Roger T. Marshall
Managing Director, ABN AMRO Asia Capital Investment, Hong Kong
President, The Hong Kong Venture Capital Association
Asian Venture Capital: Investment Partnership
Venture Capital investing as a professional activity is still young in Asia. It
commenced in the late 1980s when one or two large financial institutions such as
Prudential Assurance and American Insurance Group of the US, HSBC in Hong Kong
and Morgan Grenfell of the UK set up funds to invest in young growth companies. By
the mid-1990s the Asian stock markets had grown considerably in size and Asian
equity was identified as a separate asset class for pension funds and insurance
companies. And Asian private equity as a class was on the radar screens of the large
Of course, Asian businessmen had been investing in young growth companies for
generations and can truly be said to be the first venture capitalists in Asia. What has
changed over the last 20 years is the involvement of financial institutions, and in Asia,
particularly foreign financial institutions. Asia has an, as yet, undeveloped savings
industry. The largest Asian investors are government institutions, such as the
Government of Singapore Investment Corporation, or government controlled entities,
or large corporates. The motives of these investors were different from that of the
Westernised investors entering the market; it was often strategic, very long term and
less focused on the financial returns. The style adopted local culture as would be
The participatory style of venture capital as it is pursued in the English speaking
world, and increasingly in Europe, was new to Asia. The foreign institutional investor
needs and expects a close involvement with the investee company even though he
may not be involved in the day-to-day management. The venture capital investor sees
himself as a partner in the enterprise, particularly for early stage investments. It is the
requirements that flow from these expectations that will be the subject of this article.
Some cultural differences
All investment relies on trust – the belief that the operators of the assets will seek to
optimise the returns in the interest of all the investors. This concept of trust is actually
quite appropriate for the Asian context where business is often made on the basis of a
hand-shake and other cultural and family ties. However, financial investors introduce
different considerations into business as they are not dealing on a “Principal to
Immediately in Asia there is a disconnect here. Asian entrepreneurs expect decision
making to follow the money. Why would an investor put up (possibly the majority of
the) capital without wanting to be involved in the management of that capital? Of
course, an investor who absents himself from that responsibility must take the
consequences. The corporate governance and the concomitant business ethics
associated therewith are now being developed in Asia, but are not yet a mind set.
To understand the demands and requirements of venture capitalists, it is necessary to
understand the nature of the venture capitalist and particularly those who are working
for, or on behalf of, large financial institutions. Foreign investors have their own
requirements – and if they are to invest in a business it will be necessary to comply
with those requirements. It is important to understand the business culture of the
investor if a satisfactory partnership with the foreign investor is to be developed.
“Hands off-hands on”
The venture capitalist is most interested in financial return. He is recognised and
rewarded, on the basis of the Internal Rate of Return. He is, notwithstanding the other
benefits that he brings, a financial investor.
The days are gone when an individual would sponsor a business with his own money.
Of course these investors (now referred to as angels) do exist; but generally the large
amounts of money available to invest in different classes of venture capital are
provided from insurance companies, banks, pools of investment funds supplied by
investment managers, pension funds and even corporates. All these providers of funds
are responsible to other institutions, and ultimately to the individuals who are
providing their savings for investment.
The fund manager also works in a highly competitive environment where his
performance is constantly being compared against benchmarks and other managers.
His return is measured in financial terms – not on whether a business is successful on
any absolute criteria. Time defines the value of money. The time scale for the
development of the business is always urgent. Superior performance and returns are
expected. Venture capitalists who are managing other people’s money probably report
to their investors every 3 months.
There is, then, an inherent tension between allowing the management to manage the
business and the constant requirement to demonstrate progress. The investor may say
he is "hands off" the active management of his investment will make him very much
A joint venture will typically comprise a blend of different resources and skills. And
this is what is happening with venture capital. The VC brings skills relating to the
investment of money - typically financial planning and modelling, valuation,
performance evaluation, structuring, legal and governance etc; the entrepreneur brings
the vision and operational skills to develop a business, and the management to build
and expand the business. Neither party can make progress without the other. Both
parties may need different skills for the business to succeed - such as technology or
other strategic inputs. A business is built on the basis of the strategic partners and
relationships that can be welded together to add value to the business proposition.
