China's New Economy attracts VC cash
By Sarah Lai Stirland

On the face of it, Greg Tarr's indifference toward China seems downright strange for someone who claims to focus all his investment attention on the Asian market.

Mr. Tarr, who is touring the world raising a $100 million venture capital fund to finance mobile phone technology-related companies, is more interested in Japan and Korea. While mainland China offers a bigger potential market, it still looks like a roach motel for investments to people like him: Mr. Tarr can see lots of opportunities to check money into the Chinese market, but can't understand how to check those investments and their related profits back out again.

"You have a liquidation issue -- there are no guarantees for the ability to list on Nasdaq," he says, pointing to Sina.com. SINA and Sohu (which in February filed for an initial public offering), two companies who have already managed the feat despite the official prohibitions on foreign direct investment in Internet companies in China. He views the companies as "bizarre financial engineering experiments" that have been designed to comply with these rules.

China is integrating itself more closely into the world economy, and should get a big boost when it joins the global trading club, the World Trade Organization. On ground level, the reality is that the Chinese government, both on the federal and local levels, still has a lot of legal legwork to complete in order to foster a more attractive and sound business environment. Mr. Tarr is far from alone in finding the environment in China confusing; many entrepreneurs aren't sure how they can reap the profits of any investments in mainland Chinese startups.

"It's still very ambiguous [as to] what the exit strategies are" for venture capitalists in China, says Daniel Rosen, a senior advisor at the National Economic Council and author of Behind the Open Door: Foreign Enterprises in e Chinese Marketplace.

"Frankly, the question of ownership of these [startup] companies is still unclear," he says.

HERE COME THE VCs
Nevertheless, the Silicon Valley-inspired venture capital-financed startup craze that has radiated around the world is starting to penetrate China, a development that should prove fascinating to watch, given that the majority of industries here are run by the state.

Some of those startups will perform their elevator pitches
Monday through Wednesday at a conference in Beijing sponsored by Red Herring and People's Daily Online, China's official state-run newspaper. At the conference, officials from China's Ministry of Information Industry -- the department that has jurisdiction over the Internet in China -- and the Ministry of Science and Technology are also expected to clarify the government's guidelines for the Internet and technology industry. Also, venture capitalists from Dell Ventures and Hummer Winblad Venture Partners, among others, are slated to discuss how they operate in China as well as ponder the question of exit strategies. The conference was organized by The China Internet Group, an incubator for Internet businesses in China. Around 8OO people are expected to attend, making it perhaps the largest venture capital conference to date in China. More than 200 Chinese Internet and technology startups applied to have the chance to perform their elevator pitches at this conference.

There are encouraging signs for these entrepreneurs.

Though the ground rules are still unclear, "the government is aware of this and trying to get their arms around it," notes Mr. Rosen.

BABY STEPS
Indeed, news stories about both federal agencies' and local governments' efforts to formulate a framework for fostering New Economy companies appear regularly in the Chinese press, which can be read in translated and summarized form on China Online, an American-run news Web site based in Chicago.

In early May, for example, Hong Kong's daily newspaper
Wen Wei PO quoted a Chinese Ministry of Information
Industry (MII) official as saying that she had already drawn up a draft policy on helping to develop e-commerce. One of the main issues under consideration in that draft is foreign investment in Internet companies in China, according to the paper. The MII even has a division called The State Information Technology
Advancement Office. That office, according to Securities Times, is charged with promoting e-commerce in China.
To do that, the department is running 17 experimental e-commerce projects all over the country.

In some ways, the Chinese government isn't all that far behind that of the supposedly Net-savvy United States. Chinese government officials are tackling many of the same regulatory and taxation issues as U.S. lawmakers. And China's Copyright Bureau and Intellectual Property Rights Bureau are working on creating new patent laws and new online copyright laws.

RIPE FOR INCUBATING

The issue of exit strategies may be addressed to some extent later this year when new technology-focused stock exchanges open in Shanghai and Shenzen.

Meanwhile, venture capitalists are pouring in, looking for deals.

That's where the China Internet Group fits in, says
Dr. Michelle Wu, GIG's founder, president and CEO.

"We see this burning desire from entrepreneurs," she says. But these entrepreneurs often don't have access to venture capital because most VCs are not local. Ms. Wu sees her company, which she founded with fellow alumni from China's equivalent to MIT, Shanghai Jiao Tong University, as a bridge between the VCs and these local entrepreneurs. CIG currently incubates 11 startups located in Shenzen, Shanghai, and Beijing. Despite the lack of clarity about IPOs in China, each company still offers its employees stock options -- a relatively new concept in China.

Johnny Chan, founder of Techpacific.com, a publicly-traded incubator in Hong Kong, says that many of the Internet deals in China lend themselves to the incubator model because of their small size and the relative inexperience of the entrepreneurs. He founded Techpacific.com after looking for Internet deals when he was working as an investment banker at Bear Stearns.

"Netease.com was one of the companies we were looking at. We were trying to do a private placement, but the deal was too small -- no one was willing to put in the time and the effort," he recalls.

"So that's when I got the idea for [my company.] Netease.com, which is a Chinese Internet portal and technology company, is scheduled to go public on Nasdaq, but its IPO was delayed in early May because of regulatory concerns and market conditions.
Both incubator founders acknowledge the current uncertainties and riskiness in China's current business environment. They are building their own business models by capitalizing on the attributes of these risks -- by providing guidance, communication, and connections to investors in an uncertain market, and by acting as mentors to inexperienced entrepreneurs.

But there are still more questions than answers for entrepreneurs looking to make their mark in China.