Conference on Global Entrepreneurship: Economic Development for Asia and the U.S. – Session 3A: Global Entrepreneurship and Access to Capital

Betty B. Wu: Good afternoon. How many of you here are looking for money? Well, I see you have bright miles. You have come to the right place. In fact, I think this is one of the most exciting panels. On this panel we have four experts who will tell you the traditional and non­traditional ways of funding for your business. No matter of where you are in terms of your business, whether you are a start up, you are trying to find financing to expand further, we have the experts here.

Today we are going to start off with Mr. Savio Tung. How many of you here have a program in your hand already because I don’t want to take up time to read Mr. Savio Tung’s bio if you have it already. So why don’t we skip the bio part and we will go right to Mr. Savio Tung. Savio…

Savio Tung: I am going to stand up so that I can actually see the screen so I know what I am talking about. First of all, Betty said if you want to raise money, come to this room. That is why I am here, I am also trying to raise money. Sunday night I took a red-eye. I went all the way to Kuwait and then I came back Tuesday on my birthday, and then yesterday I was in Chicago. All of that was to look for money, so I hope I am in the right company. Hopefully we can learn a little bit from each other about what this is all about. I will explain a little about what I do and I welcome suggestions and your insight, and we can do something… Now, for big money. I think my colleague here, Paul, will be able to tell you, because he is representing the number one bank, number one global bank.

Paul Ho: Number two…

Savio Tung: There are different measurements. I am using a different benchmark.

Paul Ho: Well, that I agree.

Savio Tung: You agree right? Let me just tell you a little bit about myself and the organization that I work for. It is a group that I am pleased to be associated with. I am one of the founding partners. I have spent twenty-something years at InvestCorp, which with some of my partners we found in 1983. Prior to 1983 I spent about ten years at Chase Manhattan bank in their corporate banking and international banking department. Unlike many other young bankers I was sent to the Middle East. This was during the petro-dollar days. I think the crude was worth about 30 bucks a barrel at that time. Now we are talking about 51 and more. Those were exciting years. But InvestCorp was set up back then primarily as a leverage buyout equity firm. Today, 20 years later, we are now described as an alternative investment shop. We run four different types of investment activities. The buyout activities, that is both in the U.S. and in Europe. We also have a very large real estate investment group that is mostly in the US and what we call the [core-plus] more income producing real estate portfolio activities. And we also manage a four billion dollars fund of hedge funds. You all can spend days talking about hedge funds, but we do not have the time today. And then lastly, four years ago, I left my previous job as head of the buyout group in the U.S., and started a venture capital group, which was an interesting trip for me in the last four years. I can tell you a little bit more about that later on.

My background is primarily in investing, and in what some people consider the more riskier sector of venture capital and leverage buyout investments. That is an area I can talk about, so today I am not going to be able to talk to you about IPOs or other types of equity fundraising.

These are some of the companies that I have been involved. They are very exciting companies. Some of them are my wife’s favorite names. For me these are all wonderful, brand names, franchises. The common theme behind most of them, something I think you can relate to, is their global activities as well as their high growth characteristics. I am touching on two of the critical elements that we the investors look for when we are looking for opportunities.

Paul is going to talk about the left hand side, I think. He is a little concerned now. I will tee it up for you so you can just hit a homerun on this.

Paul Ho: What a comrade you are.

Savio Tung: Equity is what I am talking about. Our investment activities in the past twenty years are to look at the higher return part of the balance sheet. We fund companies that need the growth capital or they need to expand, and to also help the businessmen in many cases at the platform so they can do rollups and add-on acquisitions. I do not know if you guys want me to talk a little bit about leverage buyout, but I will talk a little bit about this.

A story that I always want to tell people is back in 1984 during a leverage buy out, it was the acquisition of Tiffany. Avon was selling Tiffany because it was non-core business for this conglomerate. We get excited about this story about Tiffany because at that time Tiffany’s international sales were only four million dollars, and this was 1984. We were excited with the international prospects and the potential. We were able to make the acquisition and we paid about $135 million dollars for the company. What we bought was the building, the inventory and the receivables, and the company that was doing $400 million to $500 million in revenue. So it was interesting. Looking back it was a bargain. We were able to finance part of that $135 million dollars with GE capital. I did not know Paul then, so… GE Capital provided the financing and then the equity piece that we subscribed to was about $40 million to $50 million dollars.

Two and a half years later, the international sales went from four million to $160 million. Today it is about $1.5 billion. Our judgment was correct in that case. My investment bet was on a couple of things. One, the management team was strong. They were corporate orphans. Their strategy totally clashed with Avon’s strategy. We subscribed to the international and the global potential of the company, and we liked the valuation. We were pretty lucky to have the nice valuation, and today Tiffany is a very successful public company. We are no longer involved, but we made very good money on this.

Now I want to make a few points with this case study, because some of you are either working for large conglomerates or you have your own business starting up. You got to think of what things will induce investors in to support you. In this case it was a corporate division that was suffocated under the corporate bureaucracy. What made us come in was that we believed the idea that once they became independent, the management is highly motivated, they are going to be sink or swim working hard to achieve their goals. So these were the points that they used to convince us to come into this deal.

