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Venture capital woos the nation

By Wang Xu (China Daily)
Updated: 2008-09-15 11:32

In 1995, Zhang returned to Beijing and a year later, he persuaded Nicholas Negroponte and Edward Roberts, two prominent MIT professors, to invest $225,000 in a website which later became a leading portal in China - Sohu.com.

Zhang's company later received venture investments from Intel Capital, IDGVC and went public on the NASDAQ exchange in 2000. Besides making a fortune for himself, Zhang also earned a name as one of China's digital elite and became a business idol for China's college students.

After Zhang, a number of returnees also jumped on the bandwagon to set up their own businesses in China. And governments across the nation started to set up science parks and incubators to offer low-rent offices and other incentives for the startups to encourage homegrown innovations. Meanwhile, the nation's booming economy and rising consumer market meant companies in the nation could grow at a speed unprecedented anywhere else.

Robin Li and his Baidu.com is another example of how foreign venture capitalists helped to create a Chinese hi-tech legend. Li received his master's degree in the US and went back to Beijing to establish Baidu.com, a Chinese-language search engine, with funds secured from investors such as DFJ and IDGVC.

Li's company quickly rose to become the largest search engine in China and it also went public on the NASDAQ in 2005, with a dazzling 354 percent rise on its debut.

"In terms of promotion of scientific development, Baidu's listing is even bigger than the Shenzhou-6 spacecraft (which made China's second manned spaceflight)," says Chen Liwu, an economics professor at Yale University. "Li's wealth amounted to $900 million just overnight, and the company spawned more than 100 millionaires, most of whom had just graduated from college three or four years ago. Media coverage of Li's story will inspire young people's interest in science and technology and help them realize that they could be the next Robin Li to create the next Baidu."

Despite their success, Baidu and Sohu.com are sometimes seen as copycats, as they are modeled on US counterparts such as Google and Yahoo. They were not alone in doing so as one can easily find the Chinese versions of Ebay, Amazon and other Internet mainstays.

When the Chinese entrepreneurs started to talk with would-be foreign investors, they could simply say, "We are the Chinese version of the US company. And we will be as successful in China as it already is in the US."

VC paradise

But in recent years, homegrown entrepreneurs have begun to create novel business models tailor-made for the Chinese market.

Jiang Nanchun, a former top executive in a local advertising agency, was bored waiting for elevators and suddenly realized the downtime could be a golden opportunity for advertisers.

He then established Focus Media, which put flat panel TVs on the office buildings and in elevators to display commercials. After he acquired funds from venture capital firms such as Softbank and Wi Harper, Jiang's company quickly rose to become a leading advertising agency and launched its initial public offering in 2005.

Homegrown venture firms have also started to emerge in the past few years. In 2001, Legend Holdings Ltd, the parent company of Lenovo Group, set up its venture capital arm Legend Capital. And in the past two years, some wealthy homegrown entrepreneurs also joined the game.

According to Zero2ipo, a researcher on China's venture capital sector, venture capitalists spent $3.25 billion on local startups in 2007, up 82.7 percent compared with a year ago.

Meanwhile, private equity investors spent $12.82 billion to get stakes in 177 deals. This has made China one of the largest destinations for venture capital investment in the world.

With the sudden inflow of foreign capital, some industry insiders have become alarmed at the possible overheating of the venture capital sector. Some investors began to complain about the ridiculously high valuations required by the entrepreneurs of the fledgling startups. There are also concerns of an oversized bubble in China's venture capital sector.

Some disagree, however. "China is a paradise for venture investors and it will continue to be for a long while," says Andy Yan, founding partner of SAIF Partners. Founded in 2001, SAIF has already made over 60 investments over the last six years and now manages over $2 billion in three funds. Yan and his team made their reputation with their investment in companies such as Shanda Interactive Entertainment Ltd, the nation's largest online games company, and Acorn International, a Chinese TV direct sales platform.

"One main reason is the low-efficiency of the nation's banking sector, which is traditionally unable to meet the financial demands of private businesses, especially the SMEs," explains Yan. "And the nation's continual push to restructure its State-owned sector will offer great opportunities for venture capitalists and private equity investors.

"But the nation's entrepreneurs as a whole will be the largest winner," says Yan. "The more we earned from their successes, the more we will have to help fund the next Baidu, Shanda and Focus Media."

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