Just a few years ago, Asia was a tough place for small companies. Venture capitalists worldwide were licking their wounds from the dot-com bust and had little appetite for prospecting in Asia. The region itself was still digging out from the Asian financial crisis, so banks busy clearing the bad loans from their books didn't have much time to take on new risk. And exchanges around Asia were focused on large enterprises, leaving startups out in the cold.
Today, that has all changed. New money is flooding in, the crisis feels so last century, and relaxed rules make it easier for startups to get airborne. Furthermore, consumers in Asia have new spending power, and technologies such as the Internet and cellular telephony are creating opportunities for entrepreneurs from Seoul to Singapore. In China, the 3.5 million private companies -- the vast majority of them small or midsize -- are the real engines of the economy, generating $241 billion in sales last year and accounting for 15% of gross domestic product. "The environment for entrepreneurs is getting so much better," says 27-year-old Ninie Yan Wang, founder of Pine Tree Institute, which operates vocational centers for senior citizens in Beijing. "At the moment young people would rather be their own bosses."
Plenty of Asia's scrappy upstarts are making a name for themselves. Air Asia of Malaysia and India's Air Deccan have taken advantage of airline deregulation and are now among the fastest-growing carriers in the region. In South Korea, one of the hottest new brands is TheFaceShop. The two-year-old brainchild of entrepreneur Jung Woon Ho serves up cosmetics to the young and trendy, and its sales are expected to grow by 176% this year. India's Balkrishna Tyres is making handsome profits in a niche -- tires for tractors and construction vehicles -- abandoned by the industry's giants. And just about every urban Chinese teenager knows QQ, the toy penguin mascot of Tencent Inc., which controls 60% of the mainland's Internet instant-messaging market. Tencent's sales? Up 55% in 2004.
One big reason these companies have been able to grow is the amount of cash sloshing around Asia. TheFaceShop, for instance, just got funding from Hong Kong-based Affinity Equity Partners, which took a 70% stake in the retailer. Last year, private-equity funds targeting the region raised some $10.6 billion, up from $3.3 billion in 2004, according to Asian Venture Capital Journal in Hong Kong. The journal, the most comprehensive source on VCs in Asia, predicts that new money raised this year could top $12 billion.
The money is coming from some of the biggest names in international finance. CVC Capital Partners, an arm of Citigroup, in May put together a $1.95 billion fund to invest in the region. JPMorgan Partners Asia raised $1.58 billion in September. International Data Group, which has poured $200 million into China since 1993, last year launched a $100 million fund to invest in Vietnam's fledgling tech sector. And Kohlberg Kravis Roberts & Co. in September said it's planning its first foray into Asia with new offices in Hong Kong and Tokyo.
The reason for the influx is the big payouts that some players have already enjoyed in the region. IDG paid $10 million for a stake in Chinese online auction company EachNet that it sold to eBay four years later for $180 million. And private-equity partnership Carlyle Group made back 15 times its initial investment of $8 million in Chinese online travel company Ctrip.com International Ltd. when it listed on NASDAQ in 2003.
It's not just foreigners who are sniffing around for deals. Kuala Lumpur-based Navis Capital Partners Ltd. -- which has made investments in everything from disposable diaper manufacturing in Malaysia to airline catering in India -- raised $315 million in July to back more startups in the region. And Korea has some 102 local venture-capital companies with $3.5 billion to invest. Startups in Korea "won't face funding problems as long as they have good products or technologies," says Kim Hyung Soo, director at the Korean Venture Capital Assn.
Some of the most eager backers of startups are Asian entrepreneurs who made fortunes with their own successful initial public offerings. Neil Shen, the 37-year-old Chinese returnee who helped found Ctrip is leaving the company to start his own private-equity firm in China. And Muneaki Masuda, who shepherded his Culture Convenience Club Co. -- Japan's largest chain of DVD rental outlets -- to an initial public offering five years ago is now funding smaller startups. "The guys who have made money in an IPO know there are people just like them," says C.J. Wilson, founder of Global Alliance Ltd., a mergers-and-acquisitions advisory firm. "They know it's the best money they've ever made."
