When the world's most famous venture capitalist speaks, people listen.
And right now, John Doerr is talking about entrepreneurship in China.
Recently I found myself, for the second time in so many months, on stage in front of a giant and attentive audience, interviewing Doerr.
The last time was before an association of Indian executives in Silicon Valley. In my column about that event, I focused on Doerr's growing -- and by that I mean hundreds of millions of dollars in investment money -- interest in "Green" technology.
We talked about that on this occasion as well -- to an audience from the Hua Yuan Science and Technology Association, an organization for Chinese professionals in Silicon Valley. I found his comments so interesting and informative – and so full of potential opportunities – that I've not only decided to base this column on my notes, but also (for the first time for me) attach a video selection from the event.
But our main focus this time was another subject dear to Doerr's heart: the emerging technology economy in China.
Investments Pouring Into China
It hardly needs to be said again, but China is the hottest region in the world right now for new business investment.
And the numbers that support this only grow more impressive: the largest population on Earth (1.3 billion), the fast GDP growth (an average of 9.4 percent per year from 1979-2003; and predictions for 9.8 percent growth this year), the largest manufacturing sector, the largest foreign direct investment ($60 billion last year), and 400 million cell phone users.
Despite this primacy in so many areas, China still has enormous untapped potential.
At $442 billion in 2004, it is still only the world's third-ranked importer. It is third in automobile purchases, second (behind the United States) in Internet usage, and still far back in consumer electronics purchases, communications, banking, health care and energy.
China also has unique cultural advantages, Doerr says.
For example, it has a sophisticated educational system that is pumping out astonishing numbers of new technical graduates: 250,000 engineers per year, as well as 450,000 new IT professionals.
Better yet, in the calculus of competitiveness, all of these professionals are ready to work -- and at comparatively low salaries: The average labor cost in Chinese high-tech corporations is just $500 per month.
But perhaps most important, China, like most ancient cultures, has a deep embedded entrepreneurial spirit. If England was "a nation of shopkeepers," China is the nation where shopkeeping was first invented.
Given all of those traits, and the more relaxed attitude toward capitalism by China's communist regime (at least local), it is not surprising that the Middle Kingdom has become the subject of considerable investment frenzy over the last two decades and why, in Doerr's words, "It's a good time to be a Chinese entrepreneur."
Venture-Capital Dollars on the Rise
These days China is comparatively awash in venture-capital money. Last year, venture-capital firms in China raised $4 billion, compared with $700 million the year before.
Seventy percent of that money came from foreign investors. And that money is hungry -- according to Doerr, quality Chinese startups these days can expect to have an army of VCs banging on their doors. One Chinese startup that Doerr tracks had 24 venture-capital investment offers in just two months.
All of that money chasing a limited number of good business plans has had the inevitable effect of driving up valuations across entire industries. For example, among Chinese Internet firms, P/E ratios have skyrocketed in the last year.
And that is just startups, according to Doerr. There has been a commensurate jump in the number of established foreign companies doing business in China through wholly-owned subsidiaries, outsourcing and direct investment.
At Doerr's own firm, Kleiner, Perkins, Caufield & Byers, more than 20 of its portfolio companies now either have operations in China or outsource there. And almost every one of Doerr's own "Greentech" startups is targeting the Chinese market to sell alternative energy products.
OK, that's the good news -- the kind of stuff we've been hearing since the late 1980s about doing business in China, only more so.
But everyone in Silicon Valley has worked with or worked for a company that went sailing off, flags flying, to get rich in China -- "All we need is one-tenth of 1 percent of the market, and we'll be tycoons!" -- and limped home a few years later in a leaky boat, their money gone and their hopes dashed.
For a generation now, China has seemed like the Next Big Thing that never seems to pay off for anyone you know.
Acknowledging the Possible Drawbacks
To his credit, Doerr is unflinching about the dangers of the Chinese market, the bad news that counterbalances the good.
It is these pitfalls that you, dear reader, if you plan to invest or do business in China, should closely attend:
Aside from the obvious matter of the Chinese government -- a subject which Doerr diplomatically did not address -- there are a number of serious structural issues facing entrepreneurial startups in China.
The biggest is a serious shortage of good, structurally sound new ventures and qualified entrepreneurs to run them.
That's one reason why the interesting companies are being overwhelmed with investment offers. China's culture may be entrepreneurial, but it is not yet truly technologically entrepreneurial.
That leads to the second problem: Most startup opportunities in China tend not to be technology-led, as they are in say, Silicon Valley, but rather business-model led or simply knockoffs of existing Western companies.
There is even, apparently a Motel 6 clone in China called -- seriously -- Motel 666. Unfortunately, these types of businesses