Last week, on the opposite side, I had another very smart scientific person coming into my office. He gave me very good presentations about some sort of bar-coding technology, which is growing strongly. He convinced me that this was a very strong industry sector, but in an hour he did not say anything about himself and what he was going to do in this rising tide. What is he going to do specifically to prove to me that he was capable. It was a disaster meeting. I gave him many times to do this. I told him that he convinced me about the external, the macro trends. Convince me that you are the capable CEO who is going to run this. His answer was really an embarrassing one. He said, “ I thought you were going to do that for me.” This is a fifty-year-old, smart engineer, I think. But for him to come in prepared on the macro trend, but to come in under prepared on his own business plan, his own business agenda, no excuse. No excuse.

I look at stages of the company. At one point I was looking more at the right hand side, at the more mature businesses. If you look at Tiffany and Simmons and some of these companies they are more mature. In the last four years I got more interest into the venture side. When the bubble collapsed, I said to myself wait a minute, there are a lot of very interesting young companies, and later stage companies that survived the perfect storm, after the bubble collapsd. Today they are surviving but they are all in need of capital, and that is where we at InvestCorp venture capital have been focusing. In the last three years we have invested in about 20 different companies, mostly in IT, enterprise and software companies. Luckily we have had some great success. Ranked against some of our peers, we are among the top ten percent, top decile. And that is really why I am running around right now, trying to raise money for my next fund. We have very good numbers, I am getting great reactions, it is pretty very exciting. And I am also being evaluated by some of these big institutional investors. Are you passionate? Do you have a differentiating strategy? Can you really keep your team together? Can you motivate your team? And are you really going to work hard to make them money as well as make ourselves money?

I am going to conclude a little bit now. I think Q&A will be more useful later on. I look at these as four risk factors when I look at a business proposal coming in. The number one is on the left hand side, it is the management. I have to be convinced that this manager is capable, is compatible with my investment thinking. It is not the product, it is not the technology that can bankrupt the company, in most cases it is the management. I am still learning how to do that. I think it is the number one challenge in terms of evaluating management and judging people. Number two is the market. Many people make the mistake of coming into a market when it is already maturing. Then they will be number six or number seven players in that sector. There is no chance. I don’t know of too many cases where people can be successful in that situation. The capital structure, it can be many different components. It can be the debt, the leverage the company can have on its balance sheet to support growth. Also who are the investors in that consortium? Many cases when you have a club deal, when you have too many investors with too many agendas, that is a big distraction to the management and affects how the business is run. I see that a lot in the venture capital world, there are many venture capitalists who are very disruptive. They are almost too personal in the way they interact with the management team. And then the technology/product, that is really the last part I look at. The technology part, in most cases, don’t bankrupts companies; it is really the other components. It is a very quick overview, but I thought I would leave you some points to think about, and I am happy to take questions.

Betty Wu: Thank you, Savio. I thought I’d mention that there are two parts of the financing when it comes to building your business, you have the equity and you have what? The debt. Now we will bring Mr. Paul Ho to speak about the debt side and also what commercial banks are doing nowadays to spread the growth of entrepreneurialism and also building a business. Take it away, Paul.

Paul C. Ho: Thank you Betty. Actually what you just learned from Savio is the second part. Once you have started your business and you are doing nicely, growing into a multimillion dollar significant and public business, getting ready for leverage buy outs, getting ready for big business expansions, and so on. You will then be talking to venture capitalists, merchant bankers and investment bankers like Mr. Tung. I will be giving you chapter number one, introduction 101, how to get started. In my line of business I think that’s [what we do most of the time]. Basically, I like money, too. In fact I work for a bank, it is called HSBC. Many of you have heard of it, but many local people don’t understand what it is, because it is does not have a name, it is a foreign bank. It’s recognized as a foreign bank, but we are quite big. What I like to do is talk about how a bank can help you. If you have an entrepreneurial spirit, if you want to launch a good idea, you like to be your own boss, you like to do business, then we can help you quite a bit.

I don’t care if you are selling apples or pictures or even selling a star of dreams. There are still a lot of things we can do for you at the bank. On this I will spend most of my time today, that just like anything else, everything starts with a dream. But I would also like to emphasize that to make them take you seriously, the dream has to be a different kind of dream. Some dreams come all of a sudden, out of the sky, some you think of for a long time, day in and day out. Maybe you were working in that line of business, you are very successful at it and you think you are ready to branch out. Or you say hey, I feel that I just have that talent. And you cannot just think it for one night or two nights, it has to be with you for a long time. You really want to take it seriously because if you do not take it seriously, then why should I and why should my colleague take you seriously?

Roughly there are three ways to start a business. One is to self-fund. What do you mean by self-fund? Raid the CD, take the money from your mutual fund, ask your daddy for money, whatever you have, that is a method of self-funding. The other method I will talk more about is the loan part, it is the debt part. Hopefully you will come to HSBC banks, since I will be doing some propaganda here. The last part which Mr. Tung just talked about a bit is seeking partners, venture capitalists and the others. In all honesty, most entrepreneurs start from the first or second, with their own money or their family money and with some help from the bank. I will talk about the bank now.

