: Nomura, Sanwa Bank, Nippon Life ¾ Operation since 1973; listed on the Tokyo Stock Exchange ¾ Offices in the U.S. (Palo Alto, Boston), Europe (London) and Asia (9 offices) ¾ Over US$3 billion under management with US$800 million in Asia Pacific ¾ Asian’s Track record: over 250 companies of which 120 had exited (73 had obtained IPO) ¾ Nomura – our largest shareholder has over 60 offices in 26 countries 122 ThankThank YouYou JAFCOJAFCO InvestmentInvestment (HK)(HK) LtdLtd Tel.: (852) 25361960 Website: www.jafcoasia.com 123.