Stock markets these days offer more opportunities for startups, too. Until recently, a big obstacle to raising funds in Asia was the difficulty investors had in cashing out. But in the past several years local bourses have set up secondary exchanges designed specifically for startups, which in turn has made it easier for those companies to attract money from venture capitalists early in their growth. Japan's Mothers board (short for Market of the High-growth and Emerging Stocks), has attracted 137 companies. Shares in the top mover on the exchange, V Technology Co. -- a maker of inspection gear for semiconductors -- have nearly quintupled this year. Hong Kong's Growth Enterprises Market (GEM) has 205 companies. Korea's KOSDAQ now has 582 and is actively courting profitable startups. KOSDAQ-listed NHN Corp., which runs Korea's biggest Internet portal and search engine, has seen its share price more than double this year, as its profits are expected to climb 70%. Exchanges in the West are also trying to get in on the action. In the past year, London's AIM market and the New York Stock Exchange have set up offices in Hong Kong and Beijing to woo local companies to their bourses.
A few hit stocks, of course, help sell Wall Street on an idea. And many small companies from Asia have done pretty well lately. In Shanghai, Focus Media Holding Ltd. has built a successful business placing TV screens near elevator banks and serving up ads to waiting office workers. In just two years the company went from zero to a NASDAQ IPO and is one of the hottest Chinese companies to list this year. Not quite as hot, though, as mainland Internet search engine Baidu.com Inc. Its shares now trade at double their offering price, though they've come off the 355% gain they saw on their first day of trading in New York in August.
The flood of money coming into the region carries some dangers. Expectations for Asia's startups may already be outstripping their real potential, and many investors appear to be ignoring the risks of investing in any untested company, let alone one in a developing market such as China or India. So U.S. venture-capital funds looking around China are finding that valuations, especially in the Internet and mobile telecommunications, are getting out of hand. "There is an awful lot of money chasing relatively few deals," says Michael Thorneman, the head of Bain & Co.'s private-equity practice in China. "Some private-equity companies have money burning in their pocket, and it's going to get pretty competitive."
You don't need to look far for highfliers that fell to earth, either. Chinese property and orchid magnate Yang Bin was one of the country's richest businessmen before the authorities nailed him for tax evasion in 2002. Xinjiang Delong Group, a red-hot Chinese conglomerate that sold everything from tomato sauce to cement to stocks, last year collapsed under a mountain of debt. Japanese semiconductor technology developer North Corp. is due to delist from the Tokyo Stock Exchange this fall because it was found to have falsified its financial statements. And Carlyle Group invested in New Delhi educational software company Educomp Solutions Ltd. back in 2000, hoping to cash in on the outsourcing boom in India. But earlier this year Carlyle sold its stake back to the company at a loss.
Such failures serve as a sober warning to investors on the lookout for the Next Big Thing. In the West, despite the risks of investing in young and inexperienced companies, financial backers can at least be fairly confident they're getting the real story from management. In China and India, it's not uncommon for companies to keep two or even three separate sets of accounts. That means it takes a lot of extra sleuthing before deals come together, and investors often appoint a foreign chief financial officer, while leaving the day-to-day running of the business to the local founder. Baring Private Equity Partners, for instance, hired a CFO from one of its other portfolio companies for Ningbo-based auto parts maker Minth Group.
Ready to Buy
Still, there are lots of real opportunities in Asia as developing economies take off and others undergo demographic changes. China's booming cities are sprouting new apartment buildings daily, and virtually every new flat is home to a middle-class family ready to buy everything from quality toys for Junior to better health care for grandpa. That creates opportunities for the likes of BabyCare, a Beijing-based startup that is seeking to cash in on the 23 million children born in China every year by dispensing advice on parenting -- and by selling vitamins, formula, and toys. And in Japan, many of the fastest-growing companies are those that serve the elderly -- which makes sense given the country's rapidly aging population. Message Co. runs more than 100 nursing homes and last year saw its sales jump 66%, to $92.6 million.
Startups are also taking advantage of new technologies that the region's giants have been slow to exploit. In China, already the world's largest mobile-phone market, there's an explosion in demand for everything from the latest pop music ringtone downloads to the hottest new online games. Taiwanese photovoltaic battery cell maker Motech Industries Inc. is cashing in on growing demand for green technologies and has built a robust business selling cells to solar panel makers. And Korean consumers continue to eat up anything digital, fueling the growth of companies such as Nexon Corp., which gives away online games but this year expects to more than double its sales -- to $250 million -- of virtual accessories such as cars and goggles that players buy to gain an advantage over other competitors.
Launching a startup anywhere isn't easy. And Asia will see plenty of failures as entrepreneurs take the kind of risks required to create a big success. But for those ready to seize the growing opportunities it offers, Asia is looking better all the time.
By Frederik Balfour, with Ian Rowley in Tokyo, Matt Kovac in Taipei, Bruce Einhorn in Hong Kong, and Manjeet Kripalani in Bombay