Venture Capital in China: David Chao of DCM (Part 2)

SM: What was your next step after deciding that you could not stand on the railroad tracks any longer?

DC: I immediately resigned from McKinsey and started a company called Japan Communications Inc with three other co-founders. It is the first and largest mobile virtual network operator in Japan. It is a public company that is today in the $200 million to $600 million market cap range. While we were doing that company my wife and I had our firstborn son. She wanted to raise the kids in the US so we came back here.

My co-founder, Dixon, was an angel investor in Japan Communications. We got to know each other and lived in the same neighborhood in San Francisco. He had plans to raise a small venture fund and we decided to finish that up together. That is my history up to DCM.

SM: When did you start DCM?

DC: We started in 1996. Our first investment was a company in Japan which was the second round of Japan Communications Inc. I think that really put a stake in the ground for who we are and what we do. In 1996 the rule in Silicon Valley was to invest in companies within a 35-mile radius. By making that first investment while I was in Japan, we were a very different animal.

Our fundamental thesis was that we would invest in good technology companies and we had a definite affinity to good communications equipment companies as well as Internet companies. Those were companies like Foundry Networks, About.com, and network equipment companies like iPivot. Those were all companies we funded with the first fund.

We were also investing in Japan and China. We started investing in Japan in 1997. I was looking into China for two years before we made the first investment. China in 1999 was a bizarre thing to do for multiple reasons. The US market was so hot between 1998 and 2000 that very few people were getting on a plane to look for international deals.

The other thing that was interesting was that because of my background as an “overseas Chinese”, I was quite welcomed when we were looking at deals. One of my classmates, Hurst Lin, who is now one of our general partners in our Beijing Office, was the co-founder and for eight years the COO of SINA.com, which is the Yahoo! of China. We would ping each other during that period and it was quite obvious that things were also happening in China.

In 1999 there was a period during which entrepreneurs would come and say “Here is the price, take it or leave it in the next two days”. It was a great time to go to China because access to capital for entrepreneurs there was more limited.

SM: Was there access to capital for Chinese entrepreneurs at that time?

DC: Yes and no. The venture capital market in China has really only opened up in the mid 1990s. Business law came into effect in China in the late 1980s. The gates to do business really opened up in the early 90s. There was not very much access to capital. IDG was there in the early 1990s, but that was a slow process. There were firms like Walden and WI Harper that originally did a lot of Taiwan deals and then did a deal or two on China. In 1999 we made an investment in 51Job, which is the Monster.com of China.

SM: How did you find that deal?

DC: One of the founders is a CFO. Her name was Kathleen Chen and she was at a conference in the US. My partner Tom and I thought it was a good space for China. Recruit, the company I used to work for in Japan, was the largest offline and online HR advertisement company. I knew the space fairly well.

We visited the company in Shanghai and did a little bit of due diligence. We really liked the CEO and we decided to go for it. They were not the top company in the space, they were probably number three, but they had the best team. They had the best strategy by far which was to combine offline and online. In 2004 they went public and went as high as $1 billion-plus in market cap. We sold our position when they were around $800 million market cap. Today it is hovering at $300 million to $400 million. We realized about $250 million in return. We had invested about $14 million. It was a big home run for our firm.

The first wave of Chinese IPOs were SINA, NetEase, and Sohu, which occurred in 2000. The bubble crashed and then the second wave was companies like 51Jobs and Shanda. They are either game companies or verticals.

It is really after 2005 that many firms in the US started paying close attention to China. That came in two flavors. There are companies like us who are long term and serious. There were a whole batch of companies who realized that the US market was not doing well and felt that a China strategy would look good on paper and help them raise money. That is the history of how we got started.

This segment is part 2 in the series : Venture Capital in China: David Chao of DCM
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