HALF MOON BAY, Calif.--Homesick entrepreneurs longing to return to China or Europe may find the motherland is offering more than a warm embrace: funding by eager investors.
China's stock market has climbed fivefold over the past two years, and efforts are under way to create an emerging market that would cater to younger companies.
"The China market has turned over five times, so it's very, very hot. But there've only been a handful of local companies that have done an IPO," said Kuantai Yeh, managing director of Intel Capital and a panelist Friday at the AlwaysOn Venture Summit West here.
While China's stock market caters to larger companies, Yeh noted that the Chinese government has efforts under way to create a Nasdaq-like market for emerging companies.
The government is also driving efforts to bake innovation into companies, a shift that has been evolving for the past five years, said members on a panel discussing investments in China.
"If you rank innovation, and the U.S. is 100, then China is 50," Yeh said. "If you see a model and can copy it very easily and duplicate it for over 1 billion people with very little R&D, why not do it? But the government is pushing China to develop its own 3G, its own computer standards, autos...and space program."
He added the government is beginning to recognize it can't continue to rely heavily on other countries' innovation to move the country forward and is encouraging businesses to spend more on research and development.
A path between the U.S. and Israel has also been well-trodden by entrepreneurs, noted Danny Cohen, a partner with the Gemini Israel Fund and a speaker on the State of European Venture Capital panel. He said he is increasingly seeing people get their training in the U.S. and then going back to Israel.
"Israel, outside of the U.S., is the most entrepreneurial country," Cohen said. "With valuations much lower than the U.S., about half, I tell people you can get a copy of a Silicon Valley company, but at an attractive price."
In Europe, an abundance of capital is available to companies, said Tod Bensen, founder of Cazenove Private Equity. "Some could even argue some companies are going public that shouldn't," Bensen said. "In Europe, it's a very healthy place to generate an exit (for an investor)."
Entrepreneurs got some answers Thursday from investment bankers and institutional investors during the AlwaysOn Venture Summit in Half Moon Bay, Calif.
For starters, companies looking to cash in via an IPO, or acquisition, are finding that it's usually through the acquisition route, said Paul Deninger, vice chairman of Jefferies & Co.
Over the past five years, mergers and acquisitions have provided 80 to 90 percent of all equity returned to investors of venture-backed technology companies, compared with 30 to 40 percent in the early 1990s, he noted.
And that trend concerns Deninger, who compared the situation to venture capitalists "eating their young."
"The venture (capital) industry is headed into a wall. All the best companies are being sold," Deninger said. "For seven straight years, the number of companies going public has declined. That means the number of (prospective) buyers is also declining. Eventually, the VCs will have fewer companies that they can sell their companies to."
Companies that are hot IPO material and have breakthrough technology are likely to see Glen Kacher, Integral Capital Partners managing director, in attack mode.
"The deals we are most excited about are deals that will change the industry," Kacher said, noting he will aggressively pursue an investment in these companies prior to their IPO pricing.
Start-ups that fail to attract strong investor interest are not totally out of luck, institutional investors said. In fact, Paul Wick, managing director of J. & W. Seligman & Co., is one who will scope out "cold" IPOs, seeking to snap up the shares at a discount to the IPO pricing range.
That discount, at times, can be in the 10 to 15 percent range for investors in a "cold" IPO, said Leslie Pfrang, managing director of Deutsche Bank Securities. And in those situations, Pfrang will "lock arms" with a smaller core of investors, who Deutsche Bank Securities has a greater familiarity with, she said.
Pfrang, along with other panelists, offered some practical advice to entrepreneurs before they shoot off their mouths on a road show to attract investors.
"Our advice to management is keep your presentations short and let them ask you a lot of questions, be conservative on your models, and don't be overly promotional," Pfrang said. "Tell them about your potential and opportunity and don't disparage the competition."
Indeed. Trying to do a snow job on potential investors by claiming there are "no competitors" is likely to leave entrepreneurs with no money, panelists noted.
"The arrogance factor has got to go," Kacher said, noting he often hears from entrepreneurs that they have such a unique company that there are no competitors, but a quick look at the company's prospectus tells him otherwise.
And be prepared for the pointed questions during the road show, noted John Rende, portfolio manager with Weintraub Capital Management. One chief executive who was queried by Rende may have wished he had.
As part of his due diligence on the company, Rende learned through a simple Internet search that the chief executive was facing a massive lawsuit stemming from a marriage to spouse No. 5, while still married to spouse No. 4.
"Toward the end of the road show, I asked this person if the lawsuit would be a distraction for them," Rende recalled. "This person became defensive and the meeting ended at that point. I wanted to see how this person would respond to deep questioning. The wrong response is not shaking your hand when the meeting is over."
DAVIS, Calif.--What kind of clean tech product will thrive over the long term?
"Something that doesn't defy laws of physics, and there are plenty of those," said Rodrigo Prudencio, a partner with Nth Power LLC. The venture capital firm helped Evergreen Solar and Imperium Renewables to get off the ground.
Nobody at the AlwaysOn Going Green conference was making bold predictions about what might become the Google of green tech, but the sector is expected to continue expanding at a rapid clip.
Clean tech companies receive the third largest amount of venture capital, a staggering increase to $2.4 billion last year from $917 million in 2005, according to research by Clean Edge. Ninety percent of venture-backed, green tech companies that made initial public offerings last year are listed on the Nasdaq market.
"There will be new ways to squeeze that last bit out of a kilowatt and new ways to create that kilowatt," said Steve Eichenlaub, managing director of Cleantech Investments at Intel Capital. He and other investment experts offered these tips:
- Don't burn out by shooting for every initial public offering. "You still have to be careful," said JonCarlo Mark, senior portfolio manager at CalPERS. "There will be money lost in certain technologies and investments, but there's a need to diversify from fossil fuels."
- Although unglamorous, technologies that improve energy efficiency, from manufacturing plants to workplaces to homes, will be in high demand as businesses and consumers seek to reduce expenses and carbon emissions. "All companies making incremental improvements in the energy economy are gonna move the needle," said Prudencio.
- Renewable sources of energy that don't lean on government subsidies or tax incentives look promising.
- Think globally, far into the future. For instance, the need for water filtration and treatment will balloon as the world's population exceeds 8 billion within the next decade, and more people migrate to coastal regions.
- "Climate change aside, anything that takes hazardous waste out of the market is gonna be a huge market for investment," said Keith Casto, a partner of Sedgwick, Detert, Moran & Arnold who heads the law firm's international climate change practice. Companies that use recycled components in manufacturing can save money they might otherwise spend on a dwindling supply of raw materials.
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