VCJ: What are the hot investment trends in China?
Chu: Tech is hot in China. There are a lot of areas that are exciting and have high growth, but if the margins aren’t there, in say, software, then they’re not ideal for venture investment.
We’re positioning ourselves in broader sectors. The last thing you want to do in China is to endorse a new category that you discover. It’s wonderful, but the minute you fund it, three months later, you have eight competitors. What was a great space becomes a pie divided into too many pieces, so it’s too hard to make money. That happens in a hyper-competitive environment like China where you have a lot of money chasing the A’ deals.
But we’re moving towards the next generation of software companies, investing in software infrastructure that meets the demands of companies shipping their products out of China or Asia.
Kau: A lot of deals are for enterprise software companies, or supply chain software developers. But we’re finding that it’s very hard to get paid for those kinds of projects in China. There is a cultural aversion in China for consumers to pay a lot of money for software.
Chu: You’re right, it is difficult. As a result, we’re some ASPs coming to the fore, providing subscription software in on-demand usage models. The ASP model is attractive in China, because there’s a very low desktop infrastructure requirement, just $300 for PCs, minimum. The ASP model also provides more comfort with regard to intellectual property.
VCJ: What about Internet opportunities in China?
Chao: Mobile commerce is another area that’s going to take off in China because the phone is the Internet.
Chao: Many of the first-generation companies, such as SINA.com and the other portals, were started by people educated either in Japan or the United States, who returned to China to start their businesses.
But some of the more exciting Internet companies today are being started by second-generation guys who used to work for these companies, but are not returnees who were educated elsewhere. They’re local guys.
Kau: Still, with all of that being said, there are lots of great opportunities in China across the board. We’re very active in software investments and in Internet investments. Right now, there’s relatively little credit card penetration. People still carry money with them to the post office, grocery store, or wherever to conduct business in China. And that clearly doesn’t need to be that way. Of course, there are regulatory issues. And many banking laws come into play. But we believe there will be a couple of companies in this sector that are going to figure out the key to allowing consumers in China to buy things without having to run to the bank.
Offices: Beijing, Shanghai, Hong Kong, Silicon Valley and Taiwan.
Funds: More than $200M
Focus: IT, semiconductors, communications, wireless. Active in China since the late 1990s.
Notable Deals: EachNet, V2 Technology, Shanghai Xinhua Microelectronics and Silicon Data.