China's VC syndrome
The People's Republic wants to throw its doors open to venture capital.

By Sarah Lai Stirland

BEIJING -- Entrepreneurs stood by elevators, handing out business plans to anyone walking past. And any Westerner walking around was approached with the question: "Hello, are you a VC?"
Welcome to the China Internet Venture 2000 conference, held here June 6-7, where venture capitalists are seen as the magic key to unlocking pent-up entrepreneurialism. During a break in the conference -- sponsored by Red Herring and People's Daily Online, China's official state-run newspaper -- VCs were overrun by swarms of entrepreneurs. One investor said he had no less than 70 plans pushed at him.

Even the conference organizers, from incubator China Internet Group (CIG), couldn't restrain the entrepreneurs' enthusiasm when they tried to get the members of the audience to sit down again after the break. Greg Ye, a vice president of CIG, could only smile as he attempted to bring order from the podium. "A lot of overseas investors can really feel the entrepreneurship spirit of China right now," he said with a grin.

Inspired by the success of Chinese portal Sina.com on the Nasdaq, Mainland businessmen and students are busily forming their own startups. And government officials both on the federal and municipal levels, clearly eyeing the New Economy in the United States, are pondering how they can foster similar economic conditions here.

Both camps have started looking to foreign venture capitalists for help. As they embrace this relatively new concept of venture capitalism, however, these seekers may find that they'll have to relinquish some of their long-held and deeply ingrained ideological beliefs. A whole new founding generation of Chinese entrepreneurs' futures and class of wealth generation will depend on the success or failure of relinquishing the old and bringing in the new.

A TANGLE OF LAWS
Local entrepreneurs and venture capitalists don't seem to be put off by the tangle of laws aimed at preventing foreign investors from buying into Chinese startups and blocking foreign companies from competing with Chinese startups on their home turf. Just witness the pandemonium at the China Internet Venture 2000 conference. Organizers estimate that at least 600 people attended the event, many of them local software and Internet company entrepreneurs.

Government officials on both the federal and municipal levels made it clear at the conference that they are committed to improving their country's infrastructure and to creating an attractive environment for venture capitalists.

Shi Dinghuan, director of the Chinese central government's Ministry of Science and Technology, put it bluntly: "In the past, our high-tech enterprises were quite weak, but now with the open door to the world, we're trying to introduce venture capitalists and foreign expertise as a key part of our development."

That comment was part of Mr. Shi's speech on the Chinese government's recognition of the importance of the Internet and its significance to China's economy. In his talk, Mr. Shi said that the government wants to establish a system of venture capital in China, and that he was open to ideas both from locals and foreigners on how the government could accomplish that goal.

Mr. Shi was one of three government officials who spoke at the conference. China's Internet czar, Zhang Yun Qing, director of the Ministry of Information Industry (the department that controls all Internet activities in China), and Yu Chisheng, of Beijing's Science and Technology Commission, also spoke. Ms. Chisheng gave a detailed outline of the commission's efforts to create the right environment for the New Economy.

The measures include tax breaks for special technology company development parks and the creation of a new over-the-counter stock exchange to address VCs' concerns about exit strategies.

The proposals are still just ideas and need to be approved by the central government, but they could be adopted on a federal level, Ms. Chisheng said.

ATTENTION MUST BE PAID
Observers would do well to pay more attention to government policies established at the local level, says Daniel Rosen, author of Behind the Open Door: Foreign Enterprises in the Chinese Marketplace and a senior adviser at the National Economic Council . "They play a critical role because none of the national regulators are ready" to pass new rules yet, he says. "It's really the policies and the regulations of the provincial and municipal governments that make the difference at the end of the day."

Anecdotal evidence shows that many members of the Chinese government on the federal, state, and local levels are keen to foster these entrepreneurs' dreams.

"A new venture capital system in China is an important objective, and I am open to all questions from both the foreign and domestic sectors," says the Ministry of Science and Technology's Mr. Shi.

As it stands, China's government has put up lots of barriers to discourage foreign investment and participation in its markets. For example, China's federal Internet regulator, the Ministry of Information Industry, protects Shanghai-based startup Hot-Tickets.com by prohibiting Ticketmaster Online-Citysearch from setting up offices and servers in Shanghai.

