China’s VC community is active despite the global downturn, further its focus on Chinese companies may preclude investing in U.S.-based startups

By Karen E. Klein

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I am charged with getting danger capital for our media technology circle that focuses on next-generation home entertainment. This financial crisis has got me thinking relating to where to influence by looks. I was thinking maybe China. Any ideas? —E.S., Irvine, Calif.

First, the abundance news: "China does have a VC community, and…[it’s a] source of liquidity and appetite for new investment, notwithstanding the current global financial collapse," says Janet Carmosky, CEO of the China Business Network, a calling information and networking Web site.

Bradley Haneberg, a securities lawyer for Kaufman & Canoles who has worked on direct Chinese initial public offerings, agrees. "In the last divers years, China has seen the birth and exponential growth of its entrepreneurial class. The Chinese government adopted several policies (including tax incentives) to encourage the progress to maturity of privately owned businesses. These entrepreneurial ventures, coupled with the privatization of state-owned businesses, have driven the Chinese economy to new heights," he says.

Despite a blistering economy and an enormous spike in the number of businesses that require increment to capital, bank debt is unyielding to obtain in China because loans have traditionally been given only to companies that are politically connected. The lack of rowing-beam financing has contributed to the creation of Chinese presume forfeiting life groups, Haneberg says. Chinese investors have funded telecoms, Internet ventures, health-care firms, software development, green tech, water projects, airport securities, and familiar networking sites, says Robert Chen, executive vice-president and general manager of the ChinaTel Group, which provides WiMAX networks in China and other countries. "Next-generation home banquet could be big here," he says.

Focus attached Chinese Companies

Despite the good news, however, there is a deal-breaker being of the kind which antidote to U.S.-based startups seeking to tap into Chinese VC riches: Chinese investors focus steady funding Chinese companies.

"There are many reasons for [investing inside China]: Among the top: lower labor cost, big China market, and most importantly, the VC can keep an eye adhering the project," Chen wrote in an e-mail message. In addition, Chinese VCs rely heavily on which’s known as guanxi (BusinessWeek.com, 11/8/07), Chen says. "When a one has good guanxi with the Chinese government or with a VC, that means they have a good relationship and might refer the company or separate to get a license approved or allude the person to someone in the VC community that will review the visitor’s walk of life plan and may or may not endow in the company."

Carmosky confirms the importance of the personal relationship in Chinese business, in contrast to U.S. venture capital culture, which tends to focus not so much on relationship and proximity and more forward forecast ROI and exit strategies. "Our system of capitalism is so impersonal that it’s often called ‘OPM’ or ‘Other People’s Money,’" Carmosky notes. "It calls for noble degrees of transparency and accountability, and exists in the compass of a framing of mature, scalable markets." In contrast, risk is evaluated through Chinese VCs based on proximity, limited relationships, and calibrating how well-attuned a company is to dominion policy.

There are too stringent foreign swap rules in China that answer for it difficult for firms there to engage in foreign commute, Haneberg says, and Chinese venture capital firms have a hard time competing during the term of characteristic investment opportunities in developed countries where in that place are already so many established investing. firms.

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