Venture Capital in China: David Chao of DCM (Part 6)

SM: Seeing where it has been, where is innovation in China going?

DC: In the cellular space they did it right by relying on open technologies, and innovation will continue there. They did not have anything native, so they had to rely on Motorola and Nokia, as well as an OS like Symbian. That gave way to SMS, which became a global standard. PC penetration is still low, but mobile penetration is greater. Innovation will come as that penetration occurs in ways that helps people pay bills and live their lives.

Certainly there is potential around the design side of semiconductors. It is probably 10 years out there. On the Internet side the “me too” will continue.

SM: That is OK. Some degree of concept arbitrage on the Internet is good. All these verticals that are successful in the US have to exist there as well. If entrepreneurs do not see the obvious, then what the hell are they doing?

DC: There is one sector with Internet where I think China has done phenomenally and uniquely well. That is online games. If you look at the revenue generated by online games in China, they are larger than Internet advertising dollars. People can’t afford to buy the Xbox, Wii or Playstation. People would rather go to Internet cafés, pay a dollar, and play an online game for a few hours.

The first generation of online Chinese games were licensed games from Korea. Over the next 10 years many of the innovative online games are going to come out of China.

SM: China now has to educate an enormous population in a different way than they have so far. It is becoming very clear that it would help the Chinese to learn English.

DC: We have one associate in the Beijing office who has never left China yet his English is incredible. In China there is no real historical reason for English being able to be learned natively, yet you have all these heroes and role models that learn English and benefit from it. China has an interesting dichotomy where on the one hand they feel as if they succumb to learning English they are admitting that the US is a superpower, but at the same time they are practical entrepreneurs and they know it is necessary.

Compare this to how English education is handled in Japan, where they teach kids grammar very early, yet they do not speak it very well. In China they have less to lose if they mispronounce a word. There are so many different dialects and accents in Mandarin and in China that people have a more open attitude towards butchering a word or two. China is like New York, as long as you can speak it they will accept you. Japan is like Boston. If you don’t have that New England accent people will treat you a bit differently.

SM: What about education as a business opportunity?

DC: It is great. Vocational schools are on fire because not everybody gets to go to school. There are some schools focusing on Cisco networking certificates while others are about fixing cars. Partly because of the one-child policy, parents are willing to work hard and help pay for their kids’ education. China has always had a history of making education important and scholars are celebrated culturally.

SM: Are you investing in anything in the education sector?

DC: We have one company, Oriental Standard, which helps outplace vocational schools to match them with jobs. 51Jobs has a training division that actually acts as these schools. That is our exposure to education. There are firms that do invest in the actual vocational schools.

SM: I think online education is underexplored from an entrepreneurial point of view.

DC: In Korea there was a school specifically for high school kids to practice and train for college applications, like a finishing high school. In Korea and Japan that is big business. A company in Korea took the best teachers from those finishing schools, put them online, and charged for it. It is a billion-dollar market cap company. There is a huge opportunity there for students who are too busy or remote to attend those classes in person.

This segment is part 6 in the series : Venture Capital in China: David Chao of DCM
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