China Kick-Starting Entrepreneurs’ Engines With Venture Funding
Tumbling stock prices may have spooked technology believers across the globe. But here at the world’s largest potential “dot-com” frontier, they’re just getting started on the “new economy,” with an unexpected helping hand--from the Communist government.
The state and a growing number of municipalities have adopted a new role as venture capitalist, kicking in more than $1 billion to nurture local start-ups. Instead of getting in the way, as skeptics might expect of the government, it declares it is playing a positive role, supporting people who have ideas that could invigorate the country’s changing economy.
“The government is building the stage; entrepreneurs are singing the song,” said Sun Shutao, 30, head of AuctionDown.com, a new business-to-business buyers’ auction site in Shanghai’s Zhangjiang High Technology Park, a government-built facility housing many high-tech companies.
Unlike neighboring Japan, where various cultural barriers have suppressed entrepreneurship, China sees venture capital as a tool to hasten its transition from the ruins of the planned economy to the hoped-for riches of the digital era.
Though these efforts are still young, the willingness of the government to make capital available to private entrepreneurs is already creating a sea change in the mind-set of businesspeople here.
The venture capital strategy was spurred by the promise--and threat--of the new economy transforming China’s competitors in other countries.
“Access to capital did not exist until the new economy boomed,” said Tony Zhang, a Shanghai-born UCLA graduate and the chief executive of ChinaNow, a lifestyle Web site based in Shanghai. “Before, government money only went to government enterprises. Now government money can go to private enterprises. I think it’s going to make a huge impact.”
Though there are thousands of venture capital funds in the U.S., there are only 92 such funds in China, most of them government-run, officials say. Together they have about $1.2 billion at their disposal.
The first cities to establish venture capital funds were Beijing and Shenzhen. In December the country’s economic capital, Shanghai, established Shanghai Venture Capital Co.
The city-backed fund is trying to be more hands-off than its counterparts in other cities, officials said. Instead of the government acting as funder and fund manager, Shanghai is investing money without getting directly involved in the day-to-day management of the firms it finances.
“Our model is attractive because we took the government’s interest and combined it with the market’s interest. Instead of them being in conflict, we are making them work together,” said Chen Aiguo, business manager for the Shanghai fund.
The firm has retained seven fund managers, each a professional venture capitalist--young, Western-educated members of Chinese firms that have private or government backing.
“This new model allows government to help a lot more people while keeping its own role small,” said Chen Yuchen, a French-educated business manager for Shanghai Shihua Technology Investment Co., which helps Shanghai Venture Capital identify good ideas and guide start-ups to success.
Questions remain, of course, about how healthy it is for the state to get involved at all.
“Government should not become venture capitalists,” said Liang Gui, CEO of Shanghai Internet Incubation Investment Co., a privately funded incubator formed in March. “In this business, your judgment is directly related to the success of an investment. If the government is doing this, who is accountable for them?”
To be sure, venture capital in China is very much a work in progress. Some industry leaders argue there is lots of room for government and private venture capitalists to coexist, because demand for capital far outstrips the supply. The government is the country’s richest investor. It can play a critical role in feeding cash-starved enterprises while the country awaits completion of a legal framework and a Nasdaq-like stock exchange that would bring together more start-ups and investors.
State-owned venture capitalist funds already are paying more attention to the bottom line. Though Internet companies remain a favorite investment choice, so are relatively less risky industries.
“We look for innovative technology that can be a national leader and international pioneer. And it has to have very strong market potential,” said Chen Yuchen, who manages two biotech research and development projects for the Shanghai municipal fund.
One is trying to produce a new breed of cotton--a softer, stronger fiber created by splicing together the hair genes from a rabbit and a lamb. This “transgenic” cotton is expected to hit the world market by the end of the year. The other is also a genetic engineering product, one designed to make trees grow faster. This is something China desperately needs in order to reforest its landscape.
“These Chinese scientists come to us with just the idea,” Chen Yuchen said. “Most of them do not have the personality or the training to conduct negotiations and raise the necessary money to finance the project.”
One advantage of government-backed venture capital firms is their access to, and interest in, low-profile local talent. Big-time foreign investors have a harder time identifying home-grown entrepreneurs.
Foreign venture-capital funds active in China include Softbank, IDG and the investment arms of Intel Corp. and Dell Computer Corp. They tend to pour money into high-profile names such as China.com, Sina.com, Sohu.com, 8848.com--firms that have already gone public or are lined up to do so.
Most of the leading dot-com companies in China were started by U.S.-educated Chinese. Investors generally consider them safer bets because of their combination of Chinese cultural background and multinational work experience. That leaves plenty of room for hometown venture capitalists to target local talents.
“If I have two firms with equal potential, I’d give the money to the local firm,” Chen Aiguo said. “Some of these local firms have great ideas but their packaging is not as good. Some of the returning Chinese have very limited ideas, ideas Americans have already done. But they know how to ask and what to ask, so it’s easier for them to get money.”
One of Chen Aiguo’s new finds is a 23-year-old graduate student from Shanghai’s Jiaotong University. Chen Jiabin switched on a computer for the first time in a freshman lab five years ago. Today the eighth child of a provincial doctor already has a plan to “play God” to other “netpreneurs.”
“Lots of students have flashes of inspiration, but they disappear because of a lack of resources. We want to be there to cultivate the germs of these ideas,” said Chen Jiabin. (None of the Chens are related.)
The boyish founder of SJTU Xuezi Science & Technology Entrepreneur Co. owns what he believes is the country’s first student-run incubator, a bridge between the brains on campus and the budgets of venture capitalists.
He and his team of university classmates have cultivated a pool of potential projects by running a campuswide business plan contest. They also have set up a research lab for the students to try out ideas.
None of the students has studied abroad. Most have not even finished college courses, much less gained expertise negotiating with foreigners.
“We do run into discrimination from potential investors,” Chen Jiabin said. “If you are a Harvard MBA they might be more impressed by your credential. But if you are a smart investor, you know it’s up to the individual to distinguish himself from his own background.”
That spirit is half the game, said Chen Aiguo. The rest has much to do with the courage and creativity of the venture capitalist.
Recently, a 20-year-old farmer found his way to the Shanghai Venture Capital group with the help of the Yellow Pages. His idea: Feed Chinese urbanites the flavored rice served in bamboo shoots from his native Zhejiang province.
“Most people blew him off because it seemed too low tech,” Chen Aiguo said. “I told them, ‘Yes, it’s low tech now. But if you show him how to put up a Web site and sell the bamboo rice online, he could get investors interested. We have to be more imaginative.’ ”
The farmer went home empty-handed, but was encouraged to retool his idea and try again. “I can’t believe Mr. Chen talked to me at all,” the farmer, Li Feng, said.
In the Wild West of China’s new economy, a little bit of support could go a long way.
“The state sets the model,” Zhang said. “If there is a lot of [venture capital], it would be a savior for small business, especially home-grown business.”
