How Three Mile Island Changed International VC –

At a time when many venture capitalists are doing damage control on Internet bubble portfolio investments, Walden International is busy at work expanding its investment strategy for Asia, especially in China. The firm’s president and founder, Lip-Bu Tan, now spends most of his overseas’ time in Mainland China, where helps oversee a growing portfolio of a dozen or more investments.

But China is only one of Walden’s targets. Overall, Tan oversees $1.8 billion of investments in companies scattered across three continents.

Super Siblings

Born in Malaysia, Tan, 44, was raised in Singapore in a family with five super-achieving siblings. Tan’s brother is a leading heart specialist (and a former Rhodes scholar) in the United Kingdom. One sister is a retired Harvard professor, a second sister is a marine biologist, and the third (a graduate in linguistic studies) is a consultant. Tan completed a bachelor’s degree in physics while still a teenager at Singapore’s Nanyang University. He then left Singapore to study at MIT.

The child prodigy was on his way to an MIT Ph.D. in nuclear engineering at 19 when the Three Mile Island nuclear disaster changed his career path. He moved to San Francisco, where he co-founded a software firm, Echo Energy, that developed simulation software for the nuclear power industry.

The founders of Echo agreed that one of them needed more training in business. Tan, the youngest, was drafted to earn an MBA at night, which he willingly did. When the company was sold to a competitor, Tan briefly went to work at a San Francisco investment bank. A friend introduced him to several Bay Area venture capitalists, knowing that there was a shortage of business-savvy technologists in the venture field at the time (1984). That was how Tan met Art Berliner and joined the Walden Group. Berliner and George Sarlo had founded Walden a decade earlier as an SBIC-backed venture fund.

There was no free lunch for Tan at Walden: He had to raise his own fund (U.S.-focused Walden International I), scraping together $3.3 million from friends, family and business acquaintances. That was 1985. Over the following years Tan earned the respect of the firm’s founders, eventually becoming an equal partner.

By 1987, when Tan brought Berliner and Sarlo the idea of investing in Asia, they readily agreed. But, as with his first fund, Tan had to raise the money to make the move, which he did, securing $20 million from Vertex, the Young family of Hong Kong, the Ng family of Malaysia and others.

Institutional Thinking

Up to that point Walden’s backing had come from individuals, but Tan suggested to his colleagues that the firm begin accepting investments from institutions. When they agreed, Tan started to build a long list of institutional LPs for the firm, beginning with the governments of Taiwan, Hong Kong and Singapore. As Walden’s reputation grew along with Tan’s increasing role, he added more institutional LPs: funds of funds, corporate pensions, investment banks and strategic corporate investors.

It was a natural expansion for Walden, which already had hundreds of investments, placed in different sectors. However, when viewed from the outside, the firm was a bewildering array of a dozen interlocking companies, including Walden Nikko Mauritius, WaldenVC, Walden International, Walden Israel, Walden Capital Management and Walden International Investments Group. Internally the organization was simpler, but the complexity of managing the firm’s many investments was nevertheless significant.

Tough Sell

By 2001 when Sarlo decided to retire, Berliner asked Tan if he would be managing partner of the entire firm. Surprisingly, Tan turned his old friend down. He felt the firm was too diversified and too complicated for any one person to run effectively. Over several months, a dialogue ensued in which Tan proposed a substantial reorganization of the firm, and the separation of two subsidiaries, Walden Israel and WaldenVC from the Walden Group. It was agreed, and Walden International became the single largest entity, while retaining ties to and co-investments with Walden Israel ($200 million under management) and WaldenVC ($350 million under management). Each is legally independent of Walden International and has its own executive management. Tan stresses that both funds remain close to Walden International in strategy and frequently overlap their investments.

With that reorganization complete by the fall of 2001 Tan went to work reducing the overall number of firms that Walden oversees from eight to one (Walden International) and from more than 100 to 28 total funds managed by Walden International. He also added two more groups of limited partners, investment advisors such as Grove Street Partners and international insurance companies. Today Walden International is investing its fifth fund, PacVen Walden V, through offices in eight countries, in the telecom, software, and semiconductor sectors. The fund invests in three sets of companies-Asian companies that want to expand into the United States, American companies that want to expand into Asia and other companies that want to cross geographies.

Tan says that while Walden International took a heap of bad publicity for reducing the $1.4 billion it raised for its PacVen Walden V fund to $750 million, today he feels good about the decision. He feels equally upbeat about having been one of the first to re-align Walden’s funds with the realities of the current market.