The government usually asks at least four standard questions when checking on the ownership status of mainland China Internet companies that want to go public, says Mao Tong, an attorney at Squire, Sanders & Dempsey . It asks about domain name ownership; server location and ownership; who's leasing the telecommunications lines for the business; and who owns the content and advertising licenses for the business. (All Internet businesses that provide content must apply for what's known as an Internet Content Provider license.)

Even with its formal restrictions, the Chinese government's efforts at keeping out foreigners are being worked around by crafty entrepreneurs both here and abroad. For example, Sina.com and others have gotten around restrictions by restructuring as offshore companies, carving up their firms so that part of the business is registered in China and part of it is officially registered outside the country. Many technology and Internet-related companies that do the bulk of their business in China in fact maintain their official headquarters in Silicon Valley to get around this problem.

"When it comes to China, we all know that there are all sorts of legal restrictions ­- you should plan for this process as early as possible, not just before the road show [leading up to an IPO]," Mr. Tong says.

Once China joins the World Trade Organization , a lot of restrictions should go away. Joining the WTO will mean that China will have to allow foreign companies to eventually own up to half of all Chinese Internet companies.

LONG AND WINDING ROAD
Opening its arms to entrepreneurialism is just the first step on a long road for China -- if it truly wants to join the New Economy.

Joseph Tzeng, managing director and founder of Crystal Internet Venture Funds , said many of the presentations he saw at the conference were very "raw." Other VCs at the show were put off by the lack of original ideas they saw, as well as the lack of knowledge about the venture capital process. Nevertheless, several foreign VCs were there just to soak in the environment and to find local partners who could help them to navigate and find good deals in the marketplace.

Despite this interest, China's entrepreneurs face a tough market. They face an audience of skeptical venture capitalists, many of whom haven't done too well on many of their investments in Asia, Mr. Tzeng notes.

Mr. Tzeng acknowledges the risk of investing in China, and he adds that one of the biggest elements of being successful there is diplomacy and knowing how to communicate effectively with local entrepreneurs and the government without offending them. Though he declines to name names, he says he's seen venture capitalists from Silicon Valley set up shop in China and -- without realizing it -- be perceived as pompous asses.

"A lot of people come in and they think they're coming from a hotbed of innovation," he says. "They think they're going to show you something. Well, it doesn't work like that. It's more like: 'Let's share something.'"

Knowing the terrain, Mr. Tzeng, one of the original investors in Sina.com, isn't hesitating to place bets now -- even though it's very early in the game. He's about to invest in three startups located in Beijing, Shanghai, and Shenzen. He wouldn't name them at press time because he hadn't closed the deals yet. Despite the concerns he cited, he still obviously believes in China's potential.

Local startups here definitely have stars in their eyes, but some of them are wary of VCs. "To me, venture capitalists are wise people, with smart concepts and smart visions about which are the profitable companies," says Jeff Huang, chairman and CEO of Hot-Tickets.com. "I don't like stupid VCs ... and I hate angel investors because they have no vision."

Mr. Huang first became aware of the concept of venture capital early last year, when IDG established a venture fund in Shanghai. Since then, he's learned more about the concept through his friend Sean Yao, founder of CIG. Mr. Huang was one of the 20 entrepreneurs who surrendered a small percentage of his company to CIG in exchange for the privilege of pitching his company to VCs at the conference.

CIG helped him and his fellow entrepreneurs refine their presentations, and made sure that they covered the main points that prospective investors would want to know about.

At the conference, Mr. Huang was seeking $1 million to $3 million in exchange for 10 to 15 percent of Hot-Tickets.com. The money, he says, will go toward expanding his online ticketing service outside of its current service area in Shanghai to consumers in all of China's other major cities.

Eventually, Mr. Huang, who still owns 80 percent of his company, wants to take it public on Hong Kong's stock exchange for technology and Internet companies. For entrepreneurs like Mr. Huang, the Chinese government's decisions on how to treat in-flowing foreign capital and Internet activities in the next few years will be critical.