- Venture capital is the fuel of innovation, and innovation is the engine of growth. But how did venture capital, a business model that originated in Silicon Valley, become a global phenomenon, and what does it mean for the future of technology and society? In this book, Terrance Philips and Jame DiBiasio take us on a journey across the planet, to discover how venture capital is driving the next wave of innovation.
- If you are interested in learning how venture capital works, how it has shaped the world of technology and business, and how it is changing the world of tomorrow, then you should read this book. You will gain a deeper understanding of the history, evolution, and diversity of venture capital, and the opportunities and challenges it presents for entrepreneurs, investors, and policymakers.
As improbable as it seems now, there was a time in the recent past when Silicon Valley’s visionary venture capitalists lacked the foresight to invest in China and India. In this robust analysis of the globalization of the venture capital industry, Terrance Philips and Jame DiBiasio run through the history of VC and the sector’s successes, foibles and adventures. The authors take readers on an enlightening around-the-world tour of where VC has gained new ground, particularly in places like Taiwan, Israel and Japan.
- Venture capital is expanding around the world.
- VC is based on a high-risk, high-reward mind-set.
- Israel has transformed itself into a VC success story.
- Taiwan took a unique path to VC success.
- Japan’s lack of a VC industry has hampered its economic growth.
- In the 1990s, China began to mimic US-style VC.
- American venture capitalists finally discovered China during a trip organized by Silicon Valley Bank.
Venture capital is expanding around the world.
The concept of venture capital (VC) as an economic driver was born in Silicon Valley, with dramatic results. Tech giants Amazon, Apple, Google and Netflix, along with smaller innovative companies like Zoom, have emerged as products of VC and heroes of the modern economy. Other nations are looking to the VC success story and trying to create their own innovation ecosystems. VC has been a tool for enabling fast-growing companies to succeed, thereby unlocking value and driving overall economic growth. Now the sector is globalizing: China and India have embraced the VC model. Taiwan, Israel and other nations with innovation economies have also gravitated toward VC. But Japan, mired in a long economic malaise, never mastered the VC concept.
“Venture capital is Silicon Valley’s greatest export. Not the iPhone or the personal computer, not e-commerce or genetically engineered drugs.”
Chinese tech giant Baidu is one example of the VC model driving big results outside Silicon Valley. Baidu launched when China’s internet sector was young, and the firm’s returns have been massive. Baidu operates the globe’s No. 2 search engine, trailing only Google, and Baidu also is an innovator in autonomous vehicles and artificial intelligence. Co-founder Robin Li is worth nearly $15 billion. Yet VCs almost overlooked the company. Li and Eric Xu originally raised $1.6 million from “friends and family” in China. The founders needed additional capital to fund their ambitions, so they went to Silicon Valley to make a pitch to the VCs there. Every single firm passed. Desperate, the founders started mailing letters to VC firms. Draper Fisher Jurvetson received one of the letters. Unlike most American VC firms in 2000, Draper Fisher Jurvetson had an office in Asia and saw promise in the concept. Baidu went public on the NASDAQ in 2005, making its founders billionaires – and convincing the world of the viability of VC-backed firms operating outside the United States.
VC is based on a high-risk, high-reward mind-set.
VC investors know that most of the privately owned companies they back will flop. The few that hit it big will be profitable enough to offset the losses. Venture capital fills an important void: Half of all start-ups fail, so banks and other traditional lenders refuse to finance new companies until they’ve established a track record. Venture capital first emerged in Boston in the mid-20th century, when the dawn of a new age of computing meshed with the novel funding source. As the tech sector shifted west, the VC industry migrated from Boston to Northern California.
“It is a style of investing that is deliberately risky. But that’s what makes VC work.”
As both the tech industry and venture capital got their footing during the 1980s, the human capital that powered the companies was largely imported. As one Taiwanese venture capitalist joked, “Silicon Valley is powered by ICs. Not integrated circuits, but Indians and Chinese.” From 1975 to 1990, one-third of Silicon Valley’s scientists and engineers were born outside the United States, many of them in China and India. Despite their obvious brainpower, few of these immigrant workers were promoted into senior management positions. The glass ceiling meant that many of them took their skills back home – setting the stage for VC to spread abroad.
Israel has transformed itself into a VC success story.
In the 1970s and 1980s, Israel was an economic backwater. It suffered from high inflation and a volatile stock market. However, the country had talented people, many of whom were moving to the United States to work. From 1978 to 2000, more than 14,000 high-tech workers from Israel took jobs in America. When the Israeli expats moved back home, they brought Silicon Valley with them. Such tech giants as IBM, Microsoft and Cisco so valued their Israeli employees that they allowed them to work from Israel; Intel launched a chip factory in Israel. Meanwhile, US companies began to recognize that Israel had a deep talent pool. Another of Israel’s advantages was a uniquely entrepreneurial population.
“Israel has become a model that other countries seek to emulate.”
In the early 1990s, the Israeli government created an initiative to spur a homegrown VC industry. Part of this effort was Yozma, Hebrew for “initiative,” to support start-ups. The government backed 10 firms that were instructed to raise $10 million each, with 40% to 80% of that coming from Yozma and the rest from private investors. This experiment was just the support Israel’s innovation economy needed. In an unusual showing of public sector prudence, the Israeli government quickly pulled the plug on Yozma, but the seeds had been planted. In 2009, Israel was the subject of a book titled Start-up Nation. The momentum kept rolling. In 2021, Israeli companies raised $25 billion, a new high. And the 46 Israeli firms listed on US stock exchanges boasted a combined market capitalization of $300 billion. One of Israel’s advantages is that the domestic economy is small, but its entrepreneurs are ambitious, so Israeli companies must focus on markets outside Israel’s borders.
Taiwan took a unique path to VC success.
As Taiwan built its innovation economy, it didn’t try to take on the US tech sector directly. Instead, Taiwan strived to convert itself into an outsourcing hub for Silicon Valley. Taiwan’s financing scene was idiosyncratic. While the government was signing on to the innovation economy, Taiwan’s rich families preferred to avoid the risk of start-ups and instead invest in later-stage companies. Taiwan’s VC sector emerged to fill the gap, and it took off in the 1990s. In 1990, Taiwan was home to 20 VC companies; by 1999, that total had ballooned to 153. Those firms invested $1.3 billion, making Taiwan the world’s third-largest VC hub, trailing only the United States and Israel.
“Taiwan, a poor country with no natural resources, was able to transform itself into a self-sustaining innovation machine.”
Taiwan’s first big VC hit was not a local firm but a company from Singapore. Meanwhile, Taiwan remained a politically fraught destination. As China opened and the Soviet Union fell, the United States expected China to become a democracy. While US–China relations remained awkward, Washington, DC, was heartened by Taiwan’s embrace of Western-style politics. As long ago as 1996, China was firing missiles into the waters near Taiwan, and President Bill Clinton dispatched two aircraft carriers as a show of support for Taiwan.
Japan’s lack of a VC industry has hampered its economic growth.
After World War II, the United States was the world’s tech leader, but Japan was an also-ran. Companies such as Panasonic and Sony initially competed not with innovation but with copycat products that sought to leverage cost advantages. Over the postwar decades, however, Japanese companies transformed into innovators. The VHS vs. Betamax battle of the 1970s and 1980s underscored this new reality – the two products competing for dominance in Western homes had been created by Japanese companies. Sony continued its wave of innovation, unveiling the Walkman, a hit product in America, and, later, portable CD players. Sony and another Japanese firm, Nintendo, grabbed the top spots as the big guns in video game consoles. In fact, Japanese companies asserted such dominance that American firms began to complain about unfair competition. The semiconductor sector started pushing for tariffs. The US Department of Defense urged American manufacturers to pool resources so that they could better compete with Japan, but the effort fell flat.
“In the end, it was VC-backed start-ups that revived US technology and blindsided Japan’s corporate behemoths.”
The Japanese economy peaked in the early 1990s. At the time, Japan seemed poised to overwhelm its slower competitors in the United States. But the Japanese stock market never returned to its 1990 peak. In retrospect, it’s clear that Japan’s massive growth was primarily a result of the rebuilding effort after the war. Japanese innovation was impressive, but the rebound eventually ran its course. The real culprit in Japan’s stagnation was that, unlike the United States, it didn’t embrace innovation. Japan’s bureaucratic companies were effective only up to a point. But when VC truly took off in the 1990s, Japan was left behind. Japan did try to create a homegrown VC industry, but Japanese companies used a watered-down version that was all but guaranteed to fail. Most VC funds were units of traditional banks, and the industry lacked the swashbuckling risk-takers of Silicon Valley. What’s more, Japan’s VC industry specialized in loans, not equity, robbing the VC sector of a powerful profit motive. Japan’s culture simply isn’t attuned to the sort of high-risk, high-reward mind-set necessary for a successful VC industry. Americans grew comfortable with the concept of small companies failing, but in Japan, that sort of career trajectory was seen as a failure.
In the 1990s, China began to mimic US-style VC.
While Japan never fully embraced the VC ethos, China did. In 1988, China launched Torch, an economic development initiative that formed industrial parks throughout the country. The most consequential such development was Zhongguancun Science Park in Beijing. China was backing start-ups in the hope that they would compete with the West, and the strategy began to bear fruit. The Torch incubators spawned such tech success stories as Huawei, Lenovo and Suntech Power. However, those early wins didn’t generate the wave of start-ups and spin-offs that Chinese authorities had hoped for, partly because Chinese law didn’t recognize VC. So Beijing’s science ministry adjusted and began to incorporate public VC into its plans.
“China’s talented engineers and hard-driving entrepreneurs were being let down by the country’s poor, barely functioning capital markets and banking system.”
Silicon Valley mostly ignored China, but some intrepid venture capitalists recognized the opportunity represented by a nation of one billion people, many of them well-educated and poised to become consumers. In 1981, American VC Bob Theleen launched ChinaVest, an onshore VC fund that ultimately would allocate a half-billion dollars to dozens of Chinese start-ups. The internet brought China’s VC sector to another level. Alibaba founder Jack Ma took advantage of the new reality created by the software boom. Tech companies no longer needed to be based in Silicon Valley – they could take advantage of China’s engineering talent. And tech companies no longer required expensive manufacturing facilities; they could run from the founder’s home.
“Being a Korean in Japan made him an outsider, a status that Son decided to own instead of shun.”
Japanese investor Masayoshi Son became a major factor in the growth of Chinese companies through his SoftBank. Son was seen as a maverick in Japan – he had been born in Korea. Unlike Japan, China had a tradition of risk taking and entrepreneurship, so there were plenty of ambitious business leaders willing to dream big and bet everything. When Alibaba went public in 2014, it raised $25 billion on the New York Stock Exchange, making it then the biggest IPO ever.
American venture capitalists finally discovered China during a trip organized by Silicon Valley Bank.
In the early 2000s, Silicon Valley venture capitalists weren’t especially interested in India and China, but Silicon Valley Bank (SVB) saw the opportunity. SVB organized a trip to China that would prove to be a turning point in how American investors viewed the country. Those traveling from the United States included such big VC names as Don Valentine, John Doerr and Don Dixon. At the time, China didn’t allow private jets, so the titans of tech had to fly commercial. One of the VCs annoyed his Chinese hosts by proclaiming he invested only in firms headquartered within driving distance of his office on Sand Hill Road. But other VCs spotted opportunity, and the trip quickly sparked a wave of US investment in Chinese start-ups.
“China is the first country to develop an innovation engine comparable to America’s.”
Later, Baidu and Alibaba illustrated the potential of China as a VC market. But the rise of venture-backed Chinese firms wasn’t entirely smooth. While American entrepreneurs had learned to play the VC game and accepted the toll collected by VC firms, Chinese entrepreneurs often resented giving up equity to interlopers from overseas. What’s more, power struggles were frequent. US companies have boardroom battles too, but the small size and short management benches at Chinese firms meant such infighting had an outsized impact. What’s more, China quickly developed a domestic VC industry populated by firms with questionable credentials.
“VC firms backed all of China’s successful consumer technology companies, from internet to e-commerce to mobile.”
Tencent was another Chinese success story. Founded by Pony Ma, Tencent almost failed during the dot-com crash in the early 2000s. Then it went public on the Hong Kong Stock Exchange, raising $180 million – a significant sum, but certainly less than what the company ultimately would be worth. Tencent finally exploded in 2014, when the debut of 4G allowed its mobile gaming concept to take off. By 2017, Tencent was valued at $500 billion, making it Asia’s most valuable company and solidifying Chinese VC as a legitimate endeavor.
About the Authors
Terrance Philips was a senior banker at Silicon Valley Bank for more than a decade. He helped build its international businesses. Jame DiBiasio is a writer and journalist, based in Hong Kong, who has founded various financial trade publications in the region.
Business, Finance, Entrepreneurship, Venture Capital, Globalization, Technology, Startups, Investment
The book is an exploration of how venture capital (VC), the business of financing risky and innovative startups, has spread from Silicon Valley to the rest of the world, creating new hubs of technology and entrepreneurship. The authors, Terrance Philips and Jame DiBiasio, are both Americans who have built their careers in Asia, and have witnessed the rise of VC in emerging markets such as China, India, Israel, and Brazil. They trace the history and evolution of VC, from its origins in the US to its adaptation and adoption in different countries and regions. They also examine the current trends and challenges of VC, such as the impact of technology, government, and culture on the funding and development of innovation. They draw on their extensive network and experience to interview the pioneers and leaders of VC around the world, and provide insights and anecdotes that illustrate the diversity and dynamism of the global VC industry.
The book is a well-researched and well-written account of the globalization of VC, and its implications for the future of innovation. The authors combine data, analysis, and storytelling to present a comprehensive and compelling narrative of how VC has transformed the world of technology and business. They write in a clear and engaging style, avoiding jargon and technical details, and using examples and analogies to explain complex concepts. They also inject humor and passion into their writing, making it enjoyable and inspiring. The book is well-structured and organized, with each chapter focusing on a different aspect of VC and its impact on different countries and sectors. The book is not only an informative and authoritative guide to VC, but also a provocative and visionary outlook on the potential and challenges of innovation in a globalized world.