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China getting more Silicon Valley venture capital
Chinese IT Investment, Chinese IT Investments
The scene was pure Silicon Valley: A throng of venture capitalists and entrepreneurs schmoozing and noshing on caviar appetizers and chilled sauvignon blanc at a swanky Palo Alto, Calif., bistro.
But the talk was pure China. And many of the 200 guests at the capitalist lovefest at the end of January were entrepreneurs from Beijing and Shanghai.
Silicon Valley venture capitalists are placing more bets on China, accelerating a trend that began about three years ago. China's swelling consumer market and turbocharged growth rate are capturing the eyes and dollars of such top-tier VC firms as Draper Fisher Jurvetson, Kleiner Perkins and Gobi Partners.
China's ability to attract Silicon Valley's leading venture firms, which have been instrumental in transforming the Bay Area into the world's leading technology center, raises questions about the Valley's prospects of maintaining its competitive edge.
Already, the infatuation with the Middle Kingdom is causing changes in the Bay Area.
"There's no doubt that any dollars or resource of time that goes toward Asia takes away from the region," said Kevin
Fong, managing director of Mayfield Fund, which invested in an $80 million China fund run by its partner, GSR Ventures. "Maybe that's also a sign that there's too much money and competition in the Valley."
Venture capitalists such as Fong invest in private companies in exchange for an equity stake. Most venture investments in China are in high-tech companies serving the ballooning Chinese domestic market.
Last year, $1.05 billion in venture capital flowed to China, with 30 percent to 40 percent of that coming from Silicon Valley, estimates Gavin Ni, chief executive of Zero2IPO, a venture research firm in Beijing. The percentage coming from San Francisco firms has doubled from just three years ago, he said.
That $300 million to $400 million is small compared to the $7.69 billion in venture money that flowed into Bay Area companies in 2005.
But a string of eye-popping public offerings, most recently of Beijing-based Baidu, which has been described as China's Google, will help China net more Silicon Valley dollars.
Baidu's shares skyrocketed 354 percent on the day of its initial public offering.
Seven Chinese firms went public last year on the Nasdaq stock exchange.
Their total worth today is about $7.6 billion, the equivalent of the top 12 U.S. firms that went public in 2005.
"You are following the money," said venture capitalist Tim Draper of Draper Fisher Jurvetson, one of the earliest big-name firms to invest in China.
The firm's $14 million investment in Baidu has swelled to $325 million. "The great minds and the capital will move to the places that are the most aggressive, most active and where the growth rate is highest."
Over the next year or two, Draper and others say, bigger and better deals increasingly will come out of China, not Silicon Valley.
That anticipated shift already has brought about behavior changes.
Entrepreneurs and venture capitalists agree that some startups are more likely to get funding if they are Chinese-based companies serving the Chinese market, as opposed to Silicon Valley-based firms.
AMEC is a Shanghai-based semiconductor equipment company. Its 18 founders all left Silicon Valley to start the firm in China. It never would have received funding if it were based in Silicon Valley, said Hong Chen, chief executive of Hina Group, a Chinese equity investment firm.
Start-ups in wireless, mobile phone services and semiconductor design also may have better chances at funding if they are China-based.
China has eclipsed the United States as the largest consumer of integrated circuits, used in many electronic products.
And Silicon Valley venture firms may be more willing to assume more risk in Chinese investments because their dollar goes further.
"Ten million allows you to make a lot of mistakes in China," said Chen.
Because it's relatively cheap to get a Chinese company running, the standards used to judge whether a company is a good investment may be lower in China, others agreed.
On the upside, the venture capitalists get larger stakes of the company because Chinese entrepreneurs are hungry for money.
China is attracting not just Silicon Valley money but also its talent. Many of the Chinese-based firms with U.S. funding proudly tout executives from Silicon Valley. Baidu's chief executive, Robin Li, left the Silicon Valley firm Infoseek to found Baidu.
"Being able to speak the language of Silicon Valley to venture capitalists is very important," said Li from his Beijing office.
About 70 percent of Silicon Valley firms' investments in China are in companies with an executive from the Bay Area, estimates Tony Luh, co-founder of Dragon Venture, which has been in China since 1999.
All three of the past presidents of Hua Yuan, a Bay Area high-tech association that attracts mainland Chinese, have returned to China to start firms in the venture investment arena.
Min Zhu, a past president and co-founder of WebEx, was tapped by New Enterprise Associates to run its China fund.
It's difficult to predict what the long-term impact of this movement of money and brains away from Silicon Valley will be. Venture capitalists say innovative start-ups will continue to get funded in the Valley. Most don't believe a "brain drain" will occur, because the area's acclaimed business schools will continue to attract top students from around the world.
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