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VC firm targets Chinese funds for SD market

Although venture capital funding has recently taken a dip in San Diego County, longtime venture capitalist Thomas Gephart and civic leader Malin Burnham think they may have found a solution: China.

In partnership with government and business leaders in the Chinese export center of Dalian, they are aiming to bring up to $1 billion in venture capital funds to high-tech projects in the United States over the next decade, mostly in San Diego and Orange counties.

As founder and chairman of the Ventana Global investment firm, Gephart has identified 13 companies for the $200 million first phase of the deal, including eight in San Diego County, involved in such diverse areas as pharmaceutical testing, diagnostic devices, green fuels, cloud-based medical communications and anti-pollution technology. Three Orange County firms are also on the list for the first wave, as well as one each in Oregon and Minnesota.

"The money will be raised in China but invested in the U.S. and all the decisions about investments will be made here," said Burnham, one of Gephart's longtime friends and backers. "They won't be meddling with these businesses."

But the Chinese are interested in more than mere returns on investment.

"The circular part is that even though the companies are based here, as they grow and expand they will have partners in China who can give them an entry into the Chinese market," Gephart said.

In addition, Ventana has pledged to help launch a center for innovation in the northern coastal city of Dalian, an industry and trade center that is investing heavily in the fund.

"Dalian has some fine universities and it is already a center for software, wireless and 3-D movie technology, with a long history of being very export-oriented," Gephart said. "But they're realizing they would get more attention by focusing on innovation."

Gephart said University of California campuses in San Diego and Irvine, and the University of Southern California have already expressed an interest in working on the project.

In the first phase of the funding, Ventana is raising $3 million in the United States to help clear legal and regulatory hurdles to allow $200 million worth of investments from China, including $40 million from the city of Dalian and $17 million from one of its leading businessmen.

"The $200 million will come in simultaneously with the closing of the $3 million in the U.S.," Gephart said. "They expect us to have some skin in the game."

Gephart said two more waves of funding should bring in at least $700 million more within the next 10 years, adding that the total could reach as high as $1 billion.

"I believe at the end of the day that a lot of jobs will be created in San Diego because of this," Gephart said.

Gephart pioneered the idea of bringing foreign capital into San Diego technology firms in 1982, with a fund that attracted investors from Denmark, Norway and Sweden.

During the past three decades, Ventana has launched six other international funds, attracting a total of $3.2 billion from Thailand, Belgium and Brazil.

Burkhart's funds provided backing to more than 100 companies, including San Diego's Cymer semiconductor designer, Brooktree chipset designer and Maxim, Agouron and Idun pharmaceutical firms, all of which have since been acquired by larger firms.

Burnham said he is particularly excited about the latest fund because there is "a sense of urgency" in China about finding safe places to invest.

Three decades after opening its once-closed economy, China has about $4 trillion in private wealth, but much of it has been tied up in speculative investments in the volatile domestic real estate market, resulting in vast developments of largely empty buildings.

To prevent the real estate bubble from getting even bigger, the Chinese government has been prodding companies and wealthy individuals to invest overseas instead, particularly in "innovative companies" that could help them "leverage their own systematic competitive advantages," in the words of a plenary report earlier this year.

Chinese Premier Li Keqiang predicts that China's overseas investments could total $500 billion within the next five years, led by privately owned companies and individual investors rather than the state-owned enterprises that once were the biggest investors.

"The Chinese are extremely hungry for new technologies and raw innovations in biotechnology, new energy, clean technology and new material," Lin Sun, executive director at Ventana, wrote earlier this year. "They are desperately looking to import new products and ideas. In the U.S., everything is 'made in China,' but in China they feel their products are inferior. They want anything made in the U.S."

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