Cover Story: Road To Riches? –

Depending upon whom you talk to, the story about China is different. The “old-timers”-those who have been making venture investments in China for 10 to 15 years-will tell you horror stories and complain about the heavy lifting they had to do to open the market. Talk to one of the newer firms and you hear unbridled enthusiasm.

It’s more than your standard trade press penchant for making something big of a trend du jour. Big money is being made right now. Richard Hayes, head of private equity investment at CalPERS, astonished the audience at the National Venture Capital Association’s annual meeting in San Francisco in May when he spoke about a Chinese investment made by The Carlyle Group, where CalPERS is a limited partner. The investment has already repaid CalPERS’ entire participation in the Carlyle fund, which “is only 30% drawn down,” Hayes said. It’s the kind of streets-are-paved-with-gold story that makes investors lean forward in their seats.

It’s also the kind of story that investors hope to hear more of, since they’ve been pouring billions of dollars into China. It received more foreign direct investment (FDI) than any other country in 2002 and was second only to the United States last year, with $57 billion worth of FDI, much of it in the form of private equity. While venture capital is still a small part of this trend-under $2 billion last year-you’d be hard put to find a venture firm today that isn’t at least considering investing in the largest nation in the Far East.

Active investors are spending more than half their time in China. Longstanding Asian investors-such as Crimson Private Equity, H&Q Asia Pacific (H&QAP), Newbridge Capital, Pacific Venture Partners, Walden International, Warburg Pincus and W.I. Harper-are shifting their focus in Asia toward China. Meanwhile, those firms that have invested in Greater China in more recent times are expanding their presence in China. That large group includes AsiaTech, Carlyle, Crystal Ventures, DCM-Doll Capital Management, Draper Fisher Jurvetson (DFJ) ePlanet, Intel Capital, JPMorgan Partners (JPMP) and Orchid Asia. Not to be left out, a new generation of China investors led by experienced venture firms like Battery Ventures may go straight to China and avoid old centers of Asian investing (such as Hong Kong, Singapore and Taipei) altogether.

“The development of China will be the world’s biggest economic trend over the next 20 years,” says Oliver Curme, a general partner at Wellesley, Mass.-based Battery. Curme has followed China investments over the last several years. “We won’t jump in with both feet but we’re convinced that there are lots of opportunities,” he says. “Firms who don’t participate in China are going to lose out.”

Need To Know

Before you go to China, you should listen to those who have gone before. VCJ has complied a list of recommendations from veterans (see