A lot of people ask, Paul, how do I get money from the bank? Yes, I got a lot of credit cards, I got a mortgage, I got a car loan, but exactly how do I get money to start my business? Number one, unless you have a brilliant idea and you are so smart that you can convince Mr. Tung in thirty seconds, no one will give you 100% of your investments. You must prepare to bring your own money to the table. We will help you to get some other part, but you must bring some of your own first. I say that is true, because the first time I see you I think, “why do I trust you?” If you have a banking relationship with us, we know you, that is a start. If you are starting a business in which you have a lot of experience, in which you are already in the industry, you have a steady job, you have a certain kind of track record in your personal income, that is a start.

Most importantly, and this surprises a lot of people, you must have a good personal credit, and I will tell you why. Today if you want to get $100,000 to start something, not a whole lot but not nothing, $100,000 is a $100,000. We don’t actually look at your income statement or financial statement of the last three years of your business. We think it is more important to look at you, because you are the business owner, you are the guarantor of the loan. We say how are you performing with your current obligations? Are you paying your credit card bills on time? Are you paying your car loans on time? Based on that we trust you as a business owner, we trust you as a person. We look at personal credit as very important. We don’t look at the company history with as much importance, because once again as a start up it is one or two years into the business. Honestly there is not a whole lot to look at in general.

Now let’s talk about the dream. Be serious, don’t flip-flop, have a very clear focus. In my opinion you cannot talk about your business plan in anything more than half a page, because then people will lose interest, unless you are talking about very sophisticated technology, but not too many people understand anyway. Have a plan that is almost like a group in a cooking class. Have very concrete steps on how you get there. It is your ability to manage and to lead that will convince people. Strategists will come along and approach the subject, what is my expertise? What are my connections? And I they will tell me about a few projects that I recently looked at during the last few months that [inaudible] entrepreneur spirit. We talk about capital and how you can get it. We believe that people in this room will one day be successful and go to Mr. Tung for a leverage buyout and need much more money to expand.

When the bank gives you some money to start, I think the biggest thing that I see when people run out of cash flow and cannot sustain their initial strategy is they are not focused. Don’t try too many ideas. One or two is more than enough for you. Be very conservative with your cash flow and your working capital. My point is that if you don’t have to buy the computer, please don’t; lease it, it is cheaper. You only have so much capital to start with, so don’t waste it on the one or two big-ticket items. Don’t but a fancy car, lease it. The [inaudible] is quite good; it can get you to a lot of places. I feel there are a lot of people who start out with big plans but they sometimes behave and act like a successful boss already. When you start out, don’t be ashamed that you only can get $99 printer; no need for a big fancy laser printer. Also be very reasonable in your forecasting and in your planning. Quite often people come in and say, hey, I actually deserve half a million dollars, not $100,000, take a look at my plan. We feel that, yes, it might eventually get to there, but the first three steps are important to us. If you can prove that you can take it through one, two, and three, then you will be on the way to see Mr. Tung to get big money.

Again as I said, watch for big expenses. So often we see people get in trouble after one year because they spend more than their projected cash flow income, and sometimes it is coming, but not fast enough and you find that you are short. The best way to bankrupt your startup is to stop paying your loans, it will kill your credit right away. The last thing I will say is stick with your plan, stay focused. Let’s say the China trade business, they make a few dollars and they are successful after two years. Then they heard that the real estate market is hot, let me try that. Rather than staying there, and making sure they had enough retain earnings to build their business, they start running different things. Sometimes you get lucky and sometimes you get burned, and when you get burned you actually hurt your own business that is your bread and butter. Now, credit problems. As a startup, as an entrepreneur your personal credit is very important. If you want to check how good your credit is today go online, it is easy. Things are open.

Now this is the propaganda part. Five years ago it was so difficult for a startup to think, “Hey, how should I get a loan?” In fact, I know there some government officials here. SBA is set up just for this purpose. If you have an entrepreneurial spirit, if you have a good plan, the government will help you. Why does the bank send someone to help you? Because at the end of the day the bank is trying to make money, it is trying to make a lot of money. The government sometimes takes a different view. They actually want the economy to grow, they want to create jobs. They say if the bank is not going to take some risk, let me share that risk with you. Let me help you. It is a partnership between the banks and the government to help people that have a good idea who just need a lot hand holding to get it started. SBA loans have an interest rate that is a little bit higher than those of traditional loans, but they are not very difficult to get. People think that you need ten years of your resumes to get it. In fact, Jay, one of my managers, is helping a lot of Asians to start a business and he will confess how easy it can be.

Now forget about promotion, I think that I have done about propaganda. To find a bank that actually wants you to be successful. The way I look at it a bank like HSBC or any other banks, if my customer is not successful then I am not growing. Only when you are successful growing with me, then I am growing. That is basically how I would say to go to the bank to start getting money and to start a business, and I hope it has been helpful.

Betty Wu: Thank you, Paul. Paul has given us the 101 on how to start your business. He mentioned that not only we can access the credit, the capital, but we can also go to the government. In fact this President has a wonderful pro-growth economic policy that really spurs entrepreneurship and business development. Our next speaker is Ms. Sharyn Koenig who is the senior business developer office for Export/Import Bank which represents the northeast Atlantic regional office, and she has 24 years of experience with Export/Import Bank. She will provide some of the tips and information on working with the Small Business Administration and other government agencies for you to access capital.

