PrintMayfield Fund News: February 2007
In this issue:
• Mayfield View: Kevin Fong, Managing Director.
• Guest interview: Attorney Howard Chao, partner, O’Melveny & Meyers, Asia Practice.
• In the News
Mayfield View: Kevin Fong, Managing Director
With 1.3 billion people and a middle class that’s roughly the size of the U.S., China’s startup investment opportunities are enormous. The numbers reflect this. In 2005, nine Chinese venture-backed companies went public, including search giant Baidu.com, boasting a combined market value of $11.6 billion by mid-2006 and, on average, 4X investor returns. IPOs aside, China is the world’s largest market for semiconductors and cell phones. And just seven percent of China’s population is online, leaving untold millions in ecommerce and Internet services to be mined.
We began our journey three years ago, in early 2004. Along the way, we found some guideposts that may be familiar to global investors:
- Think Globally, Invest Locally
Mayfield decided that the only way to successfully tackle a foreign investment environment was by having feet on the ground. Realizing that the Silicon Valley to Beijing commute would get old pretty soon, we decided to partner with a local or cross-border Chinese firm. We set about looking for a China partner with a similar philosophy, a strong business network and an understanding of the country’s vast complexities and cultural differences.
- It’s always about the team
With the help of Priscilla Lu, a former Mayfield portfolio CEO who guided us on our first business trips to China, I met former Nortel Networks executive Sonny Wu and Internet entrepreneur Richard Lim. Wu and Lim, China and Singapore natives respectively, wanted to build an investment bridge between Silicon Valley and China with Mayfield, a firm with a track record of investing in Chinese entrepreneurs. Mayfield helped GSR get started, mentoring the team, hosting them in our Silicon Valley offices and introducing them to our limited partners. By early 2005, the pair brought on James Ding, the former founder of Asia Info, and together, we closed their first fund, the $75 million GSR I. (http://www.gsrventures.com/)
- Providing value beyond equity
As the market in China continued to explode and the GSR team executed beyond expectation, we kept a line of quality deals flowing. Though Mayfield expected to make just two investments through GSR, our two firms have invested in 11 companies to date. We have invested by opportunity not by sector alone, and our investments include seven Internet & wireless and four semiconductor companies. Together, we have provided business counsel and financial advice to a cadre of world-class Chinese entrepreneurs.
- Know when the time is right for the deeper dive
In mid-2006, we realized that the opportunities in China exceeded our expectations and we decided to deepen our commitment. Building on our track record as partners and on limited partner interest in participating in growing, global markets, we decided to raise a larger, dedicated China fund. We closed GSR Ventures II at $200 million in January 2007. The fund was oversubscribed by our existing limited partners and we added some new groups.
- When the future is bright, you’ve got to wear shades
China today looks better than ever. While it’s too early to expect exits within our growing China portfolio, our eyes are on the NASDAQ, where even more Chinese companies are expected to go public this year. In addition, the success of the Hong Kong stock market, which raised more money than the NASDAQ last year, is indeed heartening. As government financial advisors continue to consider merging the China and Hong Kong stock exchanges and our deal flow increases, (U.S. investors saw more than 400 deals in the third quarter of 2006, compared to150 deals in the second quarter of 2005) the Year of the Pig should continue to prove an exciting one for Mayfield and GSR.
Guest Interview: Attorney Howard Chao, partner,
O’Melveny & Meyers, Asia Practice http://www.omm.com
Chao, who’s headquartered in Silicon Valley and leads the Asia practice for OMM, travels monthly to China. He is a Francophile who speaks fluent French, and an investor in Shui Yuan, an upscale Chinese restaurant on the Shanghai waterfront. When not working, you’ll find him mountain biking on Skyline Drive in the Santa Clara mountains.
Mayfield: What is the most common misconception that your clients have about doing business in China?
Howard Chao: That China works like home. China is the product of a very different political and economic system. The government and the laws are different and you have to adjust your time and framework to that reality. I think some people treat China as if they’re going to do a deal in England or France.
Mayfield: In what way?
HC: They underestimate the role of government, for one. Washington D.C. is a weakling compared to the strength of Beijing in decision making and regulation and the many government-owned companies in the sectors. Some sectors in China are opening up and other sectors are still oligarchies. Another difference is the role of the rule of law and the legal system. China has made huge progress in creating a legal system but created it from scratch after the Cultural Revolution. They now have a body of laws and a court system, lawyers, and regulatory system. But I don’t think in the near future you will get the level of liability and specificity that you get in the U.S. and there’s a gap in China between theory and practice.
Mayfield: Is the law applied differently to foreigners doing business in China?
HC: In some cases, foreigners are treated worse, in some cases better. They get better tax rates to induce foreign investment and the nationals complain about that. So China is changing the law so the tax laws are the same for both. But this isn’t just a “foreigner and Chinese” thing. There are many markets where it is an uneven playing field not because you are foreign or Chinese but because your company has a better relationship with a relevant Chinese agency or you are from a key province in a particular market. There’s provincial protectionism. It’s a local versus non-local thing.
Mayfield: Are there challenges to these traditional ways of doing business?
HC: Many of my clients are taking on that protectionism. But the markets are in flux anyway. Many product lines are in the process of consolidation and this is breaking down businesses in provinces. There’s this huge consolidation across China that’s going to continue for many years. Entrepreneurs and tycoons are going across China building enterprises and creating economies of scale. It’s like the US in the 19th century but in the U.S., a lot of this has already been done.
Mayfield: How have the deals you’ve handled changed over the past year?
HC: It’s changing rapidly and all the time. I am still polishing the list, but we closed 70 venture/private equity deals in 2006. This is up from 50 in 2005. The number of large private equity deals went up significantly last year -- we had 15 to 20 deals that were in the over $100 million range. There were a fair number of pre-IPO investments, too. We are seeing tremendous deal flow coming onto the Hong Kong exchange. And we saw a significant flow of real estate deals – a hot sector and one that is sometimes connected to the technology boom.
Mayfield: What’s next for Chinese entrepreneurs and investors?
HC: The Chinese are moving more toward domestic capital-raising. There are tons of Chinese companies that need capital because they’re growing fast and China has plenty of money available for capital investment. Chinese companies don’t need to go abroad to get money. They do want the credibility and prestige of relationships with international investors but there’s a lot of liquidity within China.
- Investments: Mayfield Fund Raises Dedicated $200 Million China Fund
- Media: Mayfield's Navin Chaddha named to Forbes Midas list of Top 100 Dealmakers
- Investments: Mayfield makes its first moves in India.
- Investments: Mayfield invests in Affinity Labs and China-based Qunar.com.
- Investments: Mayfield invests in consumer product research site Wize.
- Media: Chamath Palihapitiya discusses Jaxtr’s secret sauce on MarketWatch
- Media: Red Herring on Mayfield’s India strategy
- Hires: Webroot names a new CEO.
