Page 123 - How China Is Winning the Tech Race

The currents became a strong tide as partners defected from U.S. firms to
set up their own shops in China. Gary Rieschel, whose wife is Chinese, left
Mobius Venture Capital in the Valley to form Qiming Ventures in Shanghai
with the Seattle-based Ignition Partners. He’s made 14 bets on Chinese inno-
vations since raising $200 million in 2006.
Against that backdrop, domestic venture firms in China sprang into
action. One of the first independent Chinese venture firms not connected to a
corporate or a local authority was Capital Today Group. It was founded by
the former Baring Private Equity Asia managing director Kathy Xu, who
raised a $280 million China fund in 2006. Xu and other locals honed in
where they felt most comfortable: with the native entrepreneurs, who often
were seen as too foreign by the Americans. “The American VCs [venture cap-
italists] don’t speak Mandarin and don’t understand the culture,” scoffed Xu.

China fever

American venture firms increasingly are closing the gap with their enlightened
Chinese strategy of going local. Beware of the stampede. The rush of capital
has pushed investment valuations upward and made entrepreneurs stingier
about sharing equity in their start-ups with venture financiers. The best entre-
preneurs have their pick of venture partners and look for value-added benefits
such as knowledge of the local market, networking connections, and expe-
rience with recruiting management and going public rather than just cash.
Deals that used to be announced with fanfare today remain in “stealth
mode,” or hidden, to avoid competition.
Striking the right balance of investment in the cyclical venture capital
market has many people staying up nights, worrying when and if the fever
will break. Len Baker, a managing partner with Sutter Hill Ventures who has
honchoed two China deals and advises Chengwei Ventures’ managing partner
Eric Li in Shanghai, asks, “Ten years from now, will it be great to have moved
ahead, or will it be too fast?”
Could the Valley once again be drinking the Kool-Aid, getting a taste of
saccharine sweetness from hyped-up claims that provide no energy? Wasn’t a
lesson learned from the Internet revolution when plenty of Kool-Aid was
downed as venture capital money blindly chased deals that later vaporized?

Silicon V alley’ s T ech Route to China 97