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Local Presence Is Important In China Deals
By Brian Gormley
April 18, 2007

With business in China booming, most venture capitalists are coming around to the view that the only way to invest in China is to have a presence there.

Many of China's 20 most active investors, such as Walden International, Sequoia Capital and Granite Global Ventures, now have branches there, according to research conducted both by VentureOne and The Private Equity Analyst for the purposes of this report.

The pace has picked up in the past year or so as venture investments in China have taken off. Venture capitalists, drawn to China's population and stock of well-trained engineers and technologists, pumped $1.8 billion into Chinese deals last year, 55% more than in 2005, according to Ernst & Young and VentureOne.

In lieu of opening their own offices in China, other investors have opted to go through local partners to establish their presence in the country. For instance, Mayfield Fund, a limited partner in the $75 million debut fund raised by Chinese venture company GSR Ventures, became a general partner in the $200 million partnership the company closed recently.

Meantime, Accel Partners teamed up with longtime China investor International Data Group in 2005 to launch a $250 million China fund. Accel tapped into IDG's Chinese network (50 investment professionals operating from multiple offices) through the IDG-Accel China Growth Fund, a pool managed by IDG. Other companies have approached IDG about forming similar relationships, according to IDG Ventures Boston General Partner Michael Greeley.

That is a change from a few years ago, when many thought they could get by with occasionally jetting into the country, Mr. Greeley said. IDG has been investing in China since 1992. "I worry at the model of sending someone over a couple days a month," Mr. Greeley said. "It's a difficult proposition."

Experience has taught companies that it is much more difficult to vet opportunities or help companies recruit without local presence. Venture capitalists also recognize that China presents challenges that can be tough to manage from afar. A central one: guarding trade secrets in a country without a longstanding tradition of intellectual-property law. It is vital to have a local presence or a partner who understands the system and the recourses available to settle intellectual-property disputes, said Carmen I. Chang, head of the China practice for law firm Wilson Sonsini Goodrich & Rosati.

Some still believe it is possible to surmount these challenges without opening a China office or entering a formal alliance.

Waltham, Mass.-based Kodiak Venture Partners, for example, co-invested last year with Shanghai's Dragonvest Partners in a first round of financing for Wireless China, a Beijing provider of text-messaging infrastructure services. That allowed Kodiak to tap Dragonvest's local networks and market intelligence informally, a spokeswoman said.

Woodside Fund, a Redwood Shores, Calif., company that doesn't have a Chinese office, teamed up with IDG and another well-known China investor, DCM, to fund Analogix Semiconductor Inc., a chip-design company with design centers in Beijing and based in Santa Clara, Calif. The arrangement keeps development costs low and enables Woodside to work closely with management, Managing Director Robert E. Larson said.

"We tend to be a hands-on fund," Mr. Larson said. "We assign two partners to work with each company." Through this setup, "we've been able to provide that help at the top level."

David Chao, co-founder and general partner of Menlo Park, Calif.-based DCM, has invested in China since the late 1990s and said the Beijing office the company opened two years ago has raised its profile there. Still, the benefits of an office are often overstated, he said. A U.S. investor who is willing to fly over a dozen or so times a year, as he did when he started, and has good local connections will do just fine, Mr. Chao said.

"It depends on your level of commitment."




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