Sharyn Koenig: Hi, I am from the government, I am here to help you. I couldn’t resist. I am very fortunate to be following Paul because what I would like to do is to pick up a little bit on some of the points that he made especially about small business administration. Then I would like to focus a little bit more on my expertise and hopefully plant some seeds for those of you that are planning to export, whether you are ready tomorrow or next week or next year. I think that I have some ideas for you and I would like to start off by picking up on the SBA.

Paul made a very important point which is to have a business plan, and the SBA has two great additional resources for you. The first one is a Small Business Development Center (SBDC).

You know at the government we love our acronyms. It is a great resource, and it is a great place for you to go. They can provide you with assistance in formulating your business plan, so when you go to an HSBC or another lender you have all your ducks in a row. You have your plan and that is, as you have heard, a thing the banks really want to see. Another great resource sponsored by the SBA is an entity called SCORE. It stands for Service Corp of Retired Executives and these are exactly that. They are retired executives who have been there done that and it is free advice for you. I highly recommend that you get in touch with your local SCORE chapter if you are not already.

The SBA will do business with startups. They have 7(a) loans, they have low-doc loans, they have various different loans. HSBC is a very experienced lender in the Small Business Administration program. The SBA has a wide variety of products to help you start a business. SBA also has products to help you on the export side of your business. One of the points I like drive home about SBA and ExIm Bank, which is the third government agency I am going to talk about, is that neither the SBA nor ExIm Bank lends money. We don’t lend money. The banks lend money. We, the government, guarantee loans that banks make. We offer guarantee to the likes of HSBC to make them a little more comfortable in making a loan to you if you don’t quite meet their criteria, or if it is a new relationship and they do not know you. Keep in mind that what we offer on the government side are guarantees to a lender that protect that lender. It is an additional level of protection against your default on a loan that they are making to you. That is the role of the SBA.

They also have two great programs. One is for pre-export working capital where you can borrow money specifically to produce or purchase U.S. made products for export. It can be done either on a transaction-specific basis, meaning you have one big sale to Japan, Taiwan or the Philippines, or not even in Asia, anywhere, and you just need the working capital to purchase or manufacture those specific products. For the loan, the inventory and the receivables on that one transaction are pledged as collateral. Or the loan can be structured as a revolving loan meaning that you want to borrow money for one year so you can build your inventory for export. In that case all of your foreign receivables and all of your export inventory are pledged to the bank as collateral in that one. I highly encourage you to talk to the Small Business Administration regardless of what level your business is at, they will be a great assistance to you in that regard.

That was the first government agency that I wanted to talk to you about. The second government agency that I wanted to talk to you about is the Department of Commerce, and in that my comments will focus strictly on export because that is where my expertise is and that is what I want to talk to you about. If you are not exporting today, I would like to get you to thinking about it, especially with the dollar and the way it is now. It is a great time to be exporting and selling your products overseas. The Department of Commerce has some outstanding products that can not only help you identify what markets, what countries are good for your product, but they can also help you find distributors in those markets, they can help you find buyers in those markets, they can help you set up meetings for you in those markets. They have a great program called the Gold Key program and the Platinum Key program. Who has heard of it? Just a few. For a nominal fee, in today’s world, the Department of Commerce will set up meetings for you with potential buyers overseas. They might provide interpreters for you if you don’t speak the local language. I highly encourage you, when you are ready or if you are ready now, to talk to us at the Department of Commerce. My office is downtown and we are located in an Export Assistance Center. That means that Commerce is there, ExIm Bank is there. You can come in, and you can talk to anybody and get some ideas, and detailed information on your product and where it would be good for you to be exporting.

The third agency I want to talk about is actually the agency that I am employed by. That is the Export/Import Bank of the U.S. It is a big misnomer. Don’t do anything to support import. Don’t even think about it. The trade deficit is big enough without our tax dollars going to support import. I wasn’t around in 1934 when they named the agency, so I am have nothing to do with that. But if you are thinking about getting government support to import into the U.S. you can forget that right now. Now that we are clear on that, we only help with export and we are not a bank. Export/Import Bank is not a bank.

Again, what Export/Import Bank does, among other things, is we guarantee loans that banks make. Export Bank can make a guarantee on a loan that a bank makes to you as the exporter, or again if you need money to purchase in order to build your inventory for export. Also what we guarantee are loans made by commercial banks directly to your foreign buyer for larger ticket items such as capital equipment. If you are trying to sell some bottle filling equipment lets say, for a bottling plant, and your buyer wants five years to pay for that. You are going to have to ask yourself the question, “Gee, am I going to carry that receivable on my balance sheet for five years?” Probably no. You are going to want a bank to come in and do that. That is what the banks do. We have products where by the bank can come in, create a promissory note between themselves and your buyer, cash you out and then the bank can decide what to do with that risk. If they like the risk in that country, they can hold onto it on their balance sheet. That is not likely. What they are going to do is come to Export/Import Bank to lay off that foreign buyer risk on Export/Import Bank.

