Venture Capital in China: David Chao of DCM (Part 5)

SM: India has remained the IT back office. The best product company out of India is Zoho, which did $60 million last year as a fully bootstrapped company. That seems to be the best India has done in terms of product and innovation.

DC: We were the seed and first investors in Sling Media, which has three founders, one of whom is Bhupen Shah. We had our entire R&D center in India. Sling sold $40 million in the first year and we sold it to EchoStar in the second year. It was definitely a major consumer electronics product and was sold for $400 million. It had a huge Indian operation.

SM: That model is very common. The architecture and key design decisions were done in the Valley, so the innovation is truly in the Valley. Where is the innovation at in China?

DC: Five years ago there was almost zero deal flow on technologically innovative companies. Now it is about 9:1. Out of every ten deals we see, one is reasonably innovative. In the US it is nine innovative businesses and one copy cat.

Do I have faith that the 9:1 will become 7:3 in the next 20 years? I do. It has largely to do with the fact that the VPs of companies today are locals to China and will one day start their own companies and be architects of the next generation. Consumer electronic giants will continue to emerge, and they are going to have their own R&D. They will go through the same cycles the big Japanese companies went through.

It will not be as fast as people think it will be. There are a couple reasons why. Compared to Japan it will be a bit faster because culturally, Chinese are more entrepreneurial than Japanese society. At the same time, Japan took 20 to 30 years. It will still take China 10 to 20 years.

SM: Was Japan really going through the same phenomenon? It was a bit far back.

DC: A lot of people forget there was a point in time when every car on the road was a Cadillac and every memory chip was National. Over time companies like Toshiba and Honda emerged. Honda is an entrepreneurial company. They were pushed by the government to not do cars, but they did it anyways.

I think we have a very western notion and historical bias that everything the US did was fundamentally innovative. An article from the 1860s I read was really interesting. The British were complaining about this barbaric place called America where people copied and violated every patent on cotton farming, railroad engineering, and everything scientific. If you change the name from Britain to the US, and the US to China today or Japan in the 1960s, it would be the exact same phenomenon.

We tend to make the US into realm of absolute innovation. It may be that to a degree in the tech space, but even the world’s first cell phone was a European invention. With that background in mind, when you look at Japan, it has certainly innovated by making things smaller and more portable.

SM: Which is huge innovation and a complex engineering achievement.

DC: I think that culture exists today in Japan. They have an innovation engine. What is the one core competence that China has which will drive innovation? One answer is scale. We are investors in a couple of big Internet companies. China has the largest number of Internet users already. We are investors in Xiaonei.com, the Facebook of China. Softbank recently invested $400 million in this company and we dominate in the student and white-collar market.

If you combine the mobile access and people getting into the system, and the database 51Job has for employment opportunities, the numbers of the largest player in Japan or Monster.com look like peanuts. When you dig into how they do it and architect it, they have an ingenious way of making it really cheap. They are not buying AS400 or expensive Sun/Unix machines. They are innovative at working on a shoestring budget.

Right now people do not see that as much. My hunch says that in the future anything that has to do with scale, that works, and has a good product will likely come out of China or even India. That is how they are trained.

SM: It is scale and price. Those two countries cater to extremely price-sensitive markets, the kind that the western world has no experience of. That is where they have to come up with original solutions.

DC: I could be wrong, but I think there are definite innovations coming there.

This segment is part 5 in the series : Venture Capital in China: David Chao of DCM
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