Each party to the business should have a role to play; often it is the relationships that
the investor brings that ensured the success of the business and it is always important
to ensure that the culture and style of the parties match. The whole can be greater than
the parts and the mutual dependence suggest a partnership. The success of the
business is dependent on the availability of a number of different skills that are
blended together in the partnership
The nature of Venture Capital
Venture capital is a highly negotiated form of capital. This recognises that there are
different interests in the venture - but with one objective. In order to ensure that the
common objectives are met, it is helpful to have a platform through which the
individual interests are synthesised. Additionally, from the VC perspective, there will
be no involvement in the operations of the business puts considerable trust in the
management of the business. To define clearly the expectations and the
responsibilities of the parties, investment agreements will be entered into which will
be in writing, and legally enforceable
So, investors look for more than trust. Venture capital is now a highly negotiated form
of capital. Investors are not looking only for a superior business proposition but also
will look at a number of elements of the deal that enforce the western way of doing
business. Corporate law may provide the skeleton of the investment structure, but it
will be the detail of each investor's rights that will define the way the business is
managed. The venture capitalist will view the relationship as akin to partnership.
The issues that will need to be understood are, inter alia, as follows:
Development of the relationship
Permitting the venture capitalist to participate in the development of the business plan
enables the relationship between the investor and the entrepreneur/management to
develop. It also gives the venture capitalist greater ownership of the business plan and
helps develop his commitment to the business.
The venture capitalist will seek to put the interests of all parties in one vehicle. In this
way, the partnership nature of the business is enforced. Additionally, the investment
vehicle forms the basis for management and decision making based on a single set of
Issues of control
A major issue in structuring deals is the issue of Control. Asian owners associate a
majority shareholding with control. Venture Capitalists are less concerned about the
number of shares or the effective equity stake as the rights attaching to shares.
Structures these days are likely to be preference shares, convertible securities, shares
that have a priority of return in the event of disposal/liquidation (and probably all
shareholders in previous investment rounds). The nature of these arrangements is
highly contractual. "Control" will remain with the management; but there will be
"controls" that permit the venture capitalists to exercise control in the event that the
Partnership connotes honesty, openness, and a spirit of cooperation. Shareholders and
managers who are unable or unwilling to communicate and share the strategic and
management issues associated with the business development will not make good
partners. A high level of disclosure will be expected of all parties to a transaction.
Independent scrutiny of the management’s performance by the board is expected.
Alignment of interest
The partnership concept suggests that the balance of interests in the business and
ensuring that they are aligned is critical. There must be common financial goals and
appropriate financial incentives for the management. The importance of this
alignment pertains as much to strategic investors as financial investors. For instance, a
tripartite joint venture between a technology provider, a venture capitalist and the
managers of the business may not be successful if the technology provider is only
interested in a royalty stream rather then the underlying equity value of the business
which is the motivation of the management and the venture capitalist.
The rapid development of growth companies often requires the employment of new
management to carry the business through successive stages of its development. The
partners need to be flexible on the employment of the right managers - this will not
necessarily be the founders or significant shareholders in the company. Venture
capitalists expect to have a say in the appointment of key managers; additional
executives may be identified and appointed at the time of the venture investment - for
example, a CFO sufficiently experienced to take the business to a listing.
This is considered be critical for the management of the business. Venture capitalists
will require appropriate accounting standards, professional audits, and appropriate
management information systems. Good information is, of course, in the spirit of
good governance and partnership. It also gives the venture capitalist confidence in the
quality of the management.
Perhaps the most important objective is an understanding on the exit route. An ability
to monetise the investment and a clear common purpose in this regard should be
agreed at the outset. The financial investor is looking for a cash on cash return; and
for the institutional manager, this is the basis on which he personally is incentivised.
Investment is a partnership. In order to obtain funding from institutional investors,
existing owners will need to change psychologically. Responsibility and burdens of
developing and managing a business must be shared. The venture capitalist will
expect to make a significant commitment of time to developing the business in
partnership with the management of the business.
Foreign financial investors will be demanding, and may require a number of changes
to be made to the business. However, the involvement of venture capital in a company
will give it credibility; importantly, venture capital will drive the management and the
financial returns and should assist with further capital raising and a listing in due
course. The right partner may not be the most comfortable partner; but the right
partner can make the difference between a very successful business and a mediocre
Roger T. Marshall
12 October, 2001