One of the big products we have, especially for small and medium size companies, but not startups is export credit insurance. That is a product by which you can protect yourself against non-payment by your foreign buyer due to both commercial and political reasons. [Little] credit insurance policy is very powerful. It provides you with risk protection so you can make sure you get paid. It is also a very valuable marketing tool. For those of you that are exporting or have experience you know that if you can get a letter of credit and your buyer can get an LP, that is a great way to sell, and I am not telling you not to do that. But if and when your costumer says to you “I can’t open up an LP” or “I want terms.” Your competitor is Connecticut or Kansas or Italy or Japan is giving open terms and you want me take cash in advance. At some point you are going to have to extend credit to your foreign customers, and this insurance policy protects you against non-payment when you [extend] open account credit terms.

Finally, the most important benefit to our topic today, and that is financing. This insurance policy can be pledged as collateral to your lender. To those of you that have loans with a commercial bank, most banks exclude foreign receivables from your borrowing base. They are too risky, they are in other countries. [No banks traditionally ask to face lenders are going to look at your fixed assets and your domestic receivables]. I visited a company in New Jersey a few weeks ago that had four million dollars in foreign receivables and the bank was counting that as ineligible collateral. Four million dollars is sitting out there doing nothing, so we put them in an insurance policy to protect them and it is with the full faith and credit of the U.S. government which of course the bank likes even better. It has some legal ramifications that the banks like since it is federally insured. Now all those previously ineligible receivables have been added into the borrowing base and all of a sudden there is four million dollars in their line of credit that they did not have before.

I would like you to start thinking about the government, and I know that it is a cliché that we are here to help you, but we really are. Take the time and talk to the people from the SBA and talk to the people from Commerce when you are ready. Come talk to me when you are ready and we’d love to help export more U.S. made goods and services. Thank you.

Betty Wu: Thank you, Sharyn. We just covered a lot of information. If I were you I would write the department’s website down. The Export/Import Bank is www.exim.gov. The Small Business Administration is www.sba.gov. SCORE which is the free service which you all have to take advantage of is www.score.org. Lastly, under the Department of Commerce, there is an angebcy that is referred to as the Minority Business Development Agency, www.mbda.gov. Those are the four resources that you can take home with you today and navigate when you get home on your computer. They are the resources that the government provides to your future business plan.

No we are going to wrap up. We started off with Savio first, when we should have started with Paul. Paul gave the 101 Startup, and then Savio touched upon really the last part of a business, right? When you are ready to go public. And now we are going to have Mr. Tang come up and talk about the last part which is really venture capital. You actually have a very interesting background, Mark, because Mark actually just published a very interesting book about investing in healthcare, biotechnology and life sciences sector. Mark just came back from China yesterday, so we have a lot of world travelers here. We will give you the floor now Mark so you can talk about some of your investments and what you are looking for.

C. Mark Tang: I actually just got the program yesterday, and I saw that the talk I was asked to give was going to be three o’clock this afternoon. And I felt that that’s the time I should go to sleep, so I asked to be moved to the morning. So this morning, the topic was 20 minutes but they squeezed me into ten minutes. But that’s okay. This talk is more on the Chinese professionals. This is the area I have been focused on for the past two years. Biotech is such an important area that a lot of people are investing in it. There are 400 public companies in the U.S. so I am pretty sure one of your portfolios has something. As I said in the morning, I teach twice daily at Rutgers and I do venture capital in the daytime and at night I do some philanthropy work which we spread through the Asia-Pacific, down to Thailand, Malaysia, India and a lot of works in China in the last two years. Actually last year we organized the largest VC and IP conference in life sciences in the Asia Pacific region in Shanghai. About two thousand people showed up.

I showed you these two slides this morning, so I am going to skip them. One of the very active areas for investment is antibodies. When I visited the Shanghai science park, I found out that there are 16 antibody companies in that high-tech park mainly because the success rate… the risk in this area, specifically antibodies, is about half of the regular areas. About 20 products have been approved in the U.S. One of the recent big products is ImClone. It was once traded at about $76 a share, because of the issues with Martha Stewart and Sam Waksal, it went down to something like [$6]. We actually bought some at [$6]. Six months… it went to the [$20s]… anyways, we made some money. There are about a hundred of these drugs in late stage. In Asia, it’s a very booming area. As a matter of fact, when we were in India, we were asked to give a workshop in Pakistan. One of the guys asked me about these antibody technologies. I mentioned this morning this business model, here I put the four… One is the technology backbone, second is [inaudible], third is the hybrid. Usually you put the instruments and reagent companies into the technology platform but there are [problems]. I can give you examples, like the company called [Walders Instruments], … hybrid company… a company called [Eagle Therapeutics]… insulin for diabetes, and company like ImClone.

To invest in biotech, you have to understand [inaudible]. Essentially to develop a drug it take about 14 to 16 years, costs about $800 million to $1.2 billion to develop a drug. [inaudible] countries… [inaudible] Chinese professionals who are really seriously thinking about it, [inaudible] looking into biotech. The way to do it is you have to partner with a [pharma]. The success rate is, phase I you have 70% chance to pass, phase II to phase III is 33% chance, phase III you have 20% chance. They are risky. Somebody [inaudible] is creating a company… I said, “where do you get the money from?” He said, “from a bank.” I said, “banks don’t give you money for free. What did you use as collateral?” He said, “my house.” So I told him, “the drug success rate is 10%, there is a 90% chance you will lose your house. Where are you going to live?” He said, “uh, I didn’t think of that one.”

