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July 20, 2004 


 Q&A: Chicago Pacific Capital Founder David Baeckelandt on Overseas Funding 7/20/2004
The mission of Going Global is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.

CHICAGO Ė ePrairie international columnist continues his string of executive Q&As with David Baeckelandt, the founder of Chicago Pacific Capital Partners (CPCP) and the president of Chicago Pacific Capital Advisors (CPCA).

Based in Chicago, CPCP is a partnership of Asian hands in Chicago, Honolulu, Shanghai and Tokyo who make investments in the Pacific Rim. Also based in Chicago, CPCA is a holding company for several private equity investments in the Pacific Rim and is the majority partner in CPCP.

Baeckelandt also spent eight years at Chicago-based William Blair & Co. where he developed and grew its Pacific Rim business.

Michael Muth: Do you invest in Asian firms coming here, U.S. firms going to Asia or some combination of both?
David Baeckelandt: Historically, I have invested in companies in Tokyo, Shanghai, Honolulu, Los Angeles, Vancouver and Chicago.

I've had the greatest financial success in Tokyo. I think some of the most exciting stories are in Chicago and then Tokyo. At the moment, I am much more active and much more interested in companies here in Chicago.

MM: Why?
DB: A lot of it is based on where your circles of contacts are located. These cities are where the circles of contacts I have are entrenched.

MM: Why are you so different from angels or VCs who only invest in their backyards?
DB: Iím not. I have been living and working in Tokyo and Chicago for 20 and 40 years, respectively.

My wife's family is from Shanghai (where her father still lives) and I have been doing business (and have a long-term partner) in Honolulu for a number of years. These places were all part of my business circuit regularly.

MM commentary: Baeckelandt is a rare breed. Though the world is becoming a global village, few have devoted the time, energy and share of mind to learn the ins and outs of a number of financial capitals throughout the world. Also, few ever build such a worldwide network.

MM: How would you recommend people prepare to do the same?
DB: Prospective angel investors should:

  1. Invest where they have a reservoir of knowledge/contacts.
  2. Donít get emotional about the investment.
  3. Remember that investing at the angel level is a lot like marriage: go in with both eyes open.
  4. Be prepared to do thorough due diligence.
  5. Donít be rushed. If itís a good story and you end up paying more, itís better to wait than for it to be a less-than-optimal situation where you endure a loss.
  6. Donít throw good money after bad. If youíve made a mistake and lost money, move on.
  7. Whenever possible (yes, itís rarely possible), try to invest alongside established VCs.

MM commentary: If you donít know the international market, donít invest there. Even if you know the market, find good partners.

MM: How was it different working for a New York-based bank as compared to working within the Pacific Rim?
DB: I worked in New York for the predecessor banks of the current Tokyo-Mitsubishi Bank. My role was essentially selling financial products (mainly investment management for qualified and non-qualified retirement plans) to the pool of 3,000-plus Japanese transplants in the U.S.

I had great success there and it was great training for my position at Blair. In fact, many of the friends I made then assisted me when I moved to Blair.

MM commentary: Though he obviously had great success at William Blair, itís a shame he had to gain his experience with a New York-based bank first rather than gaining that experience with a Chicago-based organization.

MM: Are Japanese transplants more receptive to investment solicitations than domestic Japanese?
DB: For U.S. firms marketing to them, that is certainly the case.

The Japanese need to reduce costs. Thanks to the long financial slow down as well as the turmoil of the yen and dollar exchange rates, they now take a hard look at what was once a loser and more costly flow of expats from Japan to the U.S. and other overseas outposts.

If you do your homework, demonstrate a commitment to the Japanese market, adapt your products with an eye to giving prospective Japanese clients the same level of service they would receive from a Japanese service provider, thereís no reason why you canít succeed in Japan.

Where many U.S. firms fail in their efforts to market to the Japanese is their inflexibility in this respect and also their failure to understand the competitive landscape well.

In many cases that Iím personally aware about, Japanese firms have succeeded not because they cut corners or were unethical but because of their willingness to go the extra mile for the client. Good service isnít a concept that is foreign to any business or culture.

MM commentary: One of the most important things I learned living and working abroad is that you can be successful without having to do it ďthe American wayĒ.

For example, working for Siemens in Munich, they gutted and rehabbed a perfectly good building well before it began to deteriorate. They invested in something before it became a problem. At the time, I donít think many American firms would have invested that way.

MM: What business did you grow at William Blair?
DB: I grew the institutional equity sales business. I also pioneered the first investment management sales to Japanese institutions in Japan for Blair and led the charge for some nascent investment banking business there.

This concretely translated into opening the Tokyo branch office (one of four non-U.S. offices operated by William Blair) and managing a staff of about a dozen in Tokyo with a few people assisting back in Chicago.

MM: Did you form a rep office/branch/subsidiary/joint venture?
DB: When I established the office, it was technically the only operational entity of a 100 percent owned subsidiary that was headquartered in the Cayman Islands.

It was also a full broker-dealer under Japanese law as well as being a fully recognized branch of a U.S. broker-dealer. Blair has now structured it as a financial services company from a Japanese legal standpoint (though U.S. regulators will view it as a branch office).

MM: Where does William Blair stand in Japan now?
DB: Since I left in August 2002, Blair has shrunk the office in terms of staff and returned the broker-dealer license that I secured for the firm in 1999. As far as I know, the office continues to prosper. Naturally, I view that as one of my strongest legacies at Blair.

MM: How are the terms different making investments where you do?
DB: [The people are] less sophisticated and less familiar with U.S. terms and twists of the private equity dance.

This is in part dictated by the legal environment. For example, you would rarely have the target be an LLC in Japan. It would be a kabushiki kaisha (KK) or a regular corporation. Deals seldom include preferred stock, anti-dilution rights and participation rights.

MM: How are public and private offerings different in Japan and China?
DB: Iím not as familiar with China as much as I am with Japan. The interesting linkage between Japan and China on public offerings has been the dramatic impact that a POWL (public offering without listing) has played for the placement of Chinese offerings into Japanese retail hands.

That opportunity seems largely limited to high-profile deals for obvious reasons. For Japanese companies, the process is still more difficult than it is for a U.S. counterpart. The public offering process in Japan has a few more formal steps than the U.S. approach.

There is also a tendency to do much smaller deals than we would consider with greater fanfare. With all that said, Japan had the hottest IPO market during the years 2000 to 2003 (in terms of average percentage performance as well as number of deals) of any major economy.

Tune in next Tuesday for part two of this Q&A where we will explore
disclosure, due diligence and M&A activity in Japan.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at mike@intlalliances.com.
Click here for Muthís full biography.

Previous Columns:
Q&A: ADVIZOR Solutions CEO Doug Cogswell on the Art of Partnering (7/13/2004)
Q&A: ADVIZOR Solutions CEO Doug Cogswell on BP, AstraZeneca Wins (7/6/2004)
Q&A: ADVIZOR Solutions CEO Doug Cogswell on Global Software (6/29/2004)
Q&A: CEO Terry Howerton on Why Chicago, Ukraine Made FastRoot (6/22/2004)
Q&A: FastRoot CEO Terry Howerton on Blended Chicago Approach (6/15/2004)

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