Venture Capital in China: David Chao of DCM (Part 7)

SM: Was there something I should have asked you but didn’t?

DC: I would like to add some thoughts on innovation. I think in certain cleantech markets, China might be ahead of the curve. There are fewer regulations in China. If Menlo Park were going to put a smart energy grid storage in place, residents would most likely vote against it. In China the government says it is going there and that’s it.

I think that there will be some cleantech deployments that China might experience earlier and faster. Wind power is certainly in that sector, as is the use of LED lights to reduce energy requirements as China has energy restrictions. That may lead to innovation.

There are some very interesting areas in China today. E-commerce is finally booming. This is noteworthy because in the US e-commerce exploded at the same time as did Internet content. The infrastructure was not in China for that to occur, so content came first. People did not have credit cards or a UPS, but in the last year and a half it has exploded.

This is going to have an interesting impact in retail in China. In the US and Japan, good retail brands were not born online. In China there are brands which are capturing good market share which were born online.

Semiconductors are going through a down cycle right now, but I think they will come back. At the end of the day, when you have the largest scale consumer electronics company in China, demand for semiconductors will return.

I also think that social networking is going to play a unique role and will grow rapidly. Facebook opened its API, and you have SNS games on top of Facebook or Hi5. Until that opened up, developers in China could only make games for China. Now the floodgates have opened. There are game development companies in China making more money on Facebook games than domestically. If you look at labor costs in China and India, combined with the fact that these are not rocket-science applications, I can see a world where in three years the dominating players will be Indian and Chinese companies.

SM: My hope is that some entrepreneurs are going to use those principles and apply them to education. HotChalk is doing that and has created a social media community for teachers, parents and students. They have great traction. They are getting into schools without banging on the doors of school administrators.

DC: I think they absolutely will. I think MIT has almost all of their classes online. That is phenomenal. Kids will literally find ways to learn more there than paying $5,000 to a community college. I feel bad for a lot of faculty around the world. It is a plus and minus for them.

SM: If they learn from the MIT faculty, they will be able to teach better. It is better than the blind leading the blind.

DC: Good ones will emerge and have a bigger audience. I completely agree.

SM: What kind of deals are you looking for these days?

DC: I have gone through the sectors we are looking at. We are looking more closely into Series A/C deals. In the last cycle when the bubble popped it was more tech-driven, and this one is more broad. Our portfolio is doing great because of our diversification. One of the interesting phenomena we encountered in 2002 to 2004 was that there were a lot of Series C/D being done at Series A prices. People think that is a great bargain, but our experience is that it is not the case. At the end of the day is the that team drives performance. When you have a group of really smart people who know they have to work incredibly hard for three to four years, and then they realize that they have to do it again for another three to four years, it is hard. We would rather focus on new ideas because it is all about how fresh and smart the team is.

SM: I have worked a lot of turnarounds during my consulting career and I know exactly what you are talking about.

DC: Some succeed, but you need 10 times the energy. Most fail.

SM: This has been a very interesting discussion. Thank you for taking your time.

This segment is part 7 in the series : Venture Capital in China: David Chao of DCM
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