China is a hot destination for American venture capitalists, thanks to the blistering growth of China's Internet and telecom sectors. West Coast venture-capital outfits, especially those clustered along Sand Hill Road in Menlo Park, Calif., once rarely looked beyond Silicon Valley. Now, these investment pros are flying across the Pacific or setting up offices in China to find the next Baidu.com (BIDU) the Chinese search engine that is ahead of Google in China and had a spectacular Nasdaq initial public offering last summer. In the first half of 2006, Chinese companies received almost $775 million in venture capital. That's double the same period in 2005.
All this, of course, is great news if you're an entrepreneur in China looking for seed capital. Less so if you're Intel Capital President Arvind Sodhani, who oversees strategic investments for chipmaker Intel (INTC) The semiconductor giant is a longtime player in China's venture-capital scene, having been investing in Chinese startups since 1998.
Back then, not many financiers were looking to invest in China, since most American venture capitalists had their eye on U.S. Internet plays. Today, says Sodhani, there's a lot more competition. Sometimes it seems that just about every American VC firm wants a China presence. "There is a lot of new money arriving," he says. "Every day you hear of a new one."
BUBBLE REDUX? That complicates life for Sodhani and his Intel colleagues. There's lots of money chasing a limited number of deals, which is raising concerns about a repeat of the Internet bubble. "I wouldn't say anywhere near that but valuations have gone up and the trend is for higher valuation. Am I worried about it now? No. but if it continues in that direction, then it will be something to be concerned about," he says.
A more immediate concern: Intel venture-capital experts are themselves in demand. Having done over 50 deals in China, Intel's team has the experience that newcomers want. "We have been a recruiting ground for foreign VCs," admits Sodhani. "Because we have been there, our people now have the relationships, the deep experience, know-how, and knowledge of the place." As a result, he adds, "we tend to get our people poached. We have lost quite a few people."
Intel is now fighting back. Last year, the company announced that it was setting up its first country-specific fund in China, with plans to invest $200 million in Chinese startups. The point, according to Intel executives, is to show that it's around for the long haul. "Tech has always been cyclical and there will be ups and downs, and times that investors will be shying away," says Cadol Cheung, managing director for Intel Capital Asia-Pacific. "We believe that no matter whether this is a good time or a bad time in the public markets, there are good companies we can find."
CAMPUS CRUSADE. Intel differs from ordinary VCs since it's looking for companies that promise not just a nice return on its investment but also a strategic fit for Intel's overall goal—selling semiconductors. "The most attractive thing about China is growth rate," says Sodhani, who adds that Intel is now focusing on Chinese startups that aren't just exporters but rather can take advantage of booming domestic demand.
That has led Intel to some unusual companies. For instance, in June Intel announced it was investing an undisclosed sum in Campus Media, a one-and-a-half-year-old company that wants to install TVs in university cafeterias nationwide that it can use to show programming and advertising. China's higher-education sector is expanding rapidly, with schools across the country adding new buildings or constructing completely new campuses.
That's a market that Intel's new partner wants to reach. So far, Campus Media has installed more than 7,000 TVs in 300 universities, with a total enrollment of 4 million students. The company provides four-and-one-half hours of programming (including sports and news provided by China Education TV and the Shanghai Media Group) to its 34-inch screens.
GETTING IN ON GAMING. TV is just a start, promises Pike Tse, the 38-year-old former Coca-Cola (KO) salesman who now runs Campus Media as its chief executive officer. He plans to turn his terminals into Internet access points, too. "We are trying to build up an integrated media platform," he says. Having Intel as an investor "will give us some value on tech support. It has some technology that can help us a lot."
China's affluent twentysomethings also have attracted Gary Chang, president and co-founder of Winking Entertainment, an innovative company based in Shanghai that focuses on online gaming. China has more than 110 million Internet users and about 25% of them play games online, making China one of the most important markets in a fast-growing industry.
Chinese companies like NetEase.com (NTES), Shanda Interactive Entertainment (SNDA), and The9 (NCTY) have grown quickly by catering to local gamers. But the market is getting more crowded and demand for newer, more exciting games is unrelenting. Some license games from Korean companies, but that's costly, so increasingly the Chinese companies want to develop their own games.
That's where Winking comes in. It offers companies the option of outsourcing most or all of their game development. "The game operators face a challenge: They have solid back systems established and have knowledge in operating the games. But when it comes to developing games, it's a huge distraction," says Chang. So Winking has over 150 software engineers who specialize in the development work.
INDIA HOOKUP. Typically, people associate software outsourcing work with India—and sure enough, Intel Capital is also focusing on that country. Following up on its China fund, Intel announced last December that it was launching an India fund (see BW Online, 12/6/05, "Intel's Eager Passage to India"). Notably, given the rivalry between the two Asian giants, Intel's India fund is worth $250 million, $50 million more than its China fund. Why the difference? "I get this question all the time," says Intel's Sodhani.
He says that the difference is simply a matter of timing. "We announced the India fund a year later. If we were to announce a China fund today, I'm sure that it would be a much bigger fund." He also says that China has definite advantages over India as a place for venture capitalists to invest money. "China is hugely entrepreneurial, with an understanding of what being an entrepreneur means. That's very attractive for a VC." He adds that China has the high-end consumers, a big pool of engineering talent, and (unlike India) a very business-friendly government. "In India, you have to start from scratch," he says. "All the elements are in place in China."
Sodhani even sees a benefit in the arrival of the other American VCs. "We have fellow travelers," he says. "But venture capitalists don't operate in a vacuum. We want to share the risk. So that is positive." As Intel competes and cooperates with other venture capitalists, China's entrepreneurs are poised to emerge as big winners.