Funny, I never see ZSUN mentioned re hot China internet deals: "A Dot-Com Revolution in China
Venture Capital Backs Talented Young Entrepeneurs
By CRAIG S. SMITH
EIJING -- China's
economy is throwing
millions of people out of work
each year, but an unemployed
Internet journalist, Shao Ying,
says she can get a job
whenever she wants among the
hundreds of Internet companies
opening offices here.
Her eyes widened when asked
how she could be certain to find
one that pays if so few Chinese
Internet companies have any
revenue. The answer, to her, is
as obvious as the mole on Mao
Zedong's chin.
"America," she replies. "Didn't
you know?"
Ms. Shao is right: hundreds of
millions of American investment
dollars have fattened the bank
accounts of China's young
Internet entrepreneurs over the
last year, making dot-com
companies the most vibrant part
of the country's fledgling but still
struggling private sector. And
despite the high-technology
stock slump in the United
States, as much as $1 billion
more in venture capital, most of
it from America, is hovering
overhead waiting to dive into
China's fast-developing Internet
industry, venture capitalists say.
The torrent of cash into private
hands is without parallel here
under Communist Party rule. It
also is particularly conspicuous
given the enormous financing
difficulties that many budding
Chinese entrepreneurs confront
in a society that still officially
discourages real capitalism.
The money also could quickly
vanish or move elsewhere if foreign venture capitalists decide China is not
worth the risk, leaving people like Ms. Shao stranded.
But if the money keeps coming, the impact could be as big as the
breakup of the country's Maoist communes 20 years ago. A
capital-backed private sector may be the economy's best hope for
survival as hundreds of millions of workers spill from sinking state-owned
enterprises, and foreign competitors eagerly await China's market
opening after it joins the World Trade Organization.
For the first time since a fledgling private sector reappeared in the late
1970's, a group of private businesses here are accumulating capital.
"China is seeing a core entrepreneurship being established that is different
from the old one, which never really grew because it didn't have access
to capital," says Dong Tao, an economist with Credit Suisse First
Boston in Hong Kong.
The new entrepreneurs, many with American educations or American
companies on their résumés, are outrunning China's ideologically hobbled
bureaucracy not only because of their youth but because they are
supported by a powerful constituency abroad: men and women often
times not much older who represent millions of dollars in investment
capital and are not intimidated by China's authoritarian government or its
byzantine rules.
On a sultry night in June, more than 200 young men and women crowded
into a fashionable Shanghai restaurant, wearing colored stickers on their
lapels identifying them as either someone looking for money (red) or
someone with money to give (green). Rapid-fire volleys of industry
jargon were part of conversations around the room. One Chinese man
told a Silicon Valley banker that his Web site would handle transactions
next year worth 1 billion yuan, about $120 million.
"Who here would like Goldman,
Sachs to underwrite their Nasdaq
I.P.O.?," a young man in a
white-collared blue shirt shouted from
atop a chair in an effort to get the
crowd's attention for the evening's
speaker from the American
investment bank.
Like their counterparts in the United States, men and women in their 20's
have emerged from such evenings to find themselves deploying millions of
dollars, in some cases tens of millions of dollars, almost overnight.
The money is not yet sinking very deeply into China's economy. Buses
and bus stops in most major cities have been taken over by dot-com
advertising. And interior design firms are doing a booming business. At
the Internet auctioneer Eachnet.com's sleek offices in a new Shanghai
bank building, visitors are greeted by an orange-tiled wall bearing the
company's logo -- recently redesigned by a Japanese firm. Against the
glass wall of the chief operating officer's office lean presentations from a
handful of interior design companies showing various high-tech versions
of the company's new offices soon to be built in another building a few
doors away.
But as China's old Marxists know, capital is power and if the country's
young Internet entrepreneurs can hang onto their assets and make them
grow, they could emerge as a potent force shaping the country's
economic -- and political -- future.
So far, the big capital formation is limited mostly to Internet companies,
though China is exploring ways to make it easier for a business's original
investors to cash out when it goes public. China's regulators are
considering a second board on the country's stock exchanges that might
allow share sales by companies before they are profitable, for example.
And Chinese start-ups can, in theory, list their shares on a second board
already operating in Hong Kong. Several domestic venture capital funds
have even appeared, though they are mostly government controlled.
If that model takes hold, it could fundamentally alter economic life in
China, where, despite 20 years of changes that have made the economy
more flexible and market-driven, the ever-present state still decides how
resources are allocated.
"Many good mechanisms have been introduced to China, such as venture
capital and stock options, which will help trigger the restructuring of
industries throughout the country," says Wang Zhidong, chief executive of
Sina.com, one of the few mainland Chinese Internet companies to list
shares on Nasdaq so far. He says the success of those private businesses
will also influence the country's attitude toward its educated youth, who
remain suspect in the eyes of many Chinese officials.
But China's notoriously slow
government must act quickly
or the dot-com phenomenon
might disappear as quickly as
it came without having made
much of an impression on the
country's economic landscape.
Venture capitalists, despairing
of any easy exit through which
to sell their investments, may
move on, leaving China's
fledgling Internet industry
gasping for cash. The Ministry
of Information Industries
already estimates that most of
the country's 16,000 Web
sites will be gone by year-end
for lack of financing.
For now, few of China's Internet companies are seriously considering
raising capital at home.
Current listing requirements make that impossible and the approval to go
public is a political favor that private companies rarely win.
And most of the foreign investment in China's Internet sector remains
technically illegal under rules barring foreign ownership of value-added
telecommunications services. In June, China's stock market regulators
issued a new rule requiring companies that want to list abroad to first
submit to Beijing documents detailing their ownership structure and
showing that the structure adheres to Chinese law.
Even Sina.com had to strip its primary asset -- the mainland China
Sina.com Web site -- from its Cayman Islands shell company to get
Beijing's approval to list on Nasdaq. Investors in the United States stock
own a stake in the shell and its ancillary Chinese-language Web sites in
Hong Kong, Taiwan and North America, but not in the Chinese
operations.
Rivals angling for a Nasdaq listing are having to do the same, but
acknowledge that China's changing rules could make even the
restructured operations illegal. Sohu.com, one of the China's most
popular Internet portals, stated in a recent Securities and Exchange
Commission filing that "relevant P.R.C. authorities could, at any time,
assert that any portion or all of our existing or future ownership structure
and businesses, or this offering, violate existing or future P.R.C. laws and
regulations."
Yet, with China expecting to join the World Trade Organization later this
year, a feeling of invincibility -- some say hubris -- has permeated the
industry. "The same deference isn't being paid to the ministries and
bureaucrats as was paid in the past," says Greg Shea, an American who
is working for a venture capital fund sponsored by Siemens A.G. and
one of China's own investment companies, the China International
Trust and Investment Corporation. The money Mr. Shea's company is
investing comes from a telecommunications-equipment-leasing business
that was unwound last year after China declared that the structure
violated Chinese law.
Even if the current trend does die without transforming China's economy,
it has taught a group of bright, ambitious young people the basic tools of
capitalism. And not all of those people are likely to go away. Michael
Brownrigg of the San Francisco-based Chinavest, one of the first
venture capital firms to invest in China, said, "The Internet shows that
young people can run businesses here and that will resonate for a long
time to come." |
