Nov. 19, 2001

DragonVenture Putting Together Two China Funds

DragonVenture Inc., San Jose, is looking to raise a pair of funds to invest in China, which the firm sees as the world's lone economic bright spot.

One of them is a joint effort with Shenzhen Venture Capital Co. Ltd., Shenzhen, China, and has a target of roughly $60 million. Each firm is responsible for assembling one-half of the fund's capital, which would be invested chiefly in Chinese companies that design semiconductors. The joint venture also would look to back telecommunications and internet infrastructure companies.

DragonVenture is seeking institutional investors in the United States, said Tony C. Luh, the firm's co-founder and managing director. It also hopes to attract a large semiconductor company or two as strategic investors. Shenzhen Venture Capital will commit some of its own capital and is soliciting strategic investors in China.

DragonVenture also is seeking to raise $50 million for a fund that would help U.S. companies acquire Chinese companies, chiefly ones involved with Internet infrastructure, telecommunications and Linux. The Dragon fund would provide about $5 million to each Chinese company as part of a deal whereby it would be acquired by a U.S. company in a stock swap.

Mr. Luh said there are opportunities because many U.S. companies "are trading at pathetically low valuations" while many Chinese companies are profitable and growing. Investors in these companies have limited exit opportunities because the capital markets in China are poorly developed.

Chinese investors, Mr. Luh said, already have offered to commit about $12.5 million, and DragonVenture is working on potential deals.

Mr. Luh and K. Bobby Chao, a founder of Cadence Design Systems Inc., established DragonVenture in June 2000. Mr. Chao was previously a general partner at Technology Associates Management Co., a venture firm in Plano, Texas.

DragonVenture's $10 million seed-stage fund, DragonFund I LLC, has been invested in eight companies. All are based in the U.S., but most are Chinese-American companies with substantial assets in China. DragonVenture is not planning any new investments from this fund and is attempting to raise a $50 million successor, DragonFund II LLC.

Because of the difficult fund raising climate, Mr. Luh said, DragonFund II probably will not close until after the two China funds, which DragonVenture hopes to wrap up by early next year.

Reach Mr. Luh at (408) 578-8300, ext. 110.