'Biotech is attracting VC funds' by PRASENJIT BHATTACHARYA
The Economic Times, July 20, 2002

Asia Venture Management is one of the oldest venture capital firms in Asia. Started in 1972, the Hong Kong-based firm has funded a whole host of companies, from McDonald's outlets to medical firms like Renal Care Asia.
Currently, the venture firm is in the process of raising $100 million more in funds for further investments. IAVM's MD, Lewis P Rutherford , was recently in Delhi to invest $1 million in a wireless applications start-up called ACL Wireless Limited.

ACL Wireless is into offering instant messenger services like MSN or Yahoo messenger on mobile phones and has services across the country, including with Airtel in Delhi.

Prasenjit Bhattacharya talked to Mr Rutherford about the changing face of the venture capital industry globally, particularly after the dotcom bust, and the emerging areas of venture capital investments.

People tend to think of the venture capital industry as something that started in the 1990s. How mistaken is this impression? The industry started in the US in the 1960s. And institutions like Harvard played a great role in fostering this industry.

Till the end of the 1980s, around $2-3 billion annually was the scale of venture capital funding. But in the '90s, Nasdaq changed the face of venture capital funding by allowing even companies that had no record of earnings to go public.

This meant that a number of companies with just good ideas entered the public markets and often had their scrips hit astronomical levels based on announcements or forecasts.

This really led a number of investors to pump in huge amounts of money into VC funds, in order to gain quick returns when a start-up is listed on the Nasdaq.

But VC funds made a big, big blunder. These funds would create 25 start-ups doing the same thing and obviously at least 20 of those had to die.

But the saddest part of the dotcom boom and bust story is that while earlier if a start-up sank, it was the money of rich VC funds or merchant banks that sank, in this case, it was the ordinary man on the street who lost his money in US or Asian bourses, since he believed in the dotcom hype.

What changes have there been in the VC industry after the dotcom bust of 2000? Has the structure of the industry too changed? The most profound lacunae that VCs realised was how essential it was to have a voice in the start-up they were investing in. When things are going right, VCs hardly need to bother about the start-up's strategies.

But in bad times, VCs often wished they could make themselves heard to the company's promoters, so that our expertise could have helped them tide over their troubled times.
I feel it's important that VCs have strong control over the start-ups they invest in and a negative voice in times of trouble.

As for the structure of VC funds globally, there are two types of funds these days. One are pure venture capital funds, which largely invest in the early stages of a company's life, typically start-ups. These funds, like ours, look at taking cheap stakes in lots of companies.

Then there are large buyout funds, like Walden and Carlyle. These funds often invest in the late stages of a company's life and have enough money to buy out the company's management and run the company on their own.

Where does most of the money for Asian VC funds come from and which are the current hot areas for VC investment in Asian countries, particularly in India? On a macro level, 60-65% of the money for Asian VC funds comes from the United States, 20-30% come from Europe, while the remaining 5-6% is Asian money. The reason for this is that most Asian investors think they are smart enough to buy positions in a start-up and don't need the expertise of any VC fund.

The current area of interest for VCs is life sciences and biotech, software development in niche areas like, say, derivatives or equity and call centres, especially in India. In the area of biotech, especially, several interesting areas of VC funding have emerged.