China: The World’s Biggest Market Opportunity or Newest Gold-Rush Fad

Rich and John just went on a “fact finding” trip to China – a month after some 300 valley VCs did the same (although I heard they flew first and had guided tour busses).

China is the hot topic amongst tons of venture folks all over. And I have to say, Beijing and Shanghai are amazing places jam packed with entreprenuers. The country is a huge and growing consumer market and huge and growing supplier of technology. It makes total sense for just about every company to put China on their strategic roadmap. But before you jump in and start direct investing in Chinese companies right and left there are some things to consider. Here are a few observations and reflections:

The China Market Three factors are worth paying strong attention to China’s hugeness, diversity, and complexity.
Hugeness.
• It is a huge consumer market, but growing also as global corporate players
• There are 1.3 billion people and over 300mm cellphones
• Incredible growth rates, GDP, technology adoption
• Pundits speculate that it will overtake Japan in 5 years, US in ??
Diversity: One of the things that we heard over and over again while there was that there is not one China there are two or even three Chinas.
• New China: East, wealthy, capitalist, techie, global
• Old China: rural, poor, backward, disconnected
• Youth: migrating, discriminating, ambitious, influencial
Complexity In other words things that we take for granted cannot be in China.
• Wildwest: it is still a fast and loose place. Rule of law is growing, but trust and integrity are a lot more important ways to mitigate the risk of investing in one company and seeing all the funds mysteriously funneled into another.
• Local culture: You have to know it. The language, Guanshi, connections, cash/verbal dealings – these are things you need to understand well.
• Government: Many folks we talked to said that China is the most capitalist country in the world, more so than the US. And there is a lot of truth to this. They also said the government is working hard to foster this – opening, fostering markets, making it easier for foreign investment. But the government and its agenda are still a major force. And while international ownership/IP rules are improving they are still complex and of concern.

Venture Capital in China
Capital
• Traditionally most of the foreign (often Hong Kong or Taiwan) capital has gone to big buyouts, privatizations
• Or for small, early stage deals it has all been local angels or family money
• But now there are some big valley entrants – notably NEA, Sequoia
• There is an emerging IPO and acquisition market (with a lot of Cayman Island companies) – not the recent investments by Amazon, Google, and Yahoo
• The pressure of listing on the NASDAQ has been very healthy in terms of adding financial discipline
• A friend there said in terms of capital markets her there are a lot of booms, and bust, with cycles are high and fast
Entrepreneurs There are two types:
• Chinese returnees (ABCs = American Born Chinese, or foreign Stanford grads going back home). These are the classic valley entreprenuers. Polished, speak English, went to Stanford, know how to build great PPTs. These folks are very popular with foreign VCs and deals with them are getting bid up quickly.
• Domestics. There is a much bigger universe of local, highly aggressive busines people with great local knowledge, often 2nd/3rd timers. But they don’t speak English, are deeply networked, and intertwined with family. They will often be skeptical of venture capital but one VC we talked to said they are totally focused on them. They see getting a 2-3X return just in terms of professionalizing such companies.
Risk Pay attention
• This market is a lot less about product or technology risk. Most companies are not taking that much of it. They are following the Korea model, where a company like Samsung just out executed others, sold domestically and regionally and then built a huge global brand.
• It is a lot more about people/management risk. As mentioned before who you work with, their honesty, profesionalism, etc. are all key.