“For years, I was asked to simultaneously manage all of The Walden Group companies: Walden International, Walden VC, as well as Walden Israel. But I wasn’t interested in holding so many positions,” says Lip-Bu Tan. That is the founder and chairman of one of the world’s most active venture capital funds' polite way of saying: one shouldn’t venture too deep into the swamp.
Here are some data that will give you an idea of this venture capital firm’s volume of activity: Walden has so far invested in over 300 companies, and has carried out 55 share issues and 12 exits through sales and mergers. Vitesse, Transmete, Creative Technologies, S3 and about.com are some of the fund’s clients that have had outstanding share issues.
Tan, 41, was born in Malaysia and, while still young, immigrated to Singapore, where he acquired a BA degree in physics. He subsequently arrived at MIT to continue his studies in the field, concentrating on nuclear engineering studies. “I thought difficulties with energy were the most important problems, ” he said.
On 28 March 1979, a mishap occurred at the Three Mile Island Unit 2 nuclear reactor in Pennsylvania as a result of a failure in the cooling system. Even though no workers or residents in the area were physically injured, the malfunction was defined as the worst nuclear mishap in the history of the USA. Tan, who had already completed his MA studies, relates that the negative effect of the publication of the failure led to the “liquidation” of the American nuclear industry at the time. “According to what I heard from people engaged in the field, it didn’t seem that there was a future in nuclear research, and it seemed that it would be very difficult to get funds. So, I decided to abandon an academic career,” Tan says.
As a result, immediately after completing his studies, he found a job with an IMPEL corporation subsidiary that manufactured tubes for cooling nuclear reactors. “I learned things there connected with nuclear reactors that I couldn’t learn in a university, about building elements, seismic impacts, etc. I worked there for several years and in about 1982-1983 I decided to leave the company with some friends to found a company of my own.”
Tan founded a software company that developed a product which was supposed to solve the Water Hammer effect – a problem in the structure of water tubes that are intended to help cool nuclear reactors following earthquakes or other pressure-exerting forces.
“Of the four entrepreneurs, three were about 50 years old, and I was in my early 20s, as I finished junior high school and high school earlier than usual. To ‘atone’ for my age, I was sent to night school at the University of San Francisco to get another degree in Business Administration, while I continued to be the company’s CFO.” A year and half later, the company had revenue of $30 million, and Tan recommended to his other partners that they hire a full-time CFO, and allow him to become the company’s project and marketing manager.
After the company was sold, Tan began working in the American branch of a British investment bank. Surprisingly, considering the sector in which he works nowadays, Tan relates that the job in the investment bank did not match his expectations. “I didn’t like the style of work there. Everything was transaction-oriented – one transaction after the other. My engineering background makes me want to be more involved in the company’s operative decisions, and to help it flourish.”
We convinced investors to lower their investments
A mutual acquaintance introduced Tan to Walden USA, where he became a partner. Shortly afterwards, he became a senior partner in its investment fund, and in 1987 he founded what is today known as Walden International, in an attempt to create a network of investment funds in the USA and in Asia.
Until then, there was only one company known as The Walden Group, and it was managed by Tan, George Sarlo, and Art Berliner. Sarlo retired in the beginning of this year and Berliner decided to focus on a new entity known as Walden VC, which only invests in the fields of media and advertising.
Walden International today manages $2.1 billion in capital, after closing a fifth fund (Pac-Ven) at the beginning of the year, which has $1 billion in capital.
”Globes:” I understand that you could have closed the fund at $1.5 billion. Why did you refuse?
“The truth is that, all in all, we only wanted to raise $750 million, after the previous fund was closed at $350 million. But, when we started raising money for the new fund, we were overwhelmed by applications from investors, and we indeed arrived at a situation where we had to decide whether to go for $1.5 billion. We were careful, and decided it was a bit dangerous to leap from $350 million to $1.5 billion. We got back to most of the investors and persuaded them to lower the investments they intended to infuse into the fund, with the goal of ‘only’ reaching $1 billion. Most of the people we talked to agreed to go down – from, for example, $75 million to $40 million. So without irritating too many people, we succeeded in closing the fund at $1 billion.”
The 60 investors in Walden’s latest fund consist of banks and investment houses, such as Goldman Sachs, Morgan Stanley, Robertson Stephens, Silicon Valley Bank, the British Abbey National Bank, City Group, the Canadian British Columbia Bank, Credit Suisse First Boston, and the Singapore Development Bank. Other investors are computer companies such as Del WIBM; insurance companies such as AGF (France), Allianz (Germany), Swiss Life and AXA; media and communication companies such as AOL Time Warner, t&At and Verizon; universities - Harvard, MIT, Northwestern, Stanford, Michigan, North Carolina and Duke; as well as pension funds, the Singapore government, and the Harbor West Fund. Some 70% of the investors in the fund are from America, some 15% are from Europe, and the rest are from Asia.
