Yankees in Chairman Hu's Court

Matt Bowman · January 19, 2010 · Short URL: https://vator.tv/n/d41
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The Chinese and U.S. venture-backed industries are learning to play nice.

 Like it or not, China and Silicon Valley are in the same sandbox. Valley titans may try some strong-arm tactics to get the dragon to play nice (witness Google’s important pullback from the country last week), but in the long run, the U.S. must cooperate with Shanghai to continue building the tech economy.

Many valley leaders worry the U.S. is handicapping itself too much. U.S. regulation makes Shanghai IPOs more attractive, and capital gains taxes could push more venture capitalists to China. In an email exchange this week, DLA Piper partner Khoa Do, who represents several Asian companies and entrepreneurs in addition to running a U.S. corporate securities practice, said such regulation is already affecting startups in remote areas of People's Republic. He noted that more Chinese entrepreneurs are staying put in their homeland, as investors from overseas seek them out. Even the provinces outside Shanghai are not too far for venture capitalists to trek these days.

“Most venture capitalists in China are based in Beijing, Shanghai, GuangZhou or ShenZhen. Because the opportunities for compelling investments are significant, several venture capitalists are beginning to travel outside of these major cities in search of transactions in the secondary cities or provinces." Do says.

“Much of this activity in China is fueled by government-driven initiatives that encourage the establishment of more domestic VC funds and investments that are geared toward local market IPOs. By contrast, US policies deter innovation and chill capital markets through endless regulations and rules. Our current fiscal and regulatory mandates will impede long-term recovery prospects by taking laws like SOX and private equity capital gains taxes too far. These policies are like boat anchors on the engines of the US economy. Eventually, venture capitalists, private equity firms, entrepreneurs and thought leaders will travel overseas because the upside here is disappearing."

That’s a pretty stark diagnosis. Granted, the comments come at a time when Congress has a debate pending over capital gains taxes that could hit VCs, and, by extension, DLA’s Palo Alto office, fairly hard. Proponents of these taxes often argue that they are fair and consistent from a domestic legal point of view (naturally, that, too, is debated).  Those in the Valley tend to think less about legal consistency than opportunity costs, game theory, maximizing value, and staying competitive.

America's domestic issues and competitive position aside, Khoa also describes how the economies are integrating. Scrappy Chinese startups are attracting more Valley dollars (the U.S. going to China), but many of those same startups are looking overseas for biz dev and strategic investment personnel (China coming to the U.S.). His description of how the two tech economies are integrating is worth a read:

"Venture deals in China have become more innovative. Chinese companies have become very cash efficient because of lower cost structures. These enterprises can accomplish more with less money. A Chinese start-up can stretch a $1 million investment for a relatively long period of time -- 12 to 18 months in many instances. Chinese companies are typically more scrappy and inventive with their business models. For example, virtual goods for online gaming arose in China because there was no vibrant advertising economy. Chinese companies have become adept at more than just copying and pasting successful US business models; they adapt these models for the local environment. A successful Chinese entrepreneur cannot simply copy and paste US website models into China. He must add a twist for the China market. For example, CTrip accepts travel ticket orders by web and phone and delivers via bicycle messenger for COD payment. Chinese start-ups command a better understanding of the blend of online/mobile purchasing and retail/offline transactions than their US counterparts.

"Also noteworthy is the emergence of Chinese operations in the US. Chinese companies are starting to flex their muscles in the global economy as they aggressively seek to win market share in the US. These enterprises want to become global brands instead of cheap products that are "good enough" for the China market. They emulate leading Silicon Valley companies by hiring non-Chinese executives for roles in business development, corporate development, M&A, and strategic investment. Such functions traditionally have not been leveraged by Chinese companies. Huawei, China Mobile, and Perfect World are examples of companies that have established technology scouting and business development satellite offices in the Silicon Valley -- down the street from their biggest competitors."

As American free-press principles clash with Chinese paternalism, the almighty dollar is bound to yield many more break-ups like the recent Google controversy, and just as many make-ups, for the sake of both economies.

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