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13 Sep

Small Businesses And Foreign Investment… Possible??

Posted in Markets on 13.09.13

sbfiThe lure of the US. economy makes sources of financing overseas a viable option for small businesses.

For many business owners, the search for outside financing often begins at the nearest bank–and ends there, too, in the frustrating words, “We’re sorry, but you don’t qualify for a loan.”

Bank money is often the cheapest financing that business owners can get, but capital takes many forms and comes from many sources other than banks, including some that are unfamiliar to many entrepreneurs.

Take, for example, capital from overseas.

No one keeps tabs on how much capital American businesses raise from foreign sources, but the total probably grows every year, according to Lloyd C. Day, an assistant secretary at the California Trade and Commerce Agency in Sacramento. An arm of the state government, the agency fosters contacts between California businesses and potential investors overseas.

Day says he believes there may be hundreds of millions of dollars available to U.S. companies from foreign sources. “Money comes from institutions and from high-net-worth individuals overseas because U.S. business is a safe haven from a political standpoint–and because investors like the growth they see here.”

Put another way, the U.S. economy in general, and small and medium-sized businesses in particular, present foreign investors with opportunities that are unavailable anywhere else in the world, according to Mark Hyman, managing director of global corporate finance in New York City for Arthur Andersen LLP, an international professional-services firm.

U.S. Attractions

Hyman says Americans understand the industries that will fuel the global economy as the new century begins–computers, software, telecommunications, biotechnology, and electronic commerce, among many others. Indeed, Americans invented these industries and will very likely invent others.

Also, Hyman says, the social, political, and legal systems of the United States, despite their faults, make this country a safer place for capital than most other countries.

Among other advantages, U.S. accounting standards dictate the form and content of the balance sheets, income statements, and other documents by which outside investors can judge the risk and performance of any company they want to back, in essence making the operations of the company transparent to the outside investor.

Furthermore, investors who hit it big in the United States often hit it really big, and the new wealth created lures more investors from all over the world.

In short, Hyman says, foreign investors like their chances here, which is why each year they send a good deal of capital to these shores looking for work.

The trick is to find it. And the experience of Jerry Chang, CEO and co-founder of Clarent Corp. in California’s Silicon Valley, holds some important lessons for other business owners on the prowl for outside financing.

Linking With Hong Kong

lwhClarent makes hardware and software used to transmit telephone communications over the Internet. In essence, the company’s technology transforms the sounds carried as waves over conventional copper phone lines into digital information for Internet transmission. Privately held, the company employs about 100 people at its headquarters in Redwood City, south of San Francisco, and in six foreign countries.

A year ago Chang raised more than $10 million in a round of financing led by the Hong Kong office of Goldman Sachs, a major New York City investment-banking firm. About $3.5 million came from Goldman Sachs itself, investing on its own account, and the rest came from private investors in Hong Kong, says Richard J. Heaps, Clarent’s chief financial officer and chief operations officer.

How did Chang make the Hong Kong connection? “It wasn’t science,” says Heaps. “It was art. Jerry wanted investors who would be in it for the long term, and he spoke to venture capitalists in Silicon Valley and to some strategic investors on the West and East coasts.

“It was a process of leveraging off of who you know and what you know–and how to go about finding out what you need to know.”

Chang already knew that foreign investors like American business; in founding Clarent in 1996, he and his partner–Mike Vargo, Clarent’s chief technology officer–raised seed capital from a Taiwanese investor who is a personal acquaintance of Chang, himself a native of Taiwan.

The deal with Goldman Sachs proceeded just like any deal with U.S. investors, Heaps says. In early 1988, Chang wrote a business plan detailing Clarent’s product and his strategy for taking it to market.

He networked extensively, identified a handful of potential investors, and negotiated with two bidders, Heaps says. He closed the deal with Goldman Sachs and the Hong Kong investors–most of them wealthy individuals–last May.

“We had a commercially viable product, and it was time to scale up our operations,” Heaps says. “It took a lot of perspiration and networking.

“We were fortunate in our timing because the market we wanted to attack recognized Internet telephone technology as a legitimate product.”

Through the Hong Kong connection, Chang got what investment bankers term patient capital–so called because his backers, unlike those who invest in most other start-ups and young growth companies, did not insist that he cash them out by going public or selling out to a bigger company in three to five years. Instead, the Hong Kong investors, like Chang, saw the potential for long-term growth in Internet telephony, and they wanted in on it, Heaps says.

“There was nothing unique about the fact that the source of the funding was foreign, and there were no legal or cultural barriers,” Heaps says. “Other than the long distance, the dynamics of actually raising the financing were the same. The job was simply to make sure that our prospective investment partners had a clear picture of the opportunity.”

Ties On The Coasts

On the West Coast, Asian capital comes largely through intermediaries with family, personal, and professional ties in countries such as Taiwan and China and in cities such as Singapore and Hong Kong. On the East Coast, capital comes mostly through the big investment-banking houses and through private equity groups with ties to investors in Europe.

“In California, you have to network among diverse populations,” says the Trade and Commerce Agency’s Day. “Especially when you’re talking about capital from Asia, you have to make connections personally through foreign chambers of commerce, through banks with overseas operations, and through the many AsianAmerican business associations.

“It takes persistence and homework,” he adds, “but California is the center for venture capital in the world, and a lot of investors want to partner here so they can create their own venture-capital communities at home. They want to get in on all the activity here.”

Things You Need To Know

Heaps has some final words of advice for business owners seeking capital.

Don’t assume that your only sources of capital will be domestic, and know why your business presents a good opportunity to investors, whether they’re foreign or domestic, he says.

In addition, know what you need from your investors–for example, connections to your customers or to potential strategic partners, or board members who can bring wide expertise in your industry.

Last but not least, Heaps adds, do due diligence on any investor who bids on your proposal, because the relationship will be crucial to your success.

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2 Comments »

2 comments on this topic

  1. Reg says:

    I can tell you for sure that there is no way you’re going to get capital as a small business person anymore in America. If you don’t have several million dollars worth of hard collateral, forget it!

    Even with 800 credit, I couldn’t get any traction with the banks on setting up a franchise in Canada. These jokers don’t know money making when they see it!

    1. Big Bull says:

      Well Reg, you’re preaching to the choir here. Lord knows I could go on for an afternoon or 3000 about the Federal Reserve, the easy money and the fact that the banks are still shoring up horrifying balance sheets. That’s for sure. But I think you said it all. Where do we go from here?