Asia Online Eager to Tap New Markets –

HONG KONG – When Jim McNiel, a vice president at Pequot Capital Management, toured Asia a few months ago with the management team of Internet communications company Asia Online Ltd., he couldn’t believe what he saw.

“I felt like I was going back in time,” he says, referring to the burgeoning Asian Internet market. With the impending deregulation of the region’s local telecommunications industry, Asia bears an uncanny resemblance to the United States market of three or four years ago, as scores of Internet service providers (ISPs) and hundreds of other e-businesses lined up to take advantage of the situation.

Pequot Capital, which sent McNiel to the Far East to conduct due diligence on Asia Online, certainly is not the only venture firm eyeing Asia as a huge opportunity for Internet investing. With the region slowly creeping out of its two-and-a-half year economic slump and China emerging as a potentially huge market as it shifts to a market economy (VCJ, July, page 48), American investors are beginning to clamor for an understanding of – and a presence in – the Asian Internet market.

Sitting on the crest of this trend is Asia Online, which, since its founding in 1995, has attracted a slew of big-name backers. In early August, Pequot joined a syndicate including SOFTBANK Technology Ventures, a subsidiary of Tokyo-based SOFTBANK Corp., J.P. Morgan, GE Equity, Nexus Capital Partners and Concentric Network, which together poured $35 million in private equity into Asia Online to help the company embark on an aggressive expansion plan.

SOFTBANK first invested in Asia Online in late 1996, purchasing the assets of ISP Asia Online Hong Kong and Asia Online Philippines, better known as a Web site developer. The Japanese conglomerate in mid-1998 also helped recruit Asia Online Chief Executive Kevin Randolph, who has been a key figure in outlining the company’s growth strategy.

Randolph, who was working as a start-up, take-over and turnaround consultant in the United States when SOFTBANK approached him, quickly became enamored of Asia Online’s potential and accepted SOFTBANK’s offer to take Asia Online’s vacant CEO post.

Surveying a market that looked strikingly similar to ground zero for the Internet boom in the United States, Randolph saw an opportunity to capitalize on the inevitable expansion of the market by widening Asia Online’s business to a complete, full-service communications company for corporate and consumer users. Asia Online’s services include Internet connection, Web hosting and design, advertising and e-commerce, and other services in development.

The upcoming deregulation of the local telecommunications market throughout Asia, which took place in the U.S. earlier this decade, will provide a host of opportunities for ISPs to gain an early foothold in the Far East. Asia Online will use much of its recent round of financing to acquire ISPs in markets that are closest to deregulation, or already deregulated, such as Hong Kong, Australia and South Korea.

“Deregulation is an opportunity,” McNiel says. Despite the fact that the Greenwich, Conn.-based firm never had made an investment overseas, McNiel’s firm believed now was the ideal time to start. “If we get in there early and establish relationships with the incumbent players … then we’re getting an edge on the market.”

Internet access, however, is not the company’s only ambition. Asia Online also will continue to develop its presence as a Web developer and a portal site that can be read in several different languages.

“What we want to do is show customers how the technology can be used to better reach their customers,” Randolph says. Overseas Chinese and others interested in the region, for instance, can read the site in both Cantonese and Mandarin, something that differentiates Asia Online from its competitors, Randolph says.

As for possible rivals, Randolph is confident that Asia Online’s diverse lineup of services will turn portal companies such as China.com and Sina.com – other players in similar spaces that earlier this year received large rounds of private equity financing – into potential customers, rather than competitors. Randolph hopes that portals like these – and the portfolio companies of Asia Online’s investors, like SOFTBANK’s Yahoo! Inc. – will work with Asia Online to leverage its technology, such as its ability to provide several different languages.

Investors understandably are excited about tapping into the heavily-populated region and establishing an early presence there as the Internet mirrors its development in the U.S. and creeps into everyday life across Asia.

“We did not want to miss an opportunity [to invest] in what is going to be the largest Internet market in the world,” McNiel says. “There’s only a finite number of companies there that can be [capitalized] and acquired.”

Companies such as Asia Online, however, also stand to benefit from U.S.-based VC firms that have experience backing similar businesses and can guide a young e-business through the emerging industry overseas. J.P. Morgan, which led the company’s recent round of financing, had been scouting Asia for companies that sought to take advantage of telecom deregulation in the region and could learn from the experiences of the bank’s U.S. portfolio companies. Asia Online is J.P. Morgan’s first investment in an Asian ISP.

“Asia is behind [the U.S in terms of the development of the Internet], but that gap narrows every six months or so,” says Karl Fooks, a vice president in J.P. Morgan’s Asian private equity division. “It’s good to be able to see ahead a bit.”

“We chose these investors because they brought more than just money,” Randolph explains, adding that companies such as SOFTBANK, GE Equity and J.P. Morgan provide access to portfolios filled with companies that can benefit from Asia Online’s service.

And Asia Online’s aggressive strategy likely will require another financing event sometime soon, so the company is always on the lookout for new equity partners, he adds.

“The opportunity out here is huge,” Randolph says. “If we continue to evolve at the speed we [have been], we’ll be a monster.”