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The joint fund of Dragon Venture and Shenzhen Venture is expected to close by the end of the first quarter of 2002. The focus will be on chips and components for telecommunications and Internet infrastructure. As the world's most populous nation, China comprises the largest consumer base in the world. Edwin Yeh, Dragon Venture's vice president of technology, says that China is the No. 2 market of Finnish cell-phone maker Nokia (the U.S. is No. 1) with more than 150 million subscribers. But as a nation with a state-controlled economy and totalitarian rule, a steep learning curve in capitalism remains. China's stock market is difficult to get onto -- mainly because of extremely high standards for becoming a public company, including the prerequisite of three years' profitability. So, Dragon Venture's strategy, announced Oct. 16, is to merge Chinese startups with publicly traded U.S. companies or take those startups public. Dragon Venture also will source companies in Silicon Valley that would like to expand into China. Innovation and entrepreneurship are alive and well in China. But from an investment standpoint, Chinese investments are highly illiquid. "[The startups] are doing just dandy, but liquidity is a problem in China," says Bobby Chao, CEO of Dragon Venture. The liquidity event (an IPO or an acquisition with a public company), he says, is the missing link that keeps investors from putting money into Chinese startups to take public in China. Chao cites two particular sources of funding opportunities: The privatization of state-owned agencies, and the ongoing efforts of Chinese entrepreneurs. Add the fact that China is one of the few economies that is growing more than 7 percent annually, and that makes for an Asia-sized opportunity. But the VC industry in China is only just beginning, and the market will need more openness and structure to encourage the confidence of investors. "In the past, China has been mysterious, and the one thing VCs are afraid of is uncertainty," Yeh says. He notes that there are myriad changes occurring in China, but without connections on the ground in China, it's difficult to know what those changes are. "They are interested in working with us because of language and culture differences," Yeh says. "For any foreign VC firms to compete there, it will be very difficult." Relationships play a key role in securing a business venture in China, which is why investors have been busy making inroads even though the economic infrastructure in China is not ripe yet. George Koo, director of the Chinese Services Group of Deloitte & Touche, says that China attracts more direct-investment dollars -- $40 billion a year for each of the last five years -- than any other country besides the United States. "You invest in China because it represents a huge, growing market," Koo says. Joseph Sun, CEO of e21 Corp., a global marketing company, says that the situation will become much better after acceptance into the World Trade Organization, when the laws become more solidified. And the government, Sun says, has every reason to nurture a healthy marketplace. China is moving closer and closer to becoming a member of the WTO, which will allow the world's largest nation to globalize its economy by adopting the organization's trade standards. WTO officials could formalize China's entrance as early as November at a conference in Geneva. "Outside investment is more than welcome, because they want to build up the country," Sun says. Jesse Reyes, vice president of Venture Economics (a division of Thomson Financial), says that the investment approach of Dragon Venture is generally the favored way of doing things in China. "By raising money both here and in Asia, they're trying to raise as much as possible," Reyes says. Also, by raising money in both China and the U.S., and actually working within mainland China, vital contacts are made and Western business culture makes a strong impression. "We just don't know about it here in the
West," says Reyes, "but a lot of groups in China are trying
to leverage the networking and technology of Silicon Valley." |
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