Anyways, one of the issues is, when you start a company, make sure it doesn’t affect your lifestyle, most of the money should be raised from other people. The way to do it, you essentially have to bootstrap, and borrow money from the three F’s that someone mentioned this morning: friends, family and fools. People who give you money are fools… and after first and second round, [inaudible] from InvestCorp. When you raise money, your job is to make sure that your company move in this direction, and not be too worried about dilution. At the end of the day, it depends on how big the pie is and how big is the piece you own, not the percentage.

In the biotech business, when you look at the 400 companies, most of them don’t have revenue. About 15 of them are positive in earning, the key part of this is intellectual properties. When you start a company, and send the business plan to us, the first thing we look at is if there is something to [inaudible], if you have patents, usually if you don’t, we pass. It becomes a very risky business. You really have to take care of IP. I have met people who don’t think that IP is very important, but they had problems later on.

The [funding] is actually good if you look at the chart. The chart is a bit old, but you can see that the [funding] is really stable. This chart is by industry. Biotechnology is here. If you added biotechnology and medical devices, which is up here, the two green bars, as a matter of fact, it will surpass the software. Biotech right now is the number one area, especially in the last couple of years, for investment in North America. In Asian countries, too, especially governments are putting a lot of money into biotechnology, a lot of early stage opportunities there, that’s part of the reason we went there and look for opportunities there.

The bad news is that, in the U.S., VCs are moving away from seed stage startups. Some of my friends have a lot of difficulties raising seed money because it takes $800 millions, 12 years, a lot of them don’t want to touch them, it’s a difficult situation. Then it also creates opportunities for people like [our school] who are interested in early stage, and are able to find good technology at reasonable valuation. This chart shows you the gaps. Here you have an idea, you get some grant funding from NIH, from the government, from the SBIR grant. Then something, like IP comes up, then the patent, then you go to the VCs. Between these areas, there is an increasing amount of gaps. I see this in a lot of my friends who got into this area and couldn’t raise any money. But there are possibilities.

There is also another pretty active area called venture philanthropy. There are foundations that used to give grants to do research, now they are willing to give money to do drug R&D. They do it in a venture capital way, they are making equity investments. However, their waiting period is a lot longer than the typical VC. Right now, a lot of VCs want to get out in two to three years; these guys can wait a lot longer because their mission is more about social return, to cure disease, and the financial returns are secondary. This is an area you should look at.

The other area is the… gap problem. There are lot of people making money VCs and angels, somewhere around $1.5 to $5 millions range is relatively [inaudible]. These are the areas you need to worry about. Anything above $5 million is [inaudible]. So this is another gap you want to be aware of when you start a company. The issue we have when we look at business plans is everybody wants to go IPO. As a matter of fact, when we make investment, we don’t expect you to go IPO. From the data that shows venture-backed companies that went IPO and the companies that got acquired, you see that most of the companies, at the end of the day, have been acquired. [inaudible] another reason that companies get acquired instead of going IPO, because going IPO is not easy these day, in terms of size, in terms of the requirements and measurements. Also, it’s very costly to maintain a public company. Sarbanes-Oxley, the new law, requires the CEO to sign the [financial statement]. If somehow they found out you had lied, you can go to jail.

For Chinese companies, they have a problem. As we know, the Chinese companies have a reputation with internal transparency. Last year companies that went public here get sued for hiding whatever. Actually for the exit, there are quite a few places you can go. Of course, the NASDAQ is the best one. In all of the countries, none of the country’s [over-the-counter] is successful, they all become penny stocks. The Hong Kong [GEM], the Taiwan Emerging Market, Singapore, the European NASDAQ… the only country where there is success is the NASDAQ, the rules and regulations are mature here. I have some friend who went back to Chinese, started a company, listed in NASDAQ, and made a lot of money in five years. In any case, you can still look at Hong Kong, Singapore, even Korea. Korean stock exchange now accepts biotech companies, not so much on the New York Stock Exchange, they are looking at much larger companies, London also. Also, the Australian and New Zealand stock markets, take a look at it. As a matter of fact, the Australian stock market lists about 180 biotech companies.

A lot of what people do in China is they list in the bulletin board, here they buy a shell to do merger. Sophisticated people, like Savio, can tell you that it should be the last resort. You never know if the shell is absolutely clean. You think it’s clean, you had everything checked out, but you can still get sued. Also the Wall Street hedge fund [inaudible] do reverse merge, and they can short you like hell. So the first two years, forget about the price. I know some very wealthy Chinese who lost money, the stock went from $12 to 50 cents, and the public company’s market value is only one third of the value back in China. NASDAQ is the way to go.

We will skip this one. Like I said, reverse merge is the last resort to use. Typically it raises only a very small amount of money, and some of the money is from hedge funds. You know how hedge funds invest in you? I am not saying hedge funds are bad, but one of the strategies that they use to make money is they say they will invest $2 million in you, [inaudible] have six months to get out. Before they invest in you, they short your stock first, then they give you the money. You do get the money, then they buy back when the stock falls and get the money out of it.. It’s a very typical strategy used by hedge fund. Financial disclosure is becoming very expensive. For an average company to maintain public, and meet financial requirements on NASDAQ is at least a couple of million, and could be a lot more depending on your size.