Walden tends to invest during communication companies’ early stages, usually in the first rounds, and invests in companies that develop everything from basic components to complete systems. Some 35% of its communication investments, in terms of money invested, are in wireless and cellular communications companies. Tan says that the fund also invests in Enterprise Software, life sciences, and medical equipment companies, as well as semiconductor companies in the computerization and communication fields, external inception activity in the electronic production field in Taiwan and China, and the service sector in the software and computerization fields.
At least seven universities and academic institutions participated in the last tender. Do such institutions normally participate in venture capital funds?
“Universities are entities that are worth a lot of money. Harvard, for example, is worth $16 billion and I believe that MIT is worth six or seven billion dollars. They're long-term investors – not only in our funds, but also in others. But, they are very selective in their choice of funds."
Following the last tender, do you intend to change your investment strategies? Will you perhaps start investing in the later stages of companies that require larger investments? According to reports from the USA, investments in late stages, in companies that have been in existence for more than several years, yield impressive returns.
“We still like to invest in early stages. But, as the market is currently in crisis, it’s definitely possible that we’ll also invest in the second and third rounds of companies, should the opportunity arise. At any rate, we still consider the second and third rounds of such companies as an investment in relatively early stages, as it’s usually a stage where the product isn’t yet being marketed but, rather, is being tried out on potential clients. "
“We have succeeded in investing in these (later) rounds at first round ‘prices’, as their value has significantly dropped, and we can get a good position. But, generally speaking, we’re still focusing on the early stages – it simply is much more fun to build a company from scratch, through a partnership with the entrepreneur. Since I come from the entrepreneurial world, I now enjoy working with other entrepreneurs on their projects.”
When you announced the closure of the fund, you were quoted as saying that 25-30% of the venture capital funds would close up shop in the near future. Wasn’t that a little too pessimistic?
“I think that the venture capital industry is in a process of consolidation, with the large funds becoming larger. Funds that carry out investments in specific fields, such as the life sciences, are expected to succeed, but there has been madness in the system in recent years – many new funds have invested a lot of money for the first time in the dot.com companies and in the communication sector, in CLECs, and those (venture capital) companies, to whom I was referring in the percentage you quoted, are expected to disappear from the world in the near future. But, in the end, it’s a healthy process and cleanses the industry.”
You invested in the Singaporean company, Creative, which manufactures sound cards and hardware products for MP3, and which subsequently had an IPO. Would you today have invested in such a company, which does not engage in laying foundations but, rather, in developing products for the final consumer?
We invested in the company in 1990 and it succeeded in reaching a situation where the sound card it manufactured, the Sound Blaster, became the leader in the market within a short period and simply eliminated its competitors. Its success allowed it to grow enormously within a short period after we invested – at the time of the investment, its revenue was about $5 million per annum, and it very quickly achieved an annual revenue of $1.5 billion. So, of course, we got back all our investment in it, and it still has 70% of the world market share in the field of sound cards. You ask whether I would invest in such a company today? The answer is no.”
One of last year’s hot IPOs was Transmete, which manufactures processors that operate on a low supply of electricity. You also invested in it, but it looks like an enormous risk to compete with Intel and AMD. How much room is left in this market?
“In that case, too, we invested at a very early stage of the company, and it has since launched an IPO, and has even concluded excellent contracts with Toshiba, NEC and Sony, so I think it has a good hardware architecture, and it was expected to take over the market of portable computers, which need a lengthy computerization period. Transmete’s electricity-saving solution makes it possible. It’s true that the situation doesn’t seem brilliant lately and, as you noted, it’s very difficult to compete with Intel and AMD, especially in the USA, but Transmete is operating in a market which is, by definition, fairly independent. It’s less involved in portable computers and more in PDAs, and you can never know what will happen there. At any rate, we sold almost all of our shares in the company after the IPO, and we still think our initial investment in it was smart.”
The Nervous Effect and the Brilliant Opportunity
In 1998-1999, everyone invested in the Internet; in 1999-2000 everyone invested in optics; and now everyone is investing in storage – have the venture capital funds not learned that the herd phenomenon leads to another phenomenon: mutual obliteration?
“Exactly. I call it the ‘nervous effect’ – there was a time in the 1980s when about 70 companies were involved in hard disks, and now there are only two or three. The same phenomenon is also occurring in the field of optics – right now, there are about 900 companies dealing in various areas of optical components, and you ask yourself how many of these will be able to survive. I expect that 80-90% of these companies will be shut down in the final quarter of this year, or in the first quarter of next year, whether through merges and acquisitions or bankruptcy. I will be very surprised if more than 10% of the companies will be able to continue to exist as independent companies.”
“In the longer run, I believe that of those 900 companies, only 10 will remain independent, and the coming period will be a test for the optics sector, unless a company has some amazing technology that changes everything we’ve known so far, and it raises plenty of money. Your chances to survive as an independent company in this field are very small.”
