Foreign Funding Blooms for Tech in U.S
Los Angeles Times
April 4, 2004

By James Flanigan

A sure sign of springtime for the economy, particularly in Southern California, is that venture capital investors are eager to back technology start-ups for the first time since the 1990s boom went bust.

And there's a new twist this time: globalization. Money and companies are coming here from all over the world to invest in software, Internet communications and biotechnology.

The scene is lively. At a recent technology conference put on by Montgomery & Co., a Santa Monica investment bank, more than 70 companies presented their business plans to 400 investors and technology executives. And last week, about 500 venture capitalists and aspiring entrepreneurs thronged a conference of the Larta Institute, a Los Angeles technology think tank — a far larger crowd than the 300 or so attendees Larta has attracted in recent years.

"Investors are becoming more courageous," says Tom Unterman, managing partner of Rustic Canyon Partners, a Los Angeles-based $700-million venture fund.

In total amounts of venture investment, Southern California and the nation as a whole reached post-boom low points of $1.7 billion and $18 billion, respectively, last year. But the initial months of 2004 have seen an upturn, experts say, pending publication of final statistics. Venture capital refers to a method of corporate finance in which pension and trust funds invest up to 5% of their capital in high risk ventures with the hope that at least 2 in 10 will succeed and produce an annual return of 25% to 30% on the venture investments as a whole.

A significant new factor is that investment is flowing both ways across oceans to back technology and gain access to the U.S. market, or to form joint ventures across continents. That so much international activity is focused on Southern California is a tribute to the magnitude of innovations spawned at local universities and in this region's entrepreneurial businesses.

An outstanding example of the trend is Posco BioVentures Inc., a $50-million fund based in Carlsbad, Calif., that was set up two years ago by South Korean steelmaker Posco to invest in fledgling U.S. biotechnology companies. Leo Kim, a longtime biotechnology executive in the U.S., has led the fund to invest in start-ups working on genetically engineered remedies for heart disease, vaccines against malaria and genetically duplicating the beneficial component of olive oil.

Now Posco is expanding its funding. Kim is back in Korea this weekend putting together a $200-million fund to invest in biotech start-ups in the U.S. The goal is to license their technology back to Korea. The steel company plans to set up biotechnology centers in its home country and in China.

The U.S. effort is essential to Posco's ambitions because the support system that backs experimentation and entrepreneurial firms is based in this country. For leads on promising technologies, Posco BioVentures relies on outlets of UC San Diego, the Salk Institute for Biological Studies and Pasadena Entretec, an organization that supports entrepreneurial firms spawned from research at Caltech.

Investors and capital markets in Asia "don't yet have the feel for venture capital," Kim says.

Another example of the globalization of venture capital is AgoraeGlobal Corp. of Pasadena. The company arose from the invention eight years ago by Caltech scientists of an Internet virtual conference room in which physicists around the world could communicate with each other via any kind of computer, cellphone or other device. AgoraeGlobal today has 8,000 users in 92 countries, says Chief Executive Aidan Foley. The corporation was formed in 2001 with investment backing from Japanese telecommunications giant KDDI Corp. and one of the largest pension funds in Canada.

The globalization trend is building up steam. A Los Angeles entrepreneur, Kevin Nikkhoo, is forming a $60-million fund with capital from China, Taiwan and Singapore to form a China center in Southern California through which U.S. and Chinese firms can collaborate on developing and marketing software. And Alexander Suh, managing director of Pasadena-based California Technology Ventures fund, is working with companies and technical institutes in Finland, Sweden and Norway on joint efforts to develop innovations in information and healthcare technology.

To be sure, every recent decade has seen investor enthusiasm for technology start-ups inflate only to abruptly deflate with big losses and misery. Even a year ago, experts questioned whether biotech — currently the hottest field — could ever attract investment again. Doubtless, these cycles of waxing and waning will repeat in the future.

Still, the global scope in technology investment is at an early stage. And there are many reasons for it, including the need of foreign companies to gain the credential of success in the tough American marketplace.

Mark Edwards, director of a venture capital firm in New Zealand, brings start-ups from that country here every year and reincorporates them in the U.S. to attract investment and win local business. This year he has brought Tacit Group Ltd., a software firm with applications for the insurance industry. Tacit's ultimate growth market may be in China, Edwards says, "but it is also important that if the firm succeeds in the U.S., then it has the credibility to gain backing in China and other countries."

Amid controversy and misunderstanding these days about outsourcing, these collaborations stand as examples of shared experimentation and development.

For example, Agribuys Inc. is a 5-year-old company based in Torrance that has worked with 50 employees in India and a comparable number here to perfect a software program that keeps track of the worldwide supply chain for fresh meats and seafood, fruits and vegetables.

Agribuys struggled through recent lean years when investment in technology was low. Now, however, two supermarket chains in the Eastern U.S. have adopted its software. Its venture capital backers have brought in Vijay Yajnik, a longtime U.S. banker and manager who has computer science and business degrees from universities in India, New York and Michigan, to head the firm.

"You may not realize it, but even the food you buy every day is part of a global network now," Yajnik says, in a comment that might apply not only to his company but his own experience — and the new global market in innovation.

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