H&Q Asia Pacific Plans To Expand Into Thailand –

BANGKOK-H&Q Asia Pacific plans to begin raising a specific fund for Thailand, in the range of $100 million to $120 million dollars. At that size, the new vehicle will be one of the largest venture funds in Asia-an emerging market for VC activity-and mark a return of significant investment in Thailand by H&QAP since the firm began work here in the early 1990s under Dan Carroll, now managing director of Newbridge Capital in San Francisco.

As one of Asia’s oldest and most experienced private equity investors, H&QAP is considered a bellwether for other U.S. private equity firms throughout the region. The firm’s expansion in Thailand-the second fastest growing economy in Asia after China-may signal to other VCs that there are lucrative and less pricey opportunities for private equity investing in Asia outside of China.

H&QAP founder Ta-Lin Hsu says that while there is constant pressure on VCs to move to China to take advantage of cheaper labor, Thailand has more respect for intellectual property laws.

“[Thai competitors] don’t steal your people so much,” he says. “And investing in Thailand insures our penetration of another growing market [in Asia apart from China]. You know, VCs prefer not to have all our financial eggs in one basket.”

Virapan Pulges, a managing director of H&QAP, says fund-raising will likely begin in 2005.

The fund will provide $10 million to $20 million apiece for technology and electronics-related startups in the country, like recent investments from Asia Pacific Growth Funds II and III, Pulges says.

Because the strategy for the new fund is likely to follow that of buyouts and management control taken in recent investments here, “participation of LPs will probably come from development banks rather than H&QAP’s traditional institutional LP base,” Pulges says.

Before H&QAP begins fund-raising, the firm plans to divest its two remaining portfolio companies in Thailand by year’s end. The expected plans for liquidity include an IPO of Fabrinet, an electronics manufacturing system company that employs more than 3,000 people in Thailand.

“We have a lot of options we’re considering,” says Pulges, who adds that divestment options include a possible merger or acquisition. H&QAP invested $18 million in Fabrinet in 1998.

At H&QAP’s office in Bangkok, Thailand, Pulges said that his firm’s investment in Fabrinet was part of it strategy in which it shifted from smaller, early-stage technology investing toward a strategy more like that of a buyout firm, in which the company acquires controlling interests in portfolio companies.

Hsu says that the expected Fabrinet IPO will represent a significant exit for H&QAP, which has a 63% ownership stake in Fabrinet.

The second firm H&QAP plans to exit, SVI, is another Thailand-based electronics manufacturing system company. It is already listed on the Stock Exchange of Thailand (SET: SVI) and is a likely candidate for a merger or acquisition. H&QAP holds a 75% ownership in SVI, based on an investment of $17 million.

H&QAP, a Redwood Shore

– Jerry Borrell

Napster Deal Dogs Hummer Winblad

Hummer Winblad Venture Partners has moved a step closer to a courtroom, as U.S. District Judge Marilyn Patel in San Francisco has refused to dismiss copyright infringement claims brought by Universal Music Group (UMG).

Patel made the ruling in mid-July. She did not rule on the case’s merits. Instead she ruled that UMG has the right to proceed through at least the discovery phase. The case relates to Hummer Winblad’s May 2000 investment of $13.5 million in Napster Inc., a Mountain View, Calif.-based company that already was in legal trouble for its online file sharing software.

The decision to allow the copyright infringement lawsuit against Napster’s investors to go forward could portend possible trouble for investors nationwide, warns John Delaney, co-chair of the law firm Morrison & Foerster’s technology transactions group.

“If you invest in a startup company that engages in infringing activities, and you exercise significant control over such company and its activities, you may find yourself in hot water along with the company,” Delaney wrote in an email responding to a reporter’s question.

