Summerton has since gone to money sources more comfortable with technology: Du Pont, the state of Oregon, and the National Institutes of Health. Now, he is talking to Mitsui & Co., which is trying to interest a number of its trading partners in Antivirals. He says the Japanese appreciation for technology runs deep. "Their high-level people across the board are technology people. They don't have M.B.A.s running the show. Mitsui has told me, 'We don't care about your management. We care about whether or not you've got the best technology and whether or not you've got a long-term future.' "
It wasn't so many years ago that Japan bashing was a favorite pastime in entrepreneurial and venture capital circles. Start-ups like Antivirals were in stiff competition with the Japanese. U.S. venture capitalists were throwing money at them. That sense of common cause crystallized in the hot IPO market of 1983 -- a market of unreal valuations that soon burned itself out, scorching plenty of investors in the process. The 1987 stock-market crash only worsened the climate for IPOs. That has left venture capitalists with no easy exit from technology companies, and they have been putting their money elsewhere.
One biotechnology company that didn't go public was San Diego's The Immune Response Corp., which had to postpone indefinitely its IPO for lack of institutional investor interest. The company has an AIDS vaccine in phase II clinical trials. The chairman of the company's scientific advisory committee, better known than Jim Summerton, is Jonas Salk, developer of the first polio vaccine. Jay Kranzler notes dryly, "You know where he's going to be going for his money."
A 1988 study by Electronic Trend Publications, in Saratoga, Calif., says that from 1986 to 1988, venture capitalists have reduced the percentage of their funds invested in start-ups from 23% to 7%. Moreover, in the deals they do fund, U.S. venture capitalists drive a harder bargain. They ask for a fatter slice of the company. They pull the plug sooner when the deal sours. When entrepreneurs these days talk about U.S. venture capital they no longer rhapsodize about being in league with their U.S. financiers against the Japanese. They quietly curse venture capital's fickle, impatient nature. They call it "hot" money.
Reid Dennis, a senior partner at Institutional Venture Partners, in Menlo Park, Calif., hardly implies hot money. A gray-haired man in bow tie and tortoiseshell-rimmed glasses, he conveys a kindly, avuncular mien. The hushed ambience of his tasteful, well-appointed office also suggests a success that has not come overnight, will not disappear tomorrow. It thus comes as a bit of a jolt when Dennis announces: "There's going to be a shakeout in this industry. The performance figures are abysmal. It's amazing to me that investors are still willing to invest with venture capital firms."
Dennis attributes much of the dismal performance to sheer numbers. Too many inexperienced people getting into the business. Too much money being flung at too many deals. Now, he admits the pendulum has swung. "There are not as many interesting opportunities. There's intense competition for virtually every good deal." He adds, "We are somewhat priced out of the later rounds [by the Japanese]. We can still play, but it's not as economically attractive."
Nonetheless, Dennis says he does not feel threatened by increased Japanese entry into the venture field. In fact, he welcomes their presence. There is, in fact, good reason for that. A venture capitalist's early-round stake can suddenly get a boost when a Japanese investor buys in at a much higher price later on. The venture capitalist rides the valuation wave. In so doing, a subtler reality arises. Not only entrepreneurs but venture capitalists have succumbed to the lure of Japanese capital.
Over the past two years, Kubota paid $6 million for 9.2% of Exabyte, a computer peripheral company that Reid Dennis's partnership had funded early on. In its most recent round, Kubota paid eight times more per share than Dennis and the other early investors had. After some lean years in high tech, that looked pretty good. Says Dennis: "They were willing to pay a price that at the time looked astronomical."
Dennis describes this deal as "win-win." Kubota gets an important new product. Exabyte gets manufacturing muscle. Dennis and his firm get a nice payoff. But then in the next breath Dennis expresses an entirely different sentiment -- worry for the start-up he has nurtured and now must offer up to well-heeled suitor: "Kubota is so big. When a flea sleeps with an elephant, it's awfully easy to get rolled on."
Dave Pidwell is an engineer who knew he wanted patient, rather than hot, money for his fledgling software company, Rasna, after he ran through his first round of financing -- $5 million from U.S. venture capitalists. Says Pidwell: "I chose to bypass venture capital. Corporate partners are willing to pay more and make decisions more quickly."
Pidwell made a list of 12 Japanese companies he considered "ideal" investors. "I then went over and met with every one of them. Within a month I had a handshake with Kubota." Three months after that Pidwell sold 15% of Rasna to Kubota for $10 million. In America he never could have gotten so much money while giving up so little of his company -- a company that will not produce its first product until this March.
In making this deal, Pidwell wanted more than access to foreign markets. He wanted a partnership with a company whose long-term objectives jibed with his. He was looking for a corporate partner that shared his values. Rasna develops sophisticated mechanical engineering programs. Kubota clearly intends to remain a leader in engineering design and manufacturing. Rasna's software will be the heart and soul of that effort. "They received the right to use my technology under certain conditions," says Pidwell. "They don't receive ownership rights to the technology." Pidwell is now engaged in the same systematic search on the other side of the globe, looking for a large German company as a second strategic partner.
Dave Pidwell was an early employee at ROLM and a founder of Inmac, which today is a $250-million company. He is a software star, the very personification of what has made the Valley hum -- and what the Japanese most lack. When Pidwell speaks about the Japanese he sounds almost grateful that they have afforded him a chance to do his creative thing over a long period of time. "They clearly want their investment to be successful. They measure it not only in yen, but in access to technology. Kubota has a long-term business strategy to be a leader in mechanical automation. It's not a 2- or 5-year strategy. It's a 20-year strategy." He cites the example of Japanese automakers, a number of which Pidwell is currently talking to. "Through technology Toyota can bring a car from concept to market in three years. Right now it takes GM twice as long. What Toyota has done in the auto industry Kubota is trying to do in heavy off-road equipment." Using Rasna's software -- Pidwell's brains -- will make it all the more possible.