Did you also follow the other funds and invest in optics?
“That’s a good question. In contrast to funds that have invested in 20-30 optics companies, you can find only four companies in our portfolio that deal with optical components, so we were very selective, and each of them deals with a different area. We took the same approach with the Internet companies – less than 3% of our portfolio is invested in Internet companies, and we weren’t hurt at all by everything that has been going on in the last two years.”
What about storage? Is the overfunding that we have witnessed in the field of optics repeating itself in the field of storage?
“Definitely. There’s too much investment in the fields of storage and of web-based storage. Right now, we have only one investment in the storage field, in a company called Digital Archway, which recently raised an impressive sum, and we invested in it at the seed stage. We’re observing the field of storage with great interest, but we’re examining every possibility very meticulously and, unless it’s really a matter of a revolutionary technology, we prefer not to be dragged in.”
Instead, you decided to focus on investments in the software field.
“That’s right, we even recently appointed Amos Barzilai, who came to us from Commerce One, to handle our software affairs. One of the companies Amos founded was a company called Mergent, which dealt with the field of B2B and was purchased by Commerce One.”
Now that we have gone through the cellular, optics and storage fields, what is the next area expected to become hyped, and is it possible to rise above the media hype?
“I think that investment in the life sciences and in medical instrumentation will be a method for getting good returns for investors, just as it's yielded good returns for us. In spite of everything that’s going on in the market, I’m still continuing to examine the possibilities in the area of optical components, which are still in the primary stages of development. And, as I said before, they have to be revolutionary and not a mere improvisation on an existing basis. They must serve as a platform for future products.”
“As for optical equipment itself, I still believe in the field of Gigabit Ethernet and metro networks and, of course, in accordance with our present focus of activity, in the field of general software, software for organizations in particular, and sophisticated safeguarding applications. The field of nanotechnology also cannot be ignored – it’s still early for us to enter into massive investments, and we’re watching the field carefully and waiting for a brilliant opportunity. “But, it’s also worthwhile to note investment foci that are good not only technologically, but also geographically – people should pay attention to China, whose hi-tech industry is growing at a rate of 8-9% annually, and whose population represents one of the world’s largest group of cellular phone users, especially once the transfer from circuit switching to packet switching is accomplished. We have made quite a lot of investments in China, and I believe that we’ll get back a lot of dividends from our investments there.”
| Israel: Superb manpower, crazy neighbors Tan’s visit to Israel for the investors conference is not his first. Tan has visited Israel many times. He took the opportunity to praise one of his Israeli investments – Actelis Networks, which develops technology for upgrading copper wires and turning them into a better means for transmitting information. Actelis recently completed a $45 million financing round. ”We were the first to invest in Actelis, when cofounders CEO Yuval Baron and president and CTO Tuvia Barlev came to me and we met for dinner,” Tan says. “I was so impressed by the company that we managed to recruit other investors, including US Venture Partners, NEA, Carlyle Group, France Telecom, and of course Walden Israel. I like them so much that when I came to Israel for two days, I spent one day at the conference and one day at Actelis.” ”Globes”: The ING Baring’s representative told me a few weeks ago that Israel reminded him of Taiwan in the 1980s – small, with superb manpower and crazy neighbors. Is that how you see us, too? Tan: ”Yes, just like Taiwan and Singapore, which also has crazy Muslim neighbors; I'm an adviser to the Singapore government. I'm very confident about Israel and have great esteem for its companies. I have many friends from Jewish and Israeli families. The security situation doesn’t stop me from visiting you – they promised me everything would be OK.” |
| Walden Israel: The new fund closes $80 million Walden Israel completed a $33 million financing round for its first fund in 1994 and raised $60 million for its second fund in 1998. Its Israeli investments include Actelis, Allot Communications, Lynx Photonic Networks, Sanctum, and Zend Technologies. The Israeli branch has posted five exits: Terayon (Nasdaq: TERN) and RADCOM (Nasdaq: RDCM) held IPOs, AbirNet and Ornet Data Communication Technologies were sold to Memco, and eMation entered Nasdaq through the back door, with a reverse merger with stock exchange shell Ravisent. In mid-February this year, it was reported that Walden Israel was raising a third fund and planned to raise $150 million. Walden Israel is managed by general partners Roni Hefetz, Eyal Kaplan, and Moty Ben-Arie. The approximate spread of its investments is: 40% software, 40% Internet infrastructures, and 20% life sciences. What's going on with the closing of Walden Israel’s new fund? Tan: ”As you noted, just over $80 million has been closed up until now. We're in constant contact with potential investors, such as Verizon, Harbor West, Alliance, and others. Substantial progress is being reported right now. The next step is to close $120 million. I predict it will take more time, but I’m sure they will reach that amount.” |
Published by Israel's Business Arena on September 24, 2001.