Mr. Meeting

As Tan describes the philosophy he has implemented at Walden, he becomes animated, demonstrating some of the energy that allows him to keep a taxing daily schedule that runs from 8 a.m. to 8 p.m., averaging six to nine meetings per day. By way of example, Tan cites Creative Technology (Nasdaq NM: CREAF). It was founded in Singapore in 1981 as a builder of clone computers. Tan takes credit for re-directing Creative’s founder, Wong Hoo Sim, and his firm into building sound cards, where margins were higher and where Creative became a household name. That advice led his portfolio company to become the first Singapore-founded company to list on the Nasdaq. Although it’s trading near its 52-week low of $6.05, Creative has returned hundreds of millions of dollars to its original investors.

Tan says that he is more proud of the behind-the-scenes aspects of flexibility he demonstrated in helping to grow Creative, a lesser-known aspect of Walden International’s investment style. To allow Creative to go public in 1992, he had to accept significant dilution of Walden International’s investment. He sacrificed the size of his 25% investment in Creative for the greater good of his portfolio firm, promising to give back 7% of Walden’s shares if Sim met a three-year goal for revenue and profitability. It was a sacrifice well made, allowing Creative to go public earlier than planned, beating both Tan’s and Sim’s expectations and becoming a company that earned nearly $1 billion in 2002 despite a technology recession.

Another Asian portfolio company, Sina Corp. (Nasdaq: SINA), is the result of Tan’s close mentoring and investment style. He brought together the firm’s two founders, one from Taiwan and the other from the Republic of China, and found them the money to build China’s largest Internet portal. It went public in 2001, but like other dot-coms, it collapsed from a high of $20 per share to a low of $1.50. Since then, while navigating a path that has allowed the company to avoid any conflicts with government policy in China, Tan and the founders redirected the portal toward delivery of games and messaging, boosting profits while maintaining its position as the most popular portal for mainland China. Today Sina is trading for about $7 per share.

Asia Bound

Centillium Communications (Nasdaq: CTLM), a firm Tan helped take public, is a fabless semiconductor design firm in Fremont, Calif. It specializes in designing chip sets for high-speed cable modems and broadband applications. The firm was a telecom high-flyer and with the crash of the telecom market, a potential telecom disaster. Instead of watching idly while orders from customers such as Lucent and Nortel dwindled, Tan networked the company with his connections in Japan, China and Taiwan. Today, Centillium’s annual revenue exceeds $100 million, largely driven from Asia. Its stock was trading at $3.30 in early March, well below its 52-week high.

Tan helped link Leadis Technology, another fabless semiconductor company, with a research team in Korea and then found a home for the company’s chipsets, which support the color displays of hand-held phones at Samsung. It is the kind of cross-cultural, cross nationality, cross-market deal that Tan clearly loves.

Political Challenges

Given all of this, you might expect that Walden would be a powerful player in the emerging markets of Asia, Thailand, Vietnam and Indonesia. “We tried Vietnam in 1995,” says Tan, but Walden closed that office in 1997. “We tried Thailand, but corruption, government regulation and other issues make it a tough market, so we do not invest there. We had an office in Indonesia, but there were political and corruption issues there as well, so we moved those people to Singapore.”

These are the first discouraging findings Tan reports to Venture Capital Journal, harsh realities hitting you like a blast of cold air.

Then Tan’s natural optimism returns. “China and India are our real focus now for Asia,” he says, beaming. “We have been in China since 1994. It’s very encouraging. We’ve already seen a 100% IRR since our investments began there. The market is on the rise, 5% to 6% of GDP growth per year, as we measure it.” Most important of all, Tan cites the fact that there are more Chinese graduate students in American schools of engineering than from any other nationality. Those engineers, he predicts, will return home and start businesses that will propel China’s economic expansion.

Walden’s focus in China is on semiconductors, software and telecom, three segments that Tan says present the biggest opportunities for venture capital.

As for India, Tan is one of the crowds of people that point to the Indian Institute of Technology (IIT) and the large number of talented graduates from those schools. Tan says Walden has two primary investment thrusts within India: outsourcing of high-end software and software development for chipsets (Centillium, for example, has a large R&D team in India).

Looking forward, Walden is emphasizing its work in Mainland China. Tan’s experience throughout the region, has allowed him to position Walden for big wins if China’s moves toward free financial markets continue.