"What are you doing here? You should be in Silicon Valley." Do these words sound familiar to you?
In Asia, it is not very uncommon for Founders with great ideas to either run their companies in boot strap mode or relocate to Silicon Valley. Even great talent is expected to take huge pay cuts when they plan to join a startup. We dont need a scientist to figure out the primary cause of this issue. This is primarily because of the scarcity of risk capital in Asia. Good ideas have to slog for cash. One of the key factor that gives wings to the dreams of most Silicon Valley startups is the free flow of capital that lets them dream big, really big. Silicon Valley is blessed with excess capital. And, that is probably why failure is embraced. How do they get that kind of money? What is the source? Who are these Limited Partners (LP)?
As per Wikipedia, the sources of funds are Public pension funds, Corporate pension funds, Insurance companies, High Networth Individuals (HNI) / family offices, Endowments, Foundations, Fund-of-funds and Sovereign wealth funds. In addition, there are many cash rich corporates that have their strategic investment arms hunting for opportunities.
Compare that with the sources of funds in Asia:
1. Do you think any government in Asia would allow pension funds to become LPs in Venture Capital funds?
Certainly not. At the most, governments would allow use of pension funds to be invested in real estate and approved listed equities. CPF Board of Singapore allows a portion of provident funds into property, gold, selected equities and top 25 percentile managed funds. All the usual suspects of low risk investing. Nothing wrong with that. I also view that as prudent considering the fact that venture capital industry as a whole is a loss making industry. Of course, we hear everyday about the success stories of Facebook, Google, Twitter, etc. But we choose to ignore the stories of failures. I read a report recently that mentioned that the average VC fund in US fails to return investor capital after fees.
2. Do we have foundations and endowments who can risk a portion of their money?
No. Most endowments and foundations outside America would choose to place their money into fixed deposits with highest rated banks or managed funds. In Singapore, the three local universities (SMU, NUS and NTU) together have about $2.7 billion in endowment funds plus another $1.7 billion in accumulated surpluses and operating funds, some of which is actively managed. Portfolio allocation to venture capital is probably close to zero. Compare that with Yale and other educational institutions in USA. Yale allocates 33% of its portfolio to private equity (venture capital and leveraged buyouts). Average actual allocation of an american educational institution to private equity is around 10.5%. Since 1976, Yale participated in a number of startups that helped define the technology industry including Compaq computer, Oracle, Genentech, Dell Computer, Amgen, Amazon.com, Yahoo, CISCO, Red Hat, Juniper, Google, Facebook, Linkedin, Twitter and Zynga. Its investment policy document says : Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management.3. Do HNIs have any incentives to back risky tech startups?
Not at all. High net worth individuals are so busy doubling and tripling their money every year in emerging economies and traditional sectors that no one has any bandwidth left for technology. Recently met some HNIs who were busy buying hotels and warehouses in Myanmar and Srilanka. What kind of IRR can GPs offer to beat emerging market returns? What I mean to say is that the traditional sectors are growing at such a fast rate that HNIs have no incentive to look for other alternative investments. The society is highly entrepreneurial but unfortunately no incentive yet to try out tech entrepreneurship.
So what are we left with? How can tech entrepreneurship flourish in Asia?
In my view, corporates can play a big role here. In South East Asia, SingTel has shown leadership by launching their fund Innov8 and sponsoring an incubator called JFDI. If top 10-20 corporates in each country can launch similar funds and sponsor incubators, it would certainly create a demand. And may be that demand for investment opportunities would act as a catalyst for some of the wannabe entrepreneurs as well as angel investors.
In addition, if University endowment funds can also allocate 5-10% of their portfolios toward venture capital, it would be a great boost for the entire tech startup ecosystem.
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