- The Washington Times - Monday, August 28, 2000

Guy Naggar came to Washington last year as a passionate art collector and left the nation's capital a newly minted trans-Atlantic venture capitalist.
The French-born chairman of Dawnay Day Lander, a London financial services company, Mr. Naggar was at the Hirschhorn Gallery in October to show a work by the 20th-century painter Lucien Freud. Though the works by the grandson of Sigmund Freud held his fancy that day, he also had in his pocket the prospectus for his firm's planned Internet incubator, and a colleague's recommendation that he look up one Emanuel Friedman.
"Manny" Friedman is the chairman of Friedman, Billings, Ramsey Group (FBR), the Arlington-based finance firm whose name seems ubiquitous in the Washington technology set. And Mr. Friedman, having made the firm into a major regional player, was ready to take the plunge overseas.
"I had no notion at all that FBR was ready to go into Europe," Mr. Naggar said. "But within a few minutes of talking with Manny, I knew there was a natural connection."
After the meeting, senior executives got to work, and by December, the two companies had inked a deal, the American firm's first abroad. FBR would bring to the table its experience in early-stage funding of Northern Virginia Internet and telecommunications start-ups, while Dawnay Day Lander would keep its fingers on the pulse of British entrepreneurs.
"Our philosophy was to find a U.S. partner," said Jonathan Lander, managing director of Dawnay Day Lander. "In Internet ventures, if you don't find a U.S. partner, you're in trouble."
"Our strategy is to be in London, in the middle of the deal flow," echoed Bob Smith, FBR's chief operating officer. "And when the start-ups happen, we will be there."
The venture capital industry, that indispensable midwife to Northern Virginia's thriving technology industry, is headed across the Atlantic and over the Pacific, and not on the slow boat either. Usually with the help of foreign partners, Washington-area financiers are putting down roots overseas where Internet and telecommunications companies are ready to blossom, eager to replicate their successes back home.
"Venture capital is going global as we speak," said Philip Garfinkle, president of Yazam, an Israeli-American company that gives new technology companies both money and assistance to get a quick leg up. Yazam opened an office in Reston earlier this month.

The American model

The internationalization of the venture capital industry is a national phenomenon once confined to California and New York. But now, Washington-area funds are getting a piece of the action. In the 18 months ending in June, venture firms in Virginia, Maryland and the District sent $3.5 billion overseas, according to Venture Economics, a Newark, N.J.-based research firm.
That number represents a respectable 8.5 percent of the American total of venture capital invested outside the United States, primarily in Europe, a region primed for its own Internet and telecommunications boom.
"Overseas investing is about replicating what [American venture capitalists] know from the United States," said Jess Reyes, the research company's vice president for global product management.
Still, local financiers caution that the $24.5 billion in domestic venture investment that American funds sank into stateside projects from January to June this year alone dwarfs this still embryonic international trend. But the numbers are heading upward as other countries, particularly in Europe, move away from risk-averse ways to get small companies going, toward in-vestments that rely on small sums and smart entrepreneurs to nurture today's corporate infants into tomorrow's titans.
"The American model is starting to bite overseas," said Edward Mathias, a managing director at the Carlyle Group who helps invest the firm's two international venture capital funds, one aimed at Europe, the other at Asia.
Like the Wild West-era bank robber Willie Sutton defending his career choice, area venture capitalists say they are branching out into foreign markets for one reason: that's where the money is.
They also move overseas because venture capital in the United States has become a much more crowded and competitive field over the past 10 years.
"In this area, there are lots of players, more and more every day," said Marc Chafetz, a managing director for Bozman Partners, a D.C.-based company with offices in Paris. "In France, there are far fewer."

China and India

McLean-based Global Internet Ventures, in a bold move, has headed into China and India two complex and often murky markets to tap their enormous reservoirs of technical talent. Already, it has put roughly $20 million into 10 companies.
"We sat down and started thinking about the big trends over the next 10 years," said Mr. Tonkel, a Silicon Valley veteran and former president of the regionally focused Capital Investors Group. "One was globalization. If the Internet is anything, it is global."
But Mr. Tonkel cautions that Global Internet Ventures still prizes the advantages it has in the United States, which remains the best climate for Internet start-ups, even as the McLean firm looks for new companies that can compete globally. Few American venture capitalists, he points out, would be willing to fund a venture that is incorporated in China, where business laws are archaic and often ambiguous.
Global Internet Ventures, for example, sank $3.5 million into Angel Engineers, a company that employs most of its engineers in Beijing. For legal reasons, however, the company is incorporated in California.
It provides international engineering services to other technology companies, allowing them to outsource functions performed by a chief technology officer.
Whatever the allure of doing business in the Far East, this portfolio also extracts a personal price from venture capitalists. Mr. Tonkel's offices in Tysons Corner bear the signs of a young company more interested in deal-making than decorating. The offices are eerily quiet for a vigorous new enterprise as managers hit the road for weeks at a time.
"See this?" Mr. Tonkel said, pointing to an empty office. "No one is ever here."
But area firms say successful international venture capital also depends on localizing it as extensively as possible. Rarely would a firm try to fund and manage an investment overseas without a physical presence in that market. Constant travel by the Americans is not enough.
"It's essential to have someone who is well-connected and on the ground," said Lior Samuelson, a managing partner at Reston-based Mercator Broadband Partners, which will soon open an office in Tel Aviv.
Mr. Tonkel's company has hired Americans with years of experience on the ground in China and India, and they work with locals who have extensive managerial and financial know-how.
Even with offices overseas, many venture capitalists look for companies that will operate primarily in the United States. Mercator, Mr. Samuelson said, will seek out Israeli companies that build "the picks and shovels" of a broadband Internet network still in its infancy. But the United States remains their main market, and Northern Virginia is an ideal jumping-off point.
"If the Israeli companies want to enter the United States, companies like ours can help," Mr. Samuelson said. "But you have to be there [in Israel] to find them early."

Israeli gusto

Local venture capitalists say Israel, more than any other international market, has taken to the American model of seed-stage investing with gusto. Israeli companies have been soaking up American venture capital for several years.
And Sterling, Va.-based America Online Inc. has been a major player there since its 1998 acquisition of Mirabilis, the Israeli company that invented the "ICQ" instant messaging software.
AOL Investments, the company's venture capital arm, reportedly invested $60 million in Israeli venture funds and new companies in the first four months of this year.
Yazam was founded last year by Schlomo Kalish, head of a major Israeli investment bank. The company landed in Northern Virginia in large part because Mr. Garfinkle is an old hand from the area. He helped start Herndon-based PictureVision, a developer of Internet photography software now owned by Eastman Kodak.
In another local twist, Yazam the Hebrew word for entrepreneur snared financial support in April from the Carlyle Group's European venture capital fund, giving the company a certified pedigree from three continents.
"We are not just an Israeli company, though we have a strong presence in Israel," Mr. Garfinkle said. "We open up our contacts to companies that want to do business globally."
Vividly demonstrating this point, Yazam, which provides seed money and services to new companies, acquired the London-based First Tuesday franchise in July. Mr. Garfinkle hopes that his multinational, 80,000-member networking organization for entrepreneurs and financiers will let Yazam tap talent in the Washington area and around the world.
The theme of using international networks to both find new opportunities and leverage the value of existing investments emerges repeatedly among globally active venture capitalists.
Some venture firms see themselves as a nuts-and-bolts lifeline for new companies that want to use their backers' infrastructure to get a foot in the door. Redleaf Group Inc., a Silicon Valley-based seed capital company that is opening offices in Europe and Asia, sees this capacity as a main selling point.
"Once we find the right entrepreneurs, they can ramp up nationally and internationally," said Mark Frantz, a senior director with the company. A Redleaf-backed company might, for example, use the overseas offices to begin distributing products in other countries.
Internet Partnership Group, a London-based firm that funds and incubates start-ups, has had an office in the District since February. It is also present in Boston, Philadelphia and Milan, and will soon enter Zurich and Paris. With investments in Internet content companies like Penguin Radio in the District, the company says it can help drive their expansion overseas.
"It's definitely an ad hoc process," said Craig Sharon, a senior vice president at the company. "But we could [do things like] introduce them to the Italian telecommunications companies."

European entrepreneurs

So far, only a few foreign venture capital firms have set up shop in the United States. European firms, in particular, are devoting most of their attention to an increasingly entrepreneurial culture taking hold in the Old World after years of stagnation.
"Most of this sort of venture activity is going [from the United States to Europe], for obvious reasons," Mr. Mathias said.
This state of affairs does not sit well with people like Ken Hagerty, president of Vienna-based Global Venture Investors Association. Mr. Hagerty believes there is a golden opportunity to marry the American venture capital culture with foreign money. He is planning a November conference in Washington to drive the point home.
"People seem to forget one fact: venture capital funds in the United States need money, too, and more could come from overseas," he said.
Europe has not bred "angel" investors who take big risks by putting their money into companies that are barely more than an idea. Instead, banks have sought safe bets usually with collateral on profitable companies, making Europe a place where good ideas desperately seek money, rather than the other way around.
If foreign investors took stakes in American venture capital funds, they would obtain hands-on experience in how to coax a winning performance out of fragile start-ups, and how to take their lumps stoically and bounce back quickly if an investment goes south, Mr. Hagerty said.
No venture capital firm in this area is looking askance at the explosion of start-ups in the Washington area, and the opportunities they offer. But the smart ones have accepted the relentless logic of the Internet revolution, and all its attendant telecommunications technologies. Once confined to the United States, it is spreading globally and relentlessly, and at a speed that lay people may not appreciate.
Friedman Billings Ramsey already has an office in Austria, giving it a foot in the door in the German-speaking world, home to the richest consumers in Europe. And Mr. Naggar's French roots, both companies hope, will help this Anglo-American strategic partnership storm the continent. FBR, for its part, would remain a regional powerhouse, but get a crucial 20 percent of its revenues from overseas within a few years, Mr. Smith, the COO, said.
"There are still a ton of great opportunities in this area," Mr. Tonkel said, "but, inevitably, the growth will be global."


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