Some of the Chinese companies have come here to do private placement because they are afraid of getting sued for transparency or whatever. You can do that, the problem is that it’s very hard to do a private placement of a $100 million. Most of the companies listed here raise billions of dollars. There’s another thing you can do, called PIPEs, which means private investment in public equity. If you are a public company, you need some money, instead of issuing stocks in the market, you can actually sell restricted stock to companies like a private equity firm, and you can lock them up for a certain period of time. It’s like a private placement, but in private equity. A lot of VCs like that these days, especially in biotech, it has become very popular because the valuations are good, VCs can find very reasonable valuations in public companies and can get out any time. The liquidity risk is a lot lower. These are the ways you should look at. In fact I got a lawyer from [Newtown] to talk about PIPEs, and my students were very excited about the opportunities there.

This is a little bit of advertising. I’m the founder of World Tech Ventures, we essentially invest in early stage companies. We focus on Asia, we do cross-border mergers and acquisitions, pretty much right now focus on China, Greater China, and we just started in India. Anyways, World Biotech Forum is a nonprofit 401(c), we do education programs, we organize conference, we actually provided free consulting to Chinese [inaudible]. We had 40 people [inaudible], from writing grants, [inaudible], to going public. We have all the expertise people need. Also, we are nonprofit and we were able to raise some money to support our [inaudible]. Last year we organized the largest VC/IP conference in Shanghai, in the APEC. We are planning to have a forum on biotech commercialization next month. This is the course I am teaching in Rutgers, we have a biotech concentration, we have venture capital, we have IP, and we have business development classes. This is the book I mentioned. Except for one chapter on venture capital, this is a book for people who are interested in participated in biotech but have no opportunity to start a company. This is one way to look and make an investment in the public market. I made a point this morning, that this book in China sells for 28 RMB, in the U.S. it sells for $28 U.S. dollar, so if you read the Chinese version it is a better deal. That’s probably one reason people are going to Asia, because the cost difference, besides the quality of the people in terms of technical level, it also becomes quite expensive. Especially in biotech companies, here you hire one people, in Taiwan you can hire five, if you move to China you can hire 25. It makes a huge different in labor-intensive things like biotech. And that’s my talk.

Betty Wu: Great, Mark. We have spent the last hour with four distinguished panelists who gave you the ins and outs of being an entrepreneur, starting your business, finding financing, and now we have ten minutes left to give you the floor, where you can ask questions. Remember what Paul said, if you can’t give an elevator pitch within a minute or two to describe your business, don’t talk to him. But I am sure that Savio, Mark and Sharyn from the government side will spend time with you. Any questions? Come on, don’t be shy, entrepreneurs.

Male Audience Member: I have a question for Paul. In your slide you mentioned the importance of others sources of income like a job or an part-time job, but in the meantime when I listen to Savio Tung, he is looking for the management team’s commitment to their business. So you are talking about part-time income and he is talking about full-time commitment. How do we balance between the two?

Paul Ho: I think it is actually concerning different phases of the business. If you are already running a successful business, let’s say you are a senior executive running the business of a corporation, and you felt that, hey, I would like to be own boss, I had help this company become a bigger business making so much more money. I want to find some investor to come in and be my partner and to do a leverage buyout, to do a management buyout. You say, let’s be partners. I know my business, you have money; I know how to do this and make it even bigger. That is what the basic partnership is all about.

The difference is that when I talk about entrepreneurship 101 I am talking about the average individual who has the dream to start their own business. Quite often when you actually want to start your own business, you might be the manager of a trading company, you know all the buyers, you know all the suppliers in China and overseas. And then you say “Gee, I think I can handle it.” But the key thing is how do you start it. If I have a rich daddy, that’s fine; if I have a lot of savings, that is fine. But the trick is that, depends on your position, if you want to start a business but you don’t have a lot of money. If you want to get a bank loan and you also don’t really want to change your lifestyle, I would suggest two things.

One is, start a business in which you have a track record, you know the industry, you know the supply and demand side. I recommend that you take the steps slowly. You may not want to totally give up your full-time job. You might have a mortgage payment or something of that nature. You can actually maintain a job and then use your existing expertise of knowing the buyers, knowing the suppliers and branch out that way. Eventually when you build that you will have the firm orders, your dream is really reachable. Then you can go full-steam. I actually have costumers who started that way, and they are doing quite well. That is why I say that I am the beginning stage and he is, I don’t want to say the mature stage, but definitely a stage that is getting bigger. You can go see him when you are ready to do the IPO to cash out, some people actually cash out. You can basically say that I already have $20 million sales and I want to make it $100 million sales. I want to make it bigger. That depends greatly on the phase of your business.

Savio Tung: I think I will add to that. That clearly is the answer. When I go around talking to friends and contacts my agenda is to convince them, in today’s very active corporate M&A world, that division are being sold and bought, that subsidiaries are being sold and bought. IBM tomorrow will cut 12,000 people in Europe. They have to do what they have to do. But if you are working for one of these large corporations, and you are one of the key executives and you want to control your destiny, you really should be alert and anticipate these changes that can hit you tomorrow. That is where InvestCorps and other private equity groups come in. We love to back a division CEO to go independent, to do what they know how to do.

