Guanxi May Not Be Enough
San Francisco-based venture capitalist Peter Liu calculates that since 1993, he has traveled to Beijing 64 times--and 107 times to Hong Kong. His mission: to develop the guanxi, or connections, with business and political leaders that his WI Harper Group Inc. would eventually need to fulfill his dream of pioneering U.S.-style venture capital in China. "It's very, very time-consuming," says Liu, who is about to make another mainland trip. "It's quite annoying if you don't have the patience."
Say this for Liu, 51: He has patience. And it may start paying off. WI Harper has lined up a $70 million venture fund with powerful Asian backers that's looking to fund China-focused technology companies. But not everything is turning out as expected. Rather than use his contacts to scoop up Chinese dot.coms, Liu puts most of his money in companies based in the U.S., Taiwan, and Hong Kong that have mainland operations. Investing directly into China, he says, "could be very dangerous."
CHILLING. Liu's caution is warranted. In late January, Beijing shocked the country's nascent Net industry with a mass of new regulations. It declared any company would be held responsible if a Chinese Net surfer were found using its site to reveal "state secrets," which in China can mean almost all information not sanitized by the government. The bureaucrats also want full access to others' secrets, so companies using foreign-designed encryption software must register with Beijing. In addition, regulators want to prevent Net startups from offering shares on offshore exchanges such as Nasdaq. That would make it hard for investors to cash out.
That even savvy players like Liu are balking shows the chilling effect Beijing's moves could have on the development of the Net in China, where users are expected to more than triple, to 33 million, in 2003. If anyone can navigate these shoals, it would seem to be Liu. Born in Beijing, he grew up in Taiwan and earned an MBA from the University of California. Before starting WI Harper in 1996, he was group managing director at U.S. venture firm Walden International. Liu's Asian ties are enviable. Great uncle K.T. Lee spearheaded Taiwan's Hsinchu science park. Chinese Finance Minister Xiang Huicheng is a relative. Chang-lin Tien, former chancellor of the University of California, Berkeley, and technology guru to Hong Kong Chief Executive Tung Chee-hwa, chairs the WI Harper Fund. The fund's backers include Beijing Enterprises Holdings Ltd.--controlled by the city government--and Tsinghua University. Liu "has the most amazing connections in China," says Hanson Cheah, head of rival AsiaTech Ventures Ltd. in Hong Kong. "He can get you to see anybody."
To be safe, Liu is investing in China indirectly. He has taken a stake in eMachines Inc., the Irvine (Calif.) personal-computer maker that is now sourcing from Chinese factories. Other California companies backed by Liu: Planetweb, which wants to team up with Legend, China's leading computer company; biochip company Artloon, which is working with researchers at Tsinghua; and bookoo.com, a publisher of books on demand that's expanding to Beijing.
Where Liu has risked money in China, he has sought protection. Take his stake in Myrice.com, a Chinese portal claiming 3.9 million page-views daily. Half of Myrice's 120 staff live in Shanghai. But it is headquartered in Hong Kong and registered in the British Virgin Islands. Of course, this doesn't guarantee Myrice will stay out of trouble.
But Liu is betting Beijing will recognize that the contributions of investors the likes of him far outweigh any threats. Beijing Enterprises Chairman Hu Zhaoguang says that through Liu's fund, "we are exposed to a lot of new technology, new products, and new companies." Still, Liu is realistic. "A lot of policymakers still have Chairman Mao's mentality--don't depend on foreigners," he says. Lasting change may not come for several years, he adds. That's an eternity in the Internet Age. So Liu will need a lot more patience before the ties he has built in China pay off.