Foreigners Making More Venture Investments in L.A.

Local startups are finding that overseas investors can be a much more agreeable source of funding than U.S.-based venture capital firms or angel investors.

With most other countries still trailing the U.S. in terms of economic growth and technological development, foreign venture funds are eager to diversify their portfolios by investing in U.S. high-tech startups. Asian-American-owned companies in Los Angeles are particularly well positioned to benefit from these offshore capital sources because their founders often have strong ties with their countries of origin.

"It is quite common for Asian-American companies to have better synergies with Asian investors than with mainstream U.S. investors," said Pierre Wuu, chief operating officer with Click2Asia Inc., an L.A.-based Internet company. "Obviously, we speak the same language, and many Asians in America have lots of ties with Asia, which makes it easier for them to access capital there than in the U.S."

Click2Asia received funding from AsiaTech Ventures, a venture capital firm with a $120 million portfolio and offices in Hong Kong, Taiwan, Singapore and the Silicon Valley.

Big jump in foreign capital

There are no statistics on the number or value of L.A. County investments made by overseas entities. However, the U.S. Department of Commerce announced last month that foreign investors poured $283 billion into the U.S. last year, a 31 percent increase from the year before.

This number includes large acquisitions, which have been on the rise in recent years, but anecdotal evidence suggests that the number of smaller foreign venture investments in L.A. is also increasing at a rapid pace.

"In the past we would see these investments from time to time, but now, we're seeing them much more frequently," said Tim Bruinsma, a partner at the law firm of Fulbright & Jaworski LLP, who has seen a number of his local clients secure funding from overseas sources. "There's a lot of money around, for instance in Asian and Arab countries, that is looking for investment opportunities in high-tech startups in the U.S., because the rest of the world is still half a step behind us. Add to that the huge scale of the L.A. market, and you'll see that a lot of that money finds its way here. After all, there are only so many companies in Silicon Valley."

According to Bruinsma, foreign investments in local companies are typically in the $1 million-to-$5 million range, and often the overseas investor will look for ownership of a piece of proprietary technology as part of the deal. The investor can use this technology for other, foreign-based companies in his portfolio.

That was the structure of a recent deal struck by B2B Highway Inc., a logistics management Internet company based in Venice, with Final Line Inc. of England. In exchange for a $250,0OO equity investment, B2B Highway will license its proprietary technology to Final Line.

"They are setting up their own Web site in the U.K.," said Michael Shirdel, B2B Highway's president and chief executive. "They are not a logistics company, though, but an insurance company, and they will use our backbone technology for their site. If the occasion should arise, we could license this technology to other Web companies around the world as well."

The quest for technology, together with a desire to get a toehold in the strong U.S. market, are the driving forces behind many of the funding deals by foreign investors.

"There are over 100 venture funds in Korea that want to invest here," said Chung Youk, president of Hanmi Bank, an L.A.-based Korean-American bank. "But it's not just the venture funds. There are also many large business groups that are attracted to high-tech companies in the U.S., because they want to get technological information in exchange for investments. There's, for example, a lot of investment by Korean companies in biotech and telecommunications startups in California."

The Asian connection

Korean-American companies are at a clear advantage when it comes to securing these investments, said Youk, because it is easier for Korean investors to understand and relate to their Korean-American counterparts than it is to people of other nationalities.

An additional advantage for Korean and other Asian-American entrepreneurs who secure venture or other funding overseas is that the investors will more often than not be silent partners, rather than taking a more active role in running the company as an American venture capital firm would.

"It is going to be much more difficult to exercise control over a company if you're overseas," said Bruinsma. "To that extent, foreign investors take more of a risk. But there are also advantages for them in terms of tax loopholes, and they can get a lot of leverage out of borrowing in one currency and lending in another, which justifies the bigger risks."

In addition to investing directly in L.A. based startups, foreign investors have been actively investing in local venture capital funds. For example, DynaFund Ventures of Torrance is predominantly funded by Taiwanese capital, said Li-Pei Wu, chairman and chief executive of General Bancorp, the parent company of General Bank. (DynaFund officials were unavailable for comment last week.)

"Taiwanese investors have been stepping up their interest in the U.S. over the last year," Wu said.

However, Wu believes that U.S.-based funds, even if they get most of their capital from Asia, are not as likely to prefer Asian-American startups. Indeed, DynaFund's portfolio includes such familiar names as eToys Inc. and Cooking.com, which are not Asian-American-owned businesses.