Saturday, March 13, 2010

Red Herring – Global?

I wrote this one in sunny San Diego at the Red Herring Global 100. I am trying to work out how to address the question “Can venture capital be truly global” in time for our presentation today ;-) The problem I'm having with this question is that I don’t think it’s the right question. To me venture capital is by definition local, not global--sure we want to invest in global companies, but we do our work locally on the ground and in the trenches alongside the companies we invest in. If we can't visit them on a daily or weekly basis then we shouldn’t be in the deal.

Does that mean we shouldn’t invest in foreign companies? Well no, but the only way I can think of to make that work is either to relocate part of the firm to the target market--i.e., have an office in China or wherever, manned by partners equal to those in the mother ship and who are part of that market and can actively source, manage, support and fundraise for their companies there the way VCs do everywhere; or to find a trusted partner firm that you can work with in that market assuming that the target company will have substantial operations in both places so both firms can add hands-on value.

There's a lot of passion around this issue--especially at Red Herring which comprises a large proportion of non-U.S. companies, and is truly global due to the passion and drive of the founders. It's frustrating for them that many valley VCs talk global but don’t act it. It's also frustrating for many Aussie entrepreneurs who come to the valley for a week, pitch 25 Sand Hill Rd VCs, fly home, and don’t get much followup from them. Sometimes they come back six months later to pitch again, but still don’t get much traction.

The trouble with the infamous driveby (not the LA kind) is that it leaves no positive lasting impression--rather like the Silicon Valley VCs deciding to spend a week in China to find an investment partner and expand their wealth creation model there. Clearly, neither of these work. To be global you must act local. If you want to invest in China then go live there, spend a few years building a trusted network, and then if you can partner up with people who really understand the ecosystem, maybe you can risk investing and be successful riding their coattails. I simply don’t believe the venture model is scalable in the way that private equity is. Once of the few good things about this downturn is, it will likely drive us back to old-school venture, where VCs actually spend time at their companies, and entrepreneurs chose their VCs not like a banker but through trusted relationships and expectation of real value add.

Clearly there is no monopoly on innovation, it happens everywhere; but everywhere is different. In Silicon Valley you have probably the world’s best developed ecosystem for commercializing innovation where every banker, lawyer, accountant, HR firm, patent attorney, and engineer think startup mode and form a formidable support network. There is an abandance of risk tolerant capital, and a well established exit market. Now Shanghai and Hong Kong provide excellent exit markets, but just because you understand Nasdaq, don’t assume the same of those markets; just because you understand commercialization, don’t assume it will work somewhere else where you don’t really understand the rules, the government, the taxes, the business environment ecosystem, nor have that crucial trusted network to leverage.

Partners can solve this, they can be great, or as Marriott once said, when you a take on a partner you take on trouble. In places like China and India you can't do it without partners, and believe me you can’t do that without trouble ;-)