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Thursday, April 27, 2006
Ng: Angel investors and venture capitalists
By Wilson Ng
Wired Desktop
Last week, I discussed the business of technology, which is referred to as technopreneur or the Silicon Valley entrepreneurship model. It is important to note that Silicon Valley is considered the information technology (IT) innovation center of the world, not only because some of the most influential information and communications (ICT) companies (such as HP, Google, Sun, Yahoo and Cisco) are located there, but also because other than these famous names there are thousands of small ICT firms that call it home.
To continue to spawn the kind of innovative development it is known for, it is important for Silicon Valley not only to remain the melting pot of some of the best computer minds in the world—something it is famous for not only because it has some of the best universities of the world (it is home of Stanford University and UC Berkeley and a host of other great schools)—but to continue attracting the best and the brightest minds all over the world. Some of the best Chinese, Indian and Filipino talents call that stretch, south of San Francisco, their home.
The Silicon Valley model has been emulated worldwide. In Eastern United States, there is the Silicon Alley (New York) and Route 128 (in Boston). In Malaysia, there is the Multimedia Super Corridor. In China, there is ZhongguangCun. In Singapore, there is Biopolis and the Singapore Science Park; in Taiwan, the Hsinchu Science Park; in India, there’s Bangalore and in Hong Kong, Cyberport. And the list goes on. Thus, we are hardly alone in our aspirations to be an ICT hub.
One of the things that are important for innovation, other than technical minds and managerial expertise, is venture capital. Technology (not the buying or selling of it, but the innovation) is a high-risk business. Most new products and services introduced don’t succeed, so producing revolutionary change is really a very risky take. For instance, while Google has become successful, there are probably thousands of search engines that failed; while there’s Hotmail, there are probably thousands of sites offering free email that did not make it; and if there’s Ebay, there may have been scores of others that fell on the wayside.
Thus, the formation of a technology business focused on innovation is a high risk, but high return business. It is said that the earliest investors of Yahoo, Google and Microsoft made thousands of times their original outlay.
Thus, while the risks are high, there are businesses that focus on selecting and funding innovation. Individuals who are into this business are called angel investors, people who help at the start. Then there are also technology incubators. At the later stage of a certain endeavor, you have the venture capitalist companies.
Venture capitalists companies are not your ordinary investors. They normally invest in something that is risky. They believe, though, that if something works, they will reap huge returns. While investors normally look for investments that have more than half the chance to succeed but when successful will give them a return of 20 to 50 percent per year, venture capitals normally think it is okay that only one of 10 or 20 of their investments make it, as long as that single successful investment will provide them returns of a thousand or ten thousand percent.
Thus, it is important to know these expectations, and to pitch and pattern your businesses that way. A venture capitalist would not probably see you if your pitch is to double the money in three to five years. They probably would not be looking at “me too” businesses, but those that have good execution and therefore have distinct competitive advantage that will enable them to have a much higher return (probably based on some unique advantage that cannot be easily copied as well as an intellectual property or patent that can protect that advantage).
We still lack understanding of the venture capitalist (VC) model, and as far as I know there is only a handful of VC companies in the Philippines. But to meet our aspiration to be an ICT hub, we definitely have to encourage more understanding of how the VC entrepreneurship model works so that we can take advantage of people who are willing to take the risk and fund innovation.
If you are interested to meet some of these people and understand further, I would encourage you to attend the Cebu Chamber of Commerce and Industry’s Second ICT Strategic Summit on May 24 to 26 in Cebu. The summit is one of the activities of the Cebu Business Month.
For Bisaya stories from Cebu. Click here. (April 27, 2006 issue)
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