The ABC of venture capital

Investment banker Ilyas Khan's company harbours a bustling start-up incubator in Hong Kong and has numerous interests, including a stake in Auckland developer WebMedia. Khan talks strategy, technology and what he thinks of opportunities in New Zealand.

Ilyas Khan (37) is a British-born, Hong Kong-resident investment banker who decided two years ago - in the midst of the Asian Crisis - to found a venture capital firm to nurture and pursue opportunities in the region.

He left his day job in late 1998 and made a series of strategic investments. Among them was a 10% stake, valued at about $1.8 million, in the Auckland developer WebMedia.

WebMedia has since become a cog in Khan's strategy - working on ventures such as the Asian pop music portal Gogo.com and its own local ventures.

Russell Brown talked to Khan in advance of his keynote speech at IDGNet's party and networking gathering, The Grok, on Friday August 11 at the Wintergarden. Tickets for the event are $40 and can be purchased online at http://www.thegrok.co.nz.

What were the conditions in Hong Kong at the time you decided to leave your job and start a VC firm?

There was a pretty severe slump economically - it was pretty rough. So in macro terms Hong Kong was still feeling in the brunt and it hadn't started to ease out of that.

But I've been involved in the Internet for a while - I was one of the first people on CompuServe in Hong Kong, when it was just a bulletin board with 2400 access speeds.

I've also been a big fan of [well-known Apple alumnus and industry commentator] Guy Kawasaki for a while. I've read all his books.

The real trigger for me was when he started something called garage.com in California. I saw what he was doing there and I thought, well, if they can do that in the US, then the need for something like that in Asia is even more acute.

I'm interested that you could see through the economic rough patch in Hong Kong - I went there early this year and I was amazed at the vibrancy. It feels now like there's a lot going on.

If you ask me why we started it, I really came up with the idea because first of all there's a reality, which still hasn't changed, that in Asia the allocation of risk capital is a very corrupting process.

Both corrupt and corrupting, in the sense that whoever is the beneficiary of the investment has to change their mindset. The investor holds all the aces and who you know is more important than what you know.

I just felt that that was bullshit, and that the whole point of the Internet is that it allows you the freedom to break away from those types of attitudes. Garage.com is about that as well.

You've got good access in California to venture capital and angel funding, but even there there was a need for something like garage, because the VCs themselves have become very elitist. That disparity in Asia's even greater.

So regardless of the environment, I felt that this was important. The fact is that I passionately believe some of the best technology businesses in the world have been created by Asians; Yahoo being for me the most obvious.

They take root in the US because that's where they have access to the legal system, the infrastructure, the capital, the universities. The indigenous talent goes across the Pacific to Stanford and Berkley or wherever.

There's also a whole ton of Asian businesses. Hotmail is an Indian business. Sycamore Systems, one of the great optical network businesses, is too. And I felt that with all that talent, if we could find one Jerry Yang in the next 10 years …

So these were the two things: being open, honest and transparent. And funding Asian talent in Asia.

I recently saw Alex Lightman from Charmed.com speak and I thought one of the most interesting things he said was that the US computer industry is going to have to get used to single-digit growth because all the growth is going to Asia - software to India and hardware to China. Do you think that's the case?

Conversations like this tend to move to the extremes. So, yes, but it's not that simple as that. Where does Asia stop and where does the US start? Look at Sony - is it an Asian business or a US business?

Or Yahoo - it generates revenue and it's a true example of what can be done in the Internet space. How much of Yahoo's growth going forward will be in the US and how much will be outside? A great deal of growth will come from Asia, but that hides a lot of detail.

When I interviewed Glenn Harding, he said that when they came into contact with TechPacific, they were so relieved to find someone who didn't want to control the business, didn't want 51% and who was prepared to let them be what they were. In New Zealand at least, there seem to be an awful lot of institutional investors posing as venture capitalists. Is that the case elsewhere?

It is the case elsewhere. There's a shortage of true VC outside of the Valley. Somebody who is prepared to take financial risk in lockstep with the entrepreneur - that's my definition of venture capital.

I've been coming to New Zealand now since 1994, so I know this place a little bit. And you're either overwhelmed by the Australian market or what little venture capital is here isn't really venture capital.

When Glenn first met us it was almost exactly a year ago. And the great thing about our relationship with WebMedia is that without talking about it, we wanted what they wanted. So we don't to tell them what to build where or that they should have weekly meetings. That's not what we're about either. We felt that they were doing something unique - which people are now beginning to realise.

A year ago, though, you might easily have looked at them and thought, just a Web design company from New Zealand …

Definitely not. This a big thing. I'm on the board of WebMedia, so I'm biased, but I think these guys have two or three things which I haven't found in many other places. I think there's a deep-rooted commitment to creativity. These guys are lateral thinkers.

Having recognised that, I thought that Asia was heading in that direction - not yet, we're still two years away from having real broadband access.

In the local market, WebMedia have their detractors - they're too fancy, too broadband, too tied to Flash.

Flash is like a car with an engine. What do you want to do - push your car? But it's more than that. Sure, they're very broadband-oriented.

I have a San Francisco office, and my guys there have at home what you guys would call broadband access. To them it's just no big deal. It's not just a New Zealand problem, but in my office we don't do nearly as much work as these guys here at WebMedia - but we have eight or nine times the access speeds. That'll change.

Speaking of offices, can you tell me a bit about the incubator you run in Hong Kong?

We have 21,000 square feet there. We have different types of investment programmes. We invest in concepts and we invest in established businesses. If all you have is a concept then what you don't want to do is try and mess around with reinventing the wheel in terms of a desk and basic business technology. So what we do in our incubator is provide all those facilities.

Let's say you came to us with an idea and we decided to back you. We'd give you a space in our incubator, enough for you and the initial members of your team. You'd have a habitable and hopefully a creative environment, computers, Internet access already set up.

Beyond that, we'll establish your company for you. Just getting a company set up can be a mind-boggling exercise, especially in Hong Kong.

Then beyond that we have partnerships with Oracle, Sun and Dell, so we can plug in certain services for them, at good discounts.

Is that a portable model? Because this is, frankly, the kind of thing we agonise about endlessly here.

We think the approach is portable. There's got to be a strength of conviction. We've recently gone public, so we now have the capital to be able to do what we want to do.

If I had one message for the New Zealand government, it would be this: a place like WebMedia, if they were anywhere else in Asia, they'd have one basic element of support - which is that software that is exported, which is pure profit to a country, should attract a tax break to encourage people to invest in it. You can have all the tax breaks you want on lamb and on forestry, all the things that are traditionally important, that's fine. But you've got to look at the next five years.

The people who are at cutting edge of the changes between now and 2005 are the service providers, people like these guys. If you're not going to nurture this, which is one area where New Zealand does have something to offer then where the hell are you going to nurture?

Our policy setting for the last decade has been not to give tax breaks on much at all - and certainly not lamb or forestry. The attitude is that you don't offer tax breaks, you don't distort economic choices, you keep it all very clean and simple.

Doesn't work. Does not work.

Have you looked at anyone else in New Zealand, besides WebMedia?

Yeah, we've looked at a couple of businesses. One in Gisborne and another one here in Auckland but we didn't manage to make an investment. But I think what we want to do now is focus on WebMedia and let them help us find opportunities.

I met the people at Advantage and they clearly have a vision. They're much more financially-oriented, whereas I think WebMedia are a generation away from that. Advantage also tend to be very corporate. I don't know whether that works in a market like the Web. Their attitude was … interesting.

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