However, Patel essentially avoided the question of Hummer Winblad’s culpability as an investor. Instead, she focused on the firm’s control over the company. Thus, her ruling may be good news for VCs, as many have expressed concern that they could be held liable just for making a minority investment in a company that somehow breaks the law-whether that is copyright law or some type of intellectual property infringement. In fact, non-control investors in Napster were not sued. Angel Investors LP of Danville, Calif., added $1.5 million to Hummer Winblad’s $13.5 million investment, but was not named as a defendant in the UMG case.

Patel’s ruling only set the stage for further legal action by UMG.

“It’s very important not to blow this case beyond what it currently is, which is at a preliminary stage,” says Michael Cohen, an antitrust, trade competition lawyer with Heller Ehrman White & McAuliffe. Nonetheless, a verdict against Hummer Winblad could spell trouble for certain buyout firms, particularly those that exercise a lot of management control over their portfolio companies.

Hummer Winblad was sued by UMG for copyright infingement on April 21, 2003. UMG also joined a larger lawsuit against Bertelsmann, which included the same charges.

The suit stunned Hummer Winblad and the venture industry. Some VCs accused UMG of trying to intimidate other firms interested in making content-related investments.

Even the National Venture Capital Association chimed in, arguing in a letter to members of the U.S. Senate Banking and Small Business Committee that the UMG lawsuit-and any copycat lawsuits-could prompt VCs to shy away from high-risk technology investments.

Following Patel’s ruling against the motion to dismiss, UMG now will produce a discovery schedule, and the case will proceed from there. It is worth noting that Hummer Winblad may present a two-part defense, with the first part being that Napster itself was never actually found liable for copyright infringement. The preliminary injunction only found that Napster likely would have been liable in the RIAA suit, not that it actually was liable. If Hummer wins this argument, then the suit fails and, amazingly, Napster could resume its free file-sharing activities (although new owner Roxio would have to escape current contracts with record companies).

More likely, however, this case will come down to Hummer Winblad’s level of control over Napster, and how far downstream copyright infringement flows. Liability of contributory copyright infringement would mean that Hummer Winblad both knowingly contributed to infringement of another, and substantially participated in the act.

On its face, contributory infringement seems an easier case to prove, as everyone-including Hummer Winblad investors-had knowledge that copyrighted materials were being swapped via Napster. The case of vicarious infringement is tougher, as Napster file swapping did not take place on a central server, and Hummer Winblad never actually profited from any file swapping.

In fact, the only money Hummer Winblad made off Napster involved T-shirt and hat sales.

– Dan Primack

Nokia Calls on India

Nokia Venture Partners (NVP) has expanded its global presence by opening an office in New Delhi, India.

The firm, which specializes in funding early stage tech companies, says the new office highlights the importance of the growing Indian market. It announced the office opening in July, following its $10 million investment in Nevis Networks, a Pune, India-based startup that’s developing a new class of enterprise security.

NVP, which maintains headquarters in Menlo Park, Calif., is not new to the Asian region. The firm began to explore the idea of a satellite office in the Asia Pacific region in 2001 after it closed its second fund. Since then it has helped its portfolio companies pursue business opportunities in Japan, China, Korea and India.

“India is an untapped resource for quality venture deals, and is also an ideal outsourcing alternative for many of our portfolio companies to leverage its IT services and business process outsourcing sectors,” says Sujit Banerjee, who will head the new office in India.

NVP also has offices in Washington, D.C.; London; Helsinki; Hong Kong; New Delhi; and Tokyo.

– Alastair Goldfisher

Fund for BPOs Raises $250M

Venture capital LPs voiced further approval of the outsourcing of American jobs to India with their investment in ChrysCapital’s third fund. The New Delhi-based venture firm, which has an office in Palo Alto, Calif., closed ChrysCapital III with $250 million, according to a filing with the SEC.

The firm specializes in investing in India-based service companies responsible for the controversial practice of business process outsourcing (BPO).

Limited partners in the fund include the Harvard Management Private Equity Corp. and Trustees of the Leland Stanford Junior University, which is affiliated with the Stanford Management Co. The firm says that its LPs include institutional investors as well as “founders of many premier technology firms in the United States, CEOs of multinational firms, and partners of several top-tier global private equity firms.”

ChrysCapital raised its first fund in 1999 with $63.9 million and closed its second fund in 2001 with $126.7 million.

The firm usually invests between $10 million and $30 million in companies in the business services, financial services, health care, IT services, pharmaceutical and specialized BPO sectors.

Portfolio companies of the firm include Avigna Technologies, a Chennai, India-based multimedia content provider; PlanetCustomer.com, a Mumbai, India-based provider of product comparison services, and TransWorks, another Mumbai-based outsourced services company that was acquired by India’s AVB Group last year.

– Matthew Sheahan

Siemens To Double Its VC in Israel

Siemens Venture Capital plans to double the size of its Israeli investment portfolio over the next 12 months.

The strategic investment arm of the German electronics company aims to seed at least three new startups in the coming year, says Heike Wiegand, an investment associate that has been tapped to lead the firm’s Israeli efforts. Siemens VC will pursue strategic investments in early-stage and expansion-stage Israeli communications, IT, energy and automation and controls companies

Siemens VC has already invested about $125 million in seven Israeli startups and in four Israeli venture capital funds. Israeli companies and funds account for about one-fifth of the $620 million investment portfolio of Siemens VC, which also has offices in Boston, Silicon Valley and Munich.

The move to beef up its Israel portfolio is a sign of the times. Investment activity in Israel is on the rise and a handful of new foreign investors are setting up shop in the Mideast country.

During the second quarter, 91 Israeli startups raised $338 million of venture capital, compared to 111 companies that raised $323 million during the previous quarter, according to Israel Venture Capital Research Center, a Tel Aviv-based industry research group. More striking, however, is that the amount raised last quarter was 25% higher than the $271 million raised by 86 companies in the second quarter of 2003.

Communications companies hauled in more than one-third of the capital during the second quarter. They attracted $123 million from private equity investors. Life sciences companies took second place, raking in $40 million during the quarter.

About half of the invested capital is homegrown, coming from Israeli venture capitalists, while the remaining half comes from foreign sources. Foreign interest in the region, however, is growing and investors outside of Israel, such as Siemens VC, could take home a bigger share of deals from Israel as the year unfolds.

C.E. Unterberg Towbin, a New York-based investment bank that specializes in launching technology, health care and security companies, opened up an Israeli outpost in May. The bank has been working with Israeli startups since the 1980s, managing IPOs and follow-on offerings for a number of Israeli companies.

Just a few weeks earlier, the California-Israel Chamber of Commerce led a group of Silicon Valley venture capitalists on a weeklong tour of the country to generate new investment opportunities. And, in May, California Gov. Arnold Schwarzenegger told an audience of 500 entrepreneurs and venture capitalists gathered in Tel Aviv that his state would encourage new business relationships between the two.

– Carolina Braunschweig

Pitango Closes Fund Without Israel LPs

Israel’s Pitango Venture Capital closed its fourth fund with $300 million after less than a year of fund-raising.

The close marks the end of a two-year fund-raising drought in Israel. After a banner year in 2001, when Israeli firms raised $1.3 billion, fund-raising came to an abrupt halt in 2002, when firms gave back more than they raised.

Last year, Israeli venture capital firms raised only $118 million. Now, at least 12 Israeli funds are making up for lost time: They’re expected to raise $1.5 billion by the end of 2005, according to the Tel Aviv-based Israel Venture Capital Research Center.

Pitango’s fund was capitalized largely by investors in the firm’s earlier funds, although there were a handful of new limited partners. The California Public Employees’ Retirement System made a $20 million commitment, while another $20 million came from HarbourVest Partners.

Not a single Israeli investor got in on the fund.

Pitango’s latest fund will invest in early-stage Israeli companies in communications, information technology and health care industries-all traditional sectors for the Herzilya-based firm. The firm also plans to scout new opportunities in nanotechnology and in technologies surrounding homeland security issues.

Pitango Fund IV brings the firm’s capital under management to $1 billion. The firm has invested in 85 companies since its founding in 1993.

Outside of Israel, the firm maintains offices in San Mateo, Calif., New York and London.

– Carolina Braunschweig

American River Afloat on $100M

American River Ventures, which was founded three years ago to jump-start entrepreneurship in parts of Northern California that are untouched by Silicon Valley’s sprawl, closed its inaugural fund in July with $100 million.

Although the so-called NorCal region is home to both Hewlett-Packard Co. and Intel Corp.’s engineering and manufacturing facilities, as well as a biotech research hub at the University of California, capital often flows past it in favor of nearby Silicon Valley. In the first half of this year, 59 startups in American River’s target region have raised $563 million, compared to 295 startups that pulled in $2.8 billion in technology-rich Silicon Valley, according to the MoneyTree Survey conducted by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.

In American River’s target region last year, 111 companies raised just over $1 billion while 694 startups in Silicon Valley closed on $5.46 billion.

“There’s more rocks to turn over and more airplane miles to log to find opportunities [in this region], but in the end our IRRs will be just as good,” says John Kunhart, one of the firm’s two founding partners.

American River’s mission is to invest in startups outside Silicon Valley-and drive venture into the areas east and north of San Francisco and San Jose. Already, the firm has built a portfolio of seven startups. Four are semiconductor companies, thanks to the expertise of two chip experts who invest for American River, Harry Laswell and Roy Martinez, both former executives with Intel Capital.

American River will invest in early stage technology companies, putting up to $7 million to work in each portfolio company. It will focus on hardware, software and network infrastructure companies.

Ilkan Cokgor, a former senior vice president with Ridgewood Capital in New Jersey and a former researcher with Hewlett Packard, will lead American River’s investments in storage systems, environmental sensors and fiber optic networks. He’s the latest addition to the team, which also includes two longtime angel investors, Corley Phillips and Kunhart.

One-third of the fund has already been invested, as $17 million has been drawn down and another $17 million has been committed. The fund should be fully invested by the end of 2005. Kunhart expects that American River will be back raising a second fund by the end of 2005 or the beginning of 2006.

American River Ventures had initially closed the fund in 2001 with $60 million, but decided it would be easier to reopen its fund than raise a new one. American River Ventures is a Small Business Investment Corp.-backed fund. If the firm had chosen to raise a new fund rather than re-open an existing fund, the SBIC may have come away with control of a higher percentage of the fund’s total equity. About two-thirds of American River’s funding is provided by the SBIC.

The fund launched three years ago with a $10 million commitment from the California Public Employees Retirement System (CalPERS). CalPERS committed another $5 million to the fund last year, bringing its total investment to $15 million.

Other limited partners also include Hallador Venture Partners, an investment firm based in Incline Village, Nev., and the Bank of the Redwoods of Petaluma, Calif.

-Carolina Braunschweig & Matthew Sheahan

DFJ Expands Its Frontier

DFJ Frontier has set up shop at the Technology Development Center in West Sacramento, Calif., a city outside the state capital that is aiming to boost development by drawing tech companies.

DFJ Frontier-an affiliate of Draper Fisher Jurvetson-also operates offices in Sacramento and Santa Barbara, Calif. It focuses on early stage investments in technology companies on the central coast and in the Central Valley of California. The $25 million fund typically looks to place between $100,000 to $500,000 in startups, with additional funding in follow-on investments.

DFJ Frontier was bankrolled with $20 million from the California Public Employees’ Retirement System. The fund opened its office in Sacramento in late 2002 and last summer invested in Digital Path Networks, a wireless Internet provider in Chico, Calif.

– Alastair Goldfisher