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The newly launched ¥30 billion Kyocera Goldman Sachs Venture Fund was started almost by chance. Goldman chair and CEO Hank Paulson was on one of his regular trips to Japan last year to meet clients. During a meeting with Kazuo Inamori, the charismatic honorary chair of Kyocera (a communications equipment and semiconductor component producer), the two started talking about providing venture capital for private high-tech firms in Japan. Their minds met and the two men signed a deal on January 7 in Tokyo, tying the 130-year-old Wall Street finance firm with one of Japan's most progressive companies. Goldman coughed up ¥20 billion, Kyocera ¥10 billion, creating one of the biggest such funds in an increasingly crowded VC market. Bob Delaney, a Goldman director on the fund's board, spoke to Paul Murphy.
What type of high-tech areas will the fund invest in?
Kyocera and we agreed to take a very broad view as to what we are going to look at in the technology arena. It will include Internet-related companies, more traditional information-technology businesses, software, hardware, emerging telecom. We might invest in a company that is entering a new area of telecom because of a technology change or a deregulatory change. One of the things we're interested in is high-tech manufacturing. We're hopeful, given the technical prowess of Japan, that we will be looking at more hardware manufacturers and more manufacturing-related companies here than we would see in other parts of the world.
How do you go about targeting a company?
Goldman Sachs has over 1,000 employees in Japan. And we have people in a number of different areas, obviously. But if you look at the investment banking business, that's a business that goes out and talks to a wide variety of companies about their financial needs. Now in the course of those conversations, especially people who are focused on the technology industry, they are constantly coming across private companies that are interested in either getting investments or in going public. So we have a constant dialogue with what I call venture companies through our normal banking business.
Similarly, Kyocera, through either its business relationships or through the
context Dr. Inamori has with his management school [Seiwa-Juku: www02.so-net.ne.jp/~seiwa],
comes across opportunities to make venture capital investment, and again
that source comes back to the fund. The third level of inquiry is direct
calls from venture companies who know about the fund and know that we
are interested in looking at technology companies.
What type of role will you play in the companies in which
you invest?
We are very flexible. We are clearly willing to take very small minority positions where we would have only a small say or in some cases only an observer status in the companies we invest in. But perhaps more likely, we would like to have at least some participation in helping formulate the strategy and plans for the company if we make large investments.
What standards do you use to evaluate companies?
The first and most important thing that we look at is the quality of the management we're backing and the quality of the business or business opportunity that the company is trying to address. So we look for good management in areas where we think a company will have a competitive edge, and also in a market where we think there is significant room for growth.
What is the smallest size that a company can be to get funding and what should its track record be?
We typically think about small-size investments on behalf of the fund as being equivalent to $1 million. However, if a particularly attractive opportunity arose where we had to make an investment of less than that, we might participate. We don't have any hard and fast rule about a minimum time up and running, but our experience and desire is to invest in companies that are not at the absolute beginning of their life cycle.
What success rate are you aiming for?
Since we are probably targeting more middle and later stage investments, I think our success rate on investment will be high. That's partly because of the stage in which we are investing. We look at rates of return over long periods of time. We don't have targeted rates of return per se.
Other big names such as Toyota, Mitsui, IBM, and Nomura have already set up high-tech venture cap funds. What can you offer that is different?
The reality is that with a surge of venture companies being created in Japan, we believe that just as in Europe, just as in the United States, there will be plenty of opportunity for us and other funds to provide value-added capital to companies going forward. So your question is what additional resources are we bringing to the party? Well, we like to think of ourselves as bringing a differentiated product with our investment capital. And maybe the answer is we're not, maybe other people are doing the same thing, but our initial experience over the last month is that there are plenty of opportunities for us.
Are you worried that the Internet-related market is overhyped and may crash?
I think we all have a concern that certain public market valuations are too high, and what will be the impact if there is a large correction in those companies? And the only way to protect yourself is to invest in companies, not because you think they will go public at high valuation, but because over the long term you believe these will be successful companies. What we're seeing in certain of the more developed sectors of the Internet in the US is that the leading companies keep getting larger and larger in terms of relative share. That's a lesson we're all watching very carefully, because it means that in some industry sectors there may be only one or two winners rather than what we're used to, which is a half dozen or so successful companies in a particular sector. And so that puts a high premium on us not only picking the right sector, but making sure we're with the company that is going to be the market leader.
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