dksuddeth

While the start of this is laid squarely at the feet of not only Clinton but also Bush for not enforcing WTO rules and sanctions against china for pegging the yen just under the dollar.

Venture capitalists flock to China.
Silicon Valley financiers seek profit in high-tech start-ups

SAN FRANCISCO: Lately, this joke has been making the rounds among Silicon Valley venture capitalists: These days, you are far more likely to run into a colleague at a hotel bar in Beijing or Shanghai than at a local haunt in Northern California.

The joke has the ring of truth. Venture investors say it is hardly possible any more to step into the business-class cabin of a flight from San Francisco to China without running into at least a couple of competitors.

Gerard Langeler, a partner in the Portland, Oregon, office of the OVP venture partnership, confesses that he is frightened when he contemplates all those trips to China. "It's a scary thing because you worry the bubble phenomenon is moving five years later to a different locale," he said.

Venture capitalists are focusing on China partly because they are sitting on more money than they could possibly invest in American-based start-up companies. Collectively, venture firms in the United States have on hand $64 billion, according to the research firm VentureOne, yet they are investing only about $5 billion a quarter.

Investors, focusing on semiconductor, telecommunications and Internet start-ups, also want to tap China's potential to provide outsourcing services to the companies already in their portfolios.

But mainly, venture capitalists are hauling themselves across numerous time zones because of successes like 51job. The company, a Shanghai-based provider of human resource services in China, went public on the Nasdaq market in the United States on Sept. 30.

Doll Capital Management, based in Menlo Park, California, invested $14 million in 51job in early 2000. Today, that investment is worth more than $260 million, the largest return in the firm's history, David Chao, a Doll Capital founding partner, said. Doll Capital was among the first U.S.-based venture firms to invest in China-based start-ups.

"Statistically speaking, it's still better to invest in the U.S., no question," Chao said. "But if you have access to good deal flow in China, and if you have the right experience, the rewards are large."

At the same time, many unhappy endings may lie ahead. Chao said that he wondered whether the newcomers would be able to demonstrate patience or impetuously pursue the next 51job. In the process, they may learn the hard way that China is very different from anywhere else on earth, particularly the United States, as a place to do business.

"I think of China as the wild, wild West," Chao said. "Business law has only been in practice for the last 10 years. There are all these fundamental issues that have yet to be resolved. What rights does a shareholder have in China?"

Chao is convinced that in time, many venture capitalists will wish they had remained closer to home. "There's definitely a bit of a lemming effect going on here," he said. "A lot of these guys will end up getting burned."

Jing Huang, managing director of the Softbank Asia Infrastructure fund, said he was inclined to agree. Huang was born and raised in China and earned his undergraduate degree in Beijing. He earned a master's from Stanford University and an MBA from Harvard.

He distinguishes between venture capitalists like himself, who are based in China but investing dollars, and those he calls the "traveling VCs," whose offices are thousands of miles away. A third category, the local venture capitalist investing local money, is almost nonexistent, Huang and others said.

"You can hear the difference between the two groups," Huang said.

"The traveling VC whose interest is only recent sees the positive side of things a lot more than we do. They tend to underestimate some of the difficulties of doing business here. They look at Nasdaq and see 51job and decide they should invest."

The traveling venture capitalist is also inclined to pay American prices for an ownership stake in a Chinese start-up, despite the difficulties of doing business in a country where intellectual property laws are still a work in progress, where private banks are still rare and where regulatory requirements are far more onerous than in the United States.

"In recent months, we've needed to walk away from some deals because the traveling VCs are getting involved, and they are willing to pay too much," Huang said. That is especially true, he added, when a start-up is led by a Chinese national who has spent time in the United States.

"They know how to do a very good presentation for the traveling VCs," Huang said.

Not everyone is inclined to think the worst of the new jet-setting investors. Chang Sun, a venture capitalist at Warburg Pincus Asia in Hong Kong and founder of the China Venture Capital Association, said that most of the venture capitalists who had recently discovered China were "sort of window-shopping - people are still mainly looking and talking." Unlike Huang, who is based in Beijing, Sun, who is based in Hong Kong, has not seen a spike in the price that venture capitalists apply to local start-ups.

Yet venture capitalists are likely to be encouraged by their American investors, called limited partners or LPs, to start making deals. "China is the hot place to invest now, and I'm sure there's all this pressure from LPs for some of the funds to start investing in China," said Michael Scown, the regional counsel for Intel Capital's Asian operations.

The newcomers are trying to strike a balance between excitement and caution. "We're learning," said John Zagula, a venture capitalist with Ignition Partners in Bellevue, Washington, who made his first trip to China this past summer. "We think China is a giant market, and we feel it's our responsibility to learn more. But our general approach is to think hard, be deliberate."

Yet even patience cannot overcome some problems, starting with geography. The venture capitalist who visits a company once a week is likely to sense when something is wrong. But how can you tell if a start-up is suffering serious problems when your office is half a globe away?

__________________
"no amount of force can control a free man, a man whose mind is free. No, not the rack, not fission bombs, not anything. You cannot conquer a free man; the most you can do is kill him."