The disease known as 'VC Envy' has yet to spread in China. Unlike the US and other countries where technology has spawned instant fortunes in recent years, China has not created enough successes among pioneering venture capitalists to create much jealousy. But venture capitalists specialising in Asia-Pacific now sense a tentative turning point in the China market, because of the same telecommunications revolution that has transformed the economies of developed countries.

In their disastrous first foray into China in the early to mid-1990s, many venture capitalists were forced to deal with state-owned entities with poor management. They lost most of their money, without any hope of legal redress.

But two key factors have changed since then: China has seen very fast telecommunications growth; and investors are now able to seek out, and deal with, private entrepreneurs, without state functionaries to demand a cut of the action. Funds such as Pantheon Capital Asia only target private businesses.

Francis Bassolino, a senior manager for Deloitte and Touche's Chinese Business Services, says the ability to deal with private businesses, and concentrate on making profit, makes a difference.

"In the 1990s, you were still forced to do business with someone who was state-owned or had some kind of government facade; whereas now, there is tacit approval of doing business with people who care about nothing more than making money."

No one is suggesting that things have suddenly got easy in China.

It is especially hard to the formulate an exit strategy that allows investors to realise any profits they might have made on paper.

Bill Kaye, of the Pacific Group in Hong Kong, a hedge-fund manager, likens China to a "roach motel for capital", recalling the US advertisement for a pest exterminator in which cockroaches check into a hotel, but never check out. "Foreign capital that goes into China rarely comes out."

But the latest figures for Asia, and China, suggest that the recently revived optimism about the mainland's economy has been matched by a new boldness amongst venture capitalists.

June and July were record months for the region, according to figures compiled by the Asian Venture Capital Journal. Seven fund closings in July brought the amount raised this year to US$5.4bn, more than double the amount for the comparable period in 1999.

With Walden International, the US fund, on track to launch another fund, "PacVen V", in October worth between US$750m to US$1bn, with half being allocated for Asia, the pace shows no signs of slowing.

The exact amounts to be allocated to China out of Asian funds are not easily teased out, but the evidence suggests that the mainland will be getting a greater share than in previous years.

The figure for China is even higher if you count as venture capital amounts raised through quicker, back-door listings in Hong Kong, as Mr Lebus suggests they should be.

Renren Media and even the two internet/telco plays of the extended family of Hong Kong tycoon Li Ka-shing and his son, Richard Li - Tom.com and PCCW respectively - could be counted as back-door VC listings. So, too, albeit at a discount, can the numerous venture capital firms in China itself, which have traditionally been vehicles for provincial or city governments to promote local business.

The largest, according to Mr Bassolino, is Shenzhen Venture Capital, with assets in 2000 of Rnb1bn based in China's emerging high-tech centre across the border from Hong Kong.

However, caution should be exercised in classifying these funds as "venture capital".

But Mr Bassolino says the mainland VC-styled funds are at least a "forthright admission" by local authorities that "profit and loss matter, and that privatisation is the right path". For the most part, exit strategies for venture capitalists remain outside China, mainly through listings on either New York's Nasdaq, or Hong Kong's GEM market.

"The other strategy is, as a financial investor, to create something that a strategic investor wants to buy," says Mr Bassolino. "For the short term, your real exit strategy is to build a company that Motorola wants to buy."

That fits with the strategy adopted by the Hong Kong-based arm of Walden International. K.O. Chia, Walden's Executive Vice-President in Hong Kong, says his fund's strategy is to look at projects that can deliver more than a single country. "That means your exit strategy has more choices," he says.

Walden helped provide seed capital to Sina.com, one of three Chinese portals which has floated overseas, and which, at the time of writing, was the only one to be trading above its listing price.

"We were able to transform it [from a software company] into a global play and a US entity," says Mr Chia.

But he acknowledges the additional risk factors inherent in investing in a country that is still developing infrastructure, taxation and accounting systems.

"When you look at China," he says, "you are actually going through a time tunnel."


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