Venture Capital in China: David Chao of DCM (Part 3)

SM: What percentage of your deals are China or Asia deals?

DC: Today it’s 40% to 45%.

SM: Does your Asia strategy include India?

DC: It is largely Japan and China. We do selective, opportunistic deals in Korea or India. We do have a deal in Korea right now. At the end of the day, venture capital is not the world’s most scalable business. We felt that having strength in Japan, China and the US would allow us to be in the three largest GDPs and IT markets in the world. We felt that would allow us to get the most leverage.

If you look at the market caps of the top 30 Internet companies in the world, in terms of numbers it is fairly equally divided between the US, Japan and China. By market cap the US is 50% of that. China and Japan at 25% each. Overall, 96% of the top Internet companies in the world are in the US, China or Japan. It made a lot of sense for us to focus on those three.

SM: Given where you are today, and having seen China evolve over the past 10 years or more, what do you see in terms of sectors evolving and entrepreneurs maturing?

DC: The first time I went to China was with my father. He used to trade medical equipment between China and Japan. I went there in 1987 and what I saw was what most people still imagine China to be: a bunch of bicycles being driven around. It was quite clear back then that everything was about fundamental infrastructure. There was not much of the technology that you see in the Valley or in Japan.

I personally feel that when you look at the field of IT, the real pioneer and entrepreneur of that sector is Chairman Liu of what is now Lenovo. He did a pseudo-joint venture with the government and started what is now the world’s second-largest PC company. Those were different times, however.

SM: What year did he start?

DC: It was in the early 1980s.

SM: Was the government playing the role of venture capitalist?

DC: Most of those projects back then were inter-related with the government. From the pure venture capital perspective, as we know it in the Valley, the first wave occurred when SINA and NetEase went public in 1999. The entrepreneurs of those companies are now returnees. In China they are called turtles, because turtles go out, lay eggs, and then come back again.

If you look at the first 10 China IT companies that went public, almost all of them are returnee CEO companies. Today that ratio is down to 50%–60%. The first wave was all the sea turtles. The second wave, which is now reaching another peak, is being driven by a mix of sea turtles and local entrepreneurs. In the past, the only way for these companies to exit was NASDAQ or a Hong Kong exit. Local entrepreneurs, while they would still like to go public on NASDAQ, now have a strong domestic market. Going public in Shanghai is now a good option, maybe even better. The market is changing from the sea turtle generation to the second generation, which is a mix of the two.

Long term, what we will see are local entrepreneurs dominating over time. There will still be room for people who go to Japan, Europe or the US to be educated.

This segment is part 3 in the series : Venture Capital in China: David Chao of DCM
1 2 3 4 5 6 7