At a start up phase, I have been there. Twenty one years ago when we founded InvestCorps, we all gave up wonderful opportunities at Chase Manhattan Bank, Bankers Trust, Morgan Stanley, but we believed in ourselves. We felt that we were well equipped in terms of corporate finance, M&A. So we took a chance. We jumped not knowing what would happen but we committed ourselves. Certainly, career risks, but also much money, side by side with the original investors who came and backed us in 1983. We did not quite mortgage our houses but it was a big commitment from us. I think that was a strong message and we were able to raise $50 million dollars from a group of investors and that was our starting point.

So we all go through the same life cycles regardless. I would urge you to be a little bit careful about the part-time involvement. Many people can do it and do it well, but it is very hard. You have to sacrifice something. It would be difficult for me to be convinced that you can work part time and that I am going to give you my money so you can invest. It is very hard. From the lender’s standpoint it is a little different, because they are a little risk-hedged with collaterals or your financial resources. For us, however, we look for full time commitment, as well as some of your money.

Male Audience Member: I want to ask Savio, can you talk about your portfolio as it relates to various industries, the make-up?

Savio Tung: Yeah, let me talk about my technology portfolio. We have about 16 companies that are broadly grouped in four focus areas. One of those areas is wireless data application, you know mobile broadband is really here now. Another is enterprise software, then digital content and telecom infrastructure. It is very broad. I think that covers most of it other than… we don’t do games, we don’t do internet, we don’t do B2C dotcoms. The macro picture is that we believe IT spending is a big part of the U.S. GDP. We have gone though the recession, and today you are seeing higher single digit maybe even low double digit, for some sectors, so these companies are growing. But they are selling mostly to Fortune 500 companies. They need to have strong financial resources. They need to have the sales force. They need to have the strong balance sheets. No offense, some of the banks don’t really like to lend to technology companies because they do not have a lot of tangible assets, so this is where we come in. We are accelerating the capital so they can get to the next step. Most of the companies have revenues of about five million dollars to about $50 million in revenues.

Female Audience Member [Carla]: You said that you make private equity investments, Mr. Savio, and that you have a fund of funds. Do you make any investments in private equity funds?

Savio Tung: No, we don’t. We are not fund of private equity funds, we are fund of hedge funds. That is a separate group which I am not responsible for. I am right now talking to some fund of private equity funds to come in as my LP. But I run two funds. It is about half a billion dollars today. We have not invested in other funds. There is really no reason to.

Female Audience Member [Joy]: I have a question for Savio. As you help companies that are doing business internationally, how do you as a company assess the political risks in different Asian countries?
Savio Tung: I would say that we don’t have to think about it too much since all of our activities are in the U.S. and in Western Europe. Having said that, in most of the technology companies we always talk about the China factor. For some of the technologies we have developers in Shanghai or Shenzen or in Taiwan. We sell some of the products to some of the Chinese companies, so we do have some of that risk. But from a corporate standpoint, we are not ready to invest in China, Korea, South East Asia or even India at this point. We don’t really have a lot of political risk or country risk factors.

Sharyn Koenig: Are you looking for a way that you can assess political risks?

Savio Tung: We should go see Sharyn. I am going to come see you.

Sharyn Koenig: I think one of the things that everyone should be doing is, at the very least, going to our website and getting the country schedule. This is an amazing document. Every country in the world is listed on here and it tells you whether or not we would provide support in a particular country. I got to tell you, if we are not providing support in a country, maybe you should think twice about being there. I would encourage you to go to our website and get this country schedule.

Betty Wu: Again the website is www.exim.gov. Last question, this gentleman in the back, yes?

Male Audience Member: I have a question for Paul. For example, if I have a business that is already generating revenue and I want to borrow more money to expand my business. In this case, I have $100,000 in the bank, how much more can I borrow?

Paul C. Ho: First of all, let me say this, it is a very tricky question. I can’t give you a firm answer but if you really have $100,000 in the bank and you give me as the collateral, I give you at least $100,000, that is an easy one. I think that the tricky one is that you have a business already, you have a certain track record, and you want to further grow. You want to have a higher working capital line. You want to buy more things, get a bigger space or whatever. Number one, I will remind people that sometimes paying [inaudible] is more than fine, it is good, because quite often, unless it is a real estate transaction where you have a property as collateral, the most important thing the bank or anyone could look at is your track record. If on paper you do not have a track record, it is difficult. Work with the CPAs, and don’t be shy to show the world that you have grown. Demonstrate that.

Secondly, a real bank is also your financial partner. I will suggest to people that if you are with a bank that has worked with you since the beginning, try to stay with them. Often people try to go around, oh, there is loan sale and you just do. Every time when you change the relationship, people do not know you, and when you try to go to the next stage, they look at you as a stranger again. To me, the best way to grow your business is to find someone that you feel comfortable with. A banker should be the same as a CPA, same as a lawyer, and if you feel that kind of partnership, I don’t mind to pay a little more in order to make sure that you maintain the relationship. I don’t know how much I would lend you, because I would really have to look at your business before I can do anything and I feel comfortable to say something. If you really have a $100,000 in the bank, unless you take it away tomorrow, you should get more than that.

Betty Wu: Paul, great, thank you so much. We want to thank Savio, Paul, Mark and Sharyn for their invaluable advice today.