News last week that U.S. online auctioneer eBay is reportedly selling off its China operations points up a challenge that VCs know all about: Investing in the world’s hottest economy is tricky business.
Differing attitudes toward intellectual property, government regulation, and cultural differences can sour deals between U.S. and Chinese investors and businesspeople, according to a survey by the National Venture Capital Association and consulting firm Deloitte & Touche. Despite these obstacles, more than 30 percent of venture capitalists in the United States plan to invest in Chinese companies this year, according to the July survey.
The enthusiasm over China’s push into high technology is clearly growing. In the second quarter of 2006, firms struck 40 deals in China’s IT sector, double the previous year’s quarter, according to a report by Dow Jones VentureOne and Ernst & Young. The amount invested nearly tripled, to $313.6 million. Most of the capital went to Internet-related services, where investment increased five-fold. What’s more, a number of VCs have spun off China-specific funds. One notable example: Intel Capital set up a $200-million fund this past year, and recently sank $40 million into Chinese software company Neusoft.
One recent change? To increase chances of success, some investors are putting teams of local talent on the ground, said Jeff Wu, executive vice president of Chinese technology outsourcing company WorkSoft, at a recent China-focused conference in Santa Clara, California. His Beijing-based company does just that, setting up outposts in China for U.S. technology firms such as IBM, Oracle, and Microsoft. The company has rung up about $40 million in venture cash from U.S. investors Sequoia Capital and DCM – Doll Capital Management, two VC firms that are among the top 10 investors in China these days (see chart on this page).
Back home, U.S. venture firms are also bringing partners on board who could give them an edge in sealing deals in China. Among the first was Kleiner Perkins Caulfield & Byers; in 1999 it hired its first Chinese-American partner, Aileen Lee, and has since hired three more partners of Chinese descent. Though far from fluent in Chinese languages, Ms. Lee says her presence on teams that travel to China has been welcomed by the business community there.
American investors expecting a quick and easy return in China are in for a shock, says John Doerr, a venture capitalist and general partner at Kleiner Perkins. “The Chinese community is well educated, works incredibly hard, and believes that... to get rich is glorious,” says Mr. Doerr, a keynoter at the China conference. But Mr. Doerr likens the China high-tech market to the “wild west”—a frontier rife with claim-jumpers, where new innovation is likely to be quickly copied, reverse-engineered, and mass-produced. He adds that many managers running Chinese tech startups lack experience and that many of their ventures don’t succeed.
eBay declined to comment on speculation that it is selling its EachNet operation in China. But even if the U.S. Internet firm is having trouble, it won’t scare off any U.S. VCs who see big opportunity in homegrown Chinese companies.
Contact the writer:SMugrabi@RedHerring.com
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