High returns on IT investments is creating a feeding frenzy in the venture capital marketplace

Information technology is propelling a revolution that is transforming businesses and industries around the world and venture capital is financing that change, said Hong Kong Venture Capital Association Chairman Richard Roque (right).

Speaking at the "Venture Capital Partnership in the New Economy" conference on Oct. 26, jointly organised by the Chamber and the Hong Kong Venture Capital Association, Mr Roque told the near full-house, which included over 80 mainland Chinese SOE senior managers, that old economies should view IT as an enabler in their businesses, rather than a threat.

"IT is following the well-proven path of companies that have used breakthroughs and inventions of major technologies, such as electricity or railroads, to develop new and successful businesses," he said.

In the last two years several trends that prove good lessons for businesses have emerged. First is that old, proven business principles still apply in the new economy. Second is acknowledgement that a more prudent approach of adopting second-mover advantage, in lieu of the sprint-and-spent strategy of first-mover advantage, is now proving to be a winner in a number of industries, he said.

"To catch up can be a lot cheaper. Second movers can also wait to see what works and avoid mistakes," Mr Roque said.

Chamber Vice Chairman Dr Lily Chiang (right), also speaking at the conference, said that in a survey of global financing conducted by PricewaterhouseCoopers, the amount of private equity financing a variable to start-ups and mid-sized companies exploded globally in 1999 and 2000.

The survey revealed that private financing across the globe rose to US$138 billion in 1999, representing an increase of 65 per cent over 1998.

"Figures so far for 2000 indicate that private investment is increasing at a similar rate this year. More venture capital has been pumped into start-ups in the first two quarters of 2000 than in the whole of 1999," she said.

Dr Chiang pointed out that high rates of return have drawn more firms into the venture capital industry, driven by the dot-coms, which produced rates of return as high as 150 per cent in 1999.

But venture capitalists are exercising more caution following the burst of the dot-com bubble, and requiring companies to prove that they can run a profitable business before investing in them.

Some of the bigger venture capitalists, who traditionally inject large sums of capital into firms in mid-life, are coming down the financing time ladder to back seed and start-up companies, said Lewis Rutherfurd (right), managing director, Inter-Asia Management (HK), who spoke on "Who Are the Venture Capitalists in Asia? VC Funds, Angels, Silicon Valley, YPOs."

Lured by prospects of greater returns in tech investments, this has created one of the feeding frenzies going on in the marketplace that is causing so much money to come into the venture capital sector, he said.

"What used to be a 10-year process to get through an investment portfolio is now happening very fast. This is attracting more players that used not to be in the industry because of how long it took," he said.

However, entrepreneurs must be very careful who they meet because it could be a late stage guy looking at an early stage deal, or it may be an early stage guy with not enough money. Either way, this will create difficulties for businesses that are being funded.

"So be very careful who you talk to and how they characterise how they offer you what they need," Mr Rutherfurd said.

Asia still doesn't attract much venture capital, but over the last three years some trends have started to emerge, said Marc Staal (right), chief executive officer, ABN AMRO Asia Capital Investment, speaking on "Where Are They Putting Their Money? Old Economy vs New Economy?"

While just a few years ago Southeast Asian nations were the hotbed of venture capital investments, the focus today has completely shifted to Northeast Asia -- with the exception of Singapore -- and Korea and Japan will play in important role in drawing more funds to the region.

Also, more venture capitalists are shifting their strategy from only looking at late stage investments to being more open to ideas and investing in early stages, he said.