IP Protection –

VCJ: How is China’s IP protection affecting investments in China?

Chao: In China, the legal issues are disregarded, at least for now. Hopefully, those issues will get fixed. But, meanwhile, there are companies making money by providing illegal downloads and getting payments on the side or through auction systems.

Will they ever go public given the fact that much of their trading is done illegally? No. But these nascent services in China will have the brand power going forward and when things get cleaned up they will be in a great position.

Toronto: Regarding whether China has issues with IP protection, there’s a lot more flexibility for people willing to take a lot more liberties in China, not withstanding the substantial legal regime that’s there to protect intellectual property. But one of our clients is the Beijing Organizing Committee for the 2008 Summer Olympics, which has a vested interest in making sure that intellectual property-the use of the Olympics’ five-rings logo-is protected.

The kind of legal system that China has is great when it’s working in your favor. And you can be sure that it will work in the favor of the Olympics, and that they will enforce the laws that are there for respecting intellectual property.

Kau: I met recently with the management of one of the major U.S. studios going to China. They’re trying to figure out how to make money, trying to figure out a new IP model to claim at least some of that money that’s generated off U.S. movies, which is being pirated today in droves.

VCJ: So are you saying that VCs might fund a Napster-like company to download movies in China?

Kau: Bidu is a good example. A huge portion of Bidu’s searches are for illegal MP3s, and movies that people want to download. The number is roughly around a third of Bidu searches. So there’s a business built on piracy.

Chu: From a different perspective, the IP issue is actually a plus for China, because there’s a mentality that you can rip [or copy and steal] anything. Not everyone shares that, of course. When we deal with our semiconductor companies, for example, the engineers are incredibly aware of security. They would never give any an entire blueprint of a whole chip, for example.

So I feel, without a doubt, that the next generation security companies will come from China, because many in the country are living the paranoia everyday there.

Chao: There is also excitement around the fact that in the Chinese Internet market, a lot of people trade content freely and download content freely. There’s an IP violation in downloading movies and stuff, but it is so prevalent and because the content protectors and IP protection is not that great in China, you’re actually going to find services coming from China that are more on the cutting edge.

Toronto: I have have a hard time trying to think of the people that we work with that would fund a portfolio company that is involved in illegal downloads. Just knowing how they work, no. They’ll look at the model and won’t agree to fund something illegal.