The Wall Street Journal

By: Henny Sender
October 27, 2000

Draper Tries to Break Tech Sell-Off Pattern

HONG KONG — In an unusual move, Draper Fisher Jurvetson, one of Silicon Valley’s premier venture-capital firms, is trying to change the share-price dynamics of a Draper-backed company listed on Hong Kong’s Growth Enterprise Market.

Draper has persuaded the management of Internet investment bank and three of its key investors to pledge to hold their techpacific stock after a lockup period on selling their shares expired last week.

By so doing, Draper, which owns 3.48% of techpacific, hopes to reassure retail investors that there won’t be a further sell-off in the stock. Techpacific shares closed Thursday at 29 Hong Kong cents (3.72 U.S. cents), 72% below its April initial-public-offering price of HK$1.05. If Draper’s effort succeeds and techpacific shares rally, the tactic could put pressure on other newly listed companies’ management and investors to make similar promises not to sell their stock as soon as they are permitted to do so. Fear of such sell-offs has become a key factor in depressing stock prices on many of Asia’s new, tech-oriented exchanges, including those in Hong Kong, Seoul and Tokyo. The poor showing has provoked acrimony between entrepreneurs and venture capitalists across the region.

“The [venture-capital firms] pushed many companies to go to the market before they were ready,” says an executive in Softbank Corp.’s Seoul office. “And then, they took their money out as soon as they could.”

But whether the combination of Silicon Valley discipline and taking a long-term view of investments can triumph over the negative sentiment and traditional short-term trading mentality prevailing in Hong Kong and other Asian markets isn’t clear.

Lockups — in which managers and major investors agree to a moratorium on selling stock after an IPO — were originally designed to prevent the volatility that they now seem to be inciting. The idea was to protect both new investors and the company itself. But in Asia, it hasn’t worked that way: Investors who have gotten into companies early have generally sold stock as soon as they could. “Declines in stock prices ahead of the end of the lockups have started kicking in earlier and earlier,” says David Williams, head of Draper’s Hong Kong office. “Nobody wants to hold shares of a company when the lockup ends.”

Stock-price charts of new tech companies around the region show heavy trading activity just before lockup periods expire and just after. The first burst of activity comes as last-to-know investors pick up on the impending sell-off; the second follows as the unlocked stock hits the market. In an effort to break that pattern, Mr. Williams approached techpacific’s management, which controls 45% of its shares, and substantial outside shareholders, including the Kuwait Fund for Arab Economic Development, Regent Pacific Group and two Japan-based funds controlled by Softbank. Collectively, the outside investors control 23.5% of techpacific’s stock. Mr. Williams pushed them to promise to refrain from selling shares for another six months.

Unlike the other investors, Draper had no lockup and was prepared to use its leverage by selling techpacific shares ahead of the other investors if they didn’t go along with the deal. “It was a great point,” concedes techpacific Chief Executive Officer Johnny Chan. “With these market conditions, it would have been foolhardy to sell even a small amount.”

Regent Pacific acknowledges that it agreed to Draper’s plan. Softbank executives didn’t respond to telephoned requests for comment. Kuwait Fund officials couldn’t be reached for comment.

A month ago, when Mr. Williams made his request, techpacific shares were trading in a sensitive zone. The stock price was about the same that Draper itself had paid, but it was just above the level at which some of the other key techpacific investors bought into the company. If those investors were to sell as soon as their lockup period expired, they had a chance to book a small profit. If the price declined much further, however, they might have been reluctant to sell and be forced to accept a loss on their investment.

Mr. Williams’ maneuver — while not a standard Silicon Valley tactic — illustrates the long-term investment approach that top-rung U.S. venture-capital firms say they favor. In addition to attempting to stabilize the share price of its investments, Draper also tries to promote the companies it backs in other ways. For example, Draper typically asks well-known brokerage firms to do research on such companies in an effort to widen its shareholder base among institutional investors who are viewed as more long-term oriented than retail investors.