It looks like 2005 is the year U.S. venture capital shakes off its tarnished reputation and gets back to business as usual. There's a growing pool of venture dollars just waiting to be put to work. Investments are up. Valuations are up. What more could you ask for?
How about a million-dollar investor that can also bring you entry into huge new markets, cutting-edge technology and teams of development engineers? That's just what entrepreneurs are getting when they look beyond--way beyond--the usual lineup of U.S. venture funds.
Adi Sideman, CEO of Oddcast Inc. in New York City, looked all the way to Japan for both money and markets. Oddcast makes web-based avatars--lifelike animated characters that act as virtual hosts on companies' websites. The company has over 3,000 customers throughout the world but needed a shot in the arm to grow to the next level. "We were looking for strategic investors, not just institutional investors," says Sideman, 35.
It didn't take long for Oddcast to find Itochu, one of the largest conglomerates in Japan. "Between 2001 and 2004, they watched our progress and eventually invested in us," Sideman says. "Today, they are one of our best partners." Since Oddcast was built with money from angel investors, Itochu is the company's only institutional investor.
And what an investor: Besides deep pockets, Itochu has operations in everything from textiles to satellites, including deep R&D capabilities and broad distribution in the vast Japanese mobile-phone market. The Itochu partnership quickly had Oddcast's avatars packing up their bags and moving to thousands of websites around the world. Oddcast's avatars will soon appear on mobile-phone screens and provide mobile-phone users with Tokyo's weather forecast or updates on the Hanshin Tigers' baseball scores.
"Multiple products have come out of this platform thanks to the Itochu investments," says Sideman. And he's quick to point out that this kind of business growth could not have come from U.S.-based venture funds, which invest primarily for financial returns.
Japanese investors are less concerned about financial returns on their U.S. investments than long-term strategic relationships, says Roger Brook of Japan Venture Partners in Raleigh, North Carolina. Japan Venture Partners helps U.S. technology companies find strategic allies and investors in Japan and other parts of Asia. "Financial criteria take a back seat to the strategic considerations--what kind of revenues can they generate by selling the company's product?"
"Most of the [Japanese] capital available for U.S. companies comes from strategic corporate investors," says Brook. "Usually, some strategic relationship has to happen first, before an investment is made." In the case of Oddcast and Itochu, there was a clear strategic benefit to both companies as they shared ideas and development tasks before the investment. And not surprisingly, along with the investment, Itochu negotiated for the rights to distribute the avatar technology in Japan.
If Asia is on your radar, do your homework, advises Brook. You'll probably need to find a company with strong distribution capabilities in your market. "In most cases, a company like Itochu may invest in a U.S. company," says Brook, "but their real interest is in selling the product in Asia."
Awake at 3 a.m.
Michael Simon had his pick of VCs last year when he set out to raise $10 million for 3am Labs Inc., his 2-year-old software company based in Boston. After all, Simon already had two $100 million successes under his belt, including Uproar, a dotcom he sold to Vivendi Universal in 2001. So why did he choose to go halfway around the world to Budapest, Hungary, to raise money?
In a word: "Strategy," he says. It really wasn't about the money but about the connections and know-how. "We tried to put together an international consortium from the get-go," says Simon, 40. He ended up parceling out his equity to three venture funds--one each in Boston; Budapest; and Palo Alto, California.
The Budapest financiers--3TS Ventures--have connections around Europe and strong experience in wireless networks, a particular focus for 3am Labs' instant networking service software. "The managing partner [at 3TS] has very specific experience that is very useful for us," says Simon. "In Europe, you're simply more likely to find people with strong connections to Nokia and Ericsson, for example, than you may find in the U.S." Those connections can be key to developing software that works seamlessly with hundreds of millions of mobile devices in markets around the world.
Of course, it doesn't hurt that 3am Labs has an office in Budapest, where Simon spends about half his time. Besides a large team of software developers, the office also supports the European sales staff, so the marriage to a European VC was an important marketing move, too: 3TS Ventures is a key link to customers. Says Simon, "A lot of the important customers in Europe are quasi-state-owned companies--former monopolies like Deutsche Telecom. They've really opened doors for us there."
Have Money, Will Travel
You don't need an office in Budapest to attract European investors, says attorney Heather M. Stone, partner and head of the fund formation practice group at Edwards & Angell in Boston. Stone has worked on both sides of the table, helping U.S. entrepreneurs negotiate terms with foreign investors and vice versa.
"Many foreign [investment] firms focus less on geographic criteria than on what their fund is going to invest in," says Stone. Many Canadian, European and Israeli funds, in particular, plan on making some or most of their investments in the U.S. "Based on the technology they are interested in, that's just where those companies are," she says. "They sort of back into it."
That should be welcome news for entrepreneurs in cities that lack a strong VC presence. U.S. venture firms tend to be concentrated in the largest cities like San Francisco and New York City, leaving many second-tier cities hungry for capital. Looking overseas may be the right move for entrepreneurs in those cities, especially entrepreneurs with products or technologies that can make the leap to foreign markets.
Many foreign funds don't even have an office in the U.S., says Stone. "They just get on a plane," she says. "Most deals are done on e-mail now anyway, so there's some initial travel, but it's not a huge time commitment."
Whether you're looking for foreign markets and partnerships or just a new pool of investors, don't limit your search to the usual suspects in the U.S. If you expand your search internationally, you may find that international investors are looking for you, too.
For a list of the top U.S. VCs for entrepreneurs, click here.
David Worrell is author of the e-book Finding