capital floods 'Chinese garages'
July 28, 2005
By Rebecca Buckman
BEIJING -- When Kewei Yang set up the Chinese
office of his high-tech company, Analogix Semiconductor Inc., he
squeezed about a dozen employees into a cramped high-rise apartment
here. One of Mr. Yang's venture-capital backers called it "the
Chinese garage" -- the Asian equivalent of the Silicon Valley
home workshops that spawned big companies such as Hewlett-Packard
There are a lot of busy Chinese garages these days. Unlike the
low-tech factory floors churning out cheap TV sets and T-shirts,
companies such as Analogix are developing innovative products that
are luring cash from foreign venture capitalists.
Early-stage investors are plowing money into China, and often posting
permanent staff here, despite concerns about political instability,
tight controls on capital and a dearth of local management talent.
U.S. financiers say huge domestic demand for high-tech gadgets and
sophisticated technical gear in China is hard to ignore, particularly
when it spawns genuine local innovation in fields such as telecommunications
and semiconductor design -- not just "me too" technologies
riffing off Western products.
"A lot of people just view China as offshore, cheap labor,
(but) it's not true," says Mr. Yang, whose chip-design company
scooped up $10 million in funding from three U.S. firms: Woodside
Fund, DCM-Doll Capital Management and IDG Technology Venture Investment.
The company just closed a second funding round with the U.S.'s Globespan
Analogix is based in California but now houses most of its staff,
including Mr. Yang, in a gleaming new Beijing office tower, mainly
to be closer to customers. And though the company's financial backers
are American, Analogix's office culture has a decidedly Chinese
flavor: Every day at 3 p.m., employees stand up next to their desks
for calisthenics. They jump and stretch in tune with militaristic
music piped over the office sound system before returning to their
jobs creating high-speed computer chips, most of which are sold
to telecom-equipment providers.
The total number of U.S. venture-capital deals in China in 2004
soared to the highest level in 10 years, according to the Arlington,
Va.-based National Venture Capital Association. The 43 Chinese deals
dwarfed the 24 investments made by U.S. venture capitalists last
year in India, a country better known for its high-tech prowess.
Although the $557 million that U.S. venture firms invested in China
last year was less than the $725 million invested in 2003, total
venture-capital investment in China last year -- including non-U.S.
firms tracked by Beijing-based research concern Zero2IPO Ltd. --
hit $1.27 billion, up 28 percent from 2003. Indeed, Doll Capital
Management co-founder David Chao, at a venture-capital conference
in Beijing this month, raised the possibility of a "bubble"
in the market, particularly for mid- to late-stage investments in
Doll Capital has an investment partnership with China's Legend
Capital; just last week, Silicon Valley's Accel Partners and International
Data Group announced a new, $250 million growth fund to invest in
China. So far, few venture investors think the Chinese government's
decision to slightly revalue its currency, the yuan, will crimp
foreign interest in the market, though the revaluation will make
Chinese investments slightly more expensive for U.S. firms investing
Earning a decent return on all these new investments can be tricky,
however. There has been a slowdown this year in the market for Chinese
initial public offerings of stock, meaning it can be tougher for
venture capitalists to profitably sell out of their investments.
And while some venture-backed Chinese companies already have engineered
successful IPOs, the euphoria doesn't always last: American depositary
shares of last year's blockbuster, the $1.8 billion listing of Shanghai-based
Semiconductor Manufacturing International Corp. on the New York
Stock Exchange, have plummeted nearly 40 percent from their initial
"A lot more people will lose money in China than make money,"
says Andy Yan, the Hong Kong-based managing partner of SAIF Partners,
which manages the $400 million, China-focused Softbank Asia Infrastructure
Fund. SAIF just raised a second $640 million fund also concentrated
on mainland Chinese companies.
Many Western venture capitalists still struggle with language and
cultural barriers. Most business in China is still based on personal
relationships, and Silicon Valley types sometimes aren't comfortable
eating with Chinese entrepreneurs in "shabby" restaurants
and singing the obligatory karaoke songs after dinner, says Mr.
Yan, who is originally from the mainland.
But the chance of hitting it big remains a strong lure for foreign
funds. One of the biggest winners for Mr. Yan's fund has been Shanda
Interactive Entertainment Ltd., which pioneered a new, profitable
business model for selling computer games over the Internet in China.
Other venture-funded companies have exploited the huge Chinese
mobile-phone market, now the largest in the world, and the Chinese
appetite for downloading services such as ringtones and horoscopes
to their handsets. Many companies receive business incentives from
the government, such as tax and rent breaks, because Beijing is
intent on building its own, domestic high-tech sector.
The government also can be a problem for venture investors, however.
Some investments are being put on hold until new rules requiring
approvals and registrations for the offshore transfer of assets
by Chinese residents are clarified, for example.
But Duane Kuang, who oversees Chinese investments for Intel Capital,
the venture arm of chip giant Intel Corp., says the rules are likely
just "another idiosyncrasy of investing in China" and
not a long-term barrier to investment. Intel -- which has seen hundreds
of semiconductor-design firms spring up in China recently to serve
the exploding local demand for chips -- last month announced a $200
million fund to invest in Chinese technology companies.
So far, Intel has found many Chinese chip-design companies making
products "that are innovative, but still addressing a relatively
low-end market," Mr. Kuang says. But "in the years to
come, we believe these companies will move upmarket ... and we're
confident that a number of these companies will have real business
interactions with Intel," he says.