Despite tougher and slower returns on investment (ROI), venture capital (VC) firms investing in Asia still find it worthwhile funding technology startups, according to industry players.
Yishai Klein, director for Asia at Giza Venture Capital, said in a phone interview that venture fund managers, over the last three to five years, "have had to be more patient" as results were not as quick as had been predicted.
To ensure returns on their investments, venture capitalists now sometimes have to "coax the exit" by getting more involved in steering the investment or startup toward the direction of an IPO or acquisition target, Klein said. In the past, as long as a startup was able to sustain itself with a clear business model and has the right talent execute its strategy, the VC company's exit plan usually "takes care of itself", he said.
Headquartered out of Tel Aviv, Israel, Giza manages a total of five funds worth US$600 million and has invested in 91 companies across various technology sectors.
Other than having to more closely nurture exit strategies, usually in the form of an IPO or company buyout, the number of exits in the last two years or so has also been "a lot less", said Klein. The company has earned 30 exits since its first fund was initiated in the 1990s, of which "at least three [were transacted] in the last couple of years", he said.
|For Asia, it's generally about the speed to market--you can't count on patents to protect your product or service.|
|Dennis Phua, Azione Capital|
However, Giza is optimistic of better times ahead in the form of exits via acquisitions, he noted. "With all that happened over the last 12 to 18 months, there will be fantastic opportunities for startups to be acquired by larger players once the large companies are able to create more stability. Then, they'll start looking for opportunities for acquisitions so they can create...rapid growth in particular regions within particular industries," he explained.
Dennis Phua, senior associate at Singapore-based Azione Capital, said in a phone interview that based on his understanding of the Asian VC market, the returns have not worsened.
According to Phua, Asia and the Middle East have seen a fall in VC investments, a trend that is in line with Western countries. The decline, however, has been largely in middle- and late-stage investments, he said.
Like Giza, Azione focuses on early-stage investments, which is an area that typically requires less capital from VC firms and is also benefiting from governments' focus and efforts to promote entrepreneurship.
Asia's VC market is seeing less fluctuations and is less volatile because "we are more cautious, particularly in Asia", Phua pointed out. "We don't necessarily invest a lot more when there's more money in the market, and don't necessarily invest a lot less when [the opposite is true]."
More about money, less about patents
When it comes to ROI, Asian investors and VC firms also still prefer monetary gains, said Phua.
"In Asia, we start businesses to make money. We don't really try to be at the frontiers of innovation, whereas in America and Europe, they are developing new technologies to change the world and to push their industry further," he said. "Based on our cultural value, it's always about profitability and market value of a company--that's why we focus less on how much innovation is going on or how many patents [there are]."
"Our competitive strategy is not only on innovation... It's about adaptability," he said.
He added that patents are "not that useful" in terms of doing business in the region as successful or popular products are often copied, especially in countries such as China and India.
"We encourage [startups] to have patents, but we don't think it's particularly useful in Asia," Phua noted. "Patents offer defensibility of a product or service, but in Asia there is a lot of piracy--the legal regimes around Asia are still not strong.
"For Asia, it's generally about the speed to market--you can't count on patents to protect your product or service," he said.
Patent ownership, however, will become more important over time, added Phua, as legal regimes in China, for example, are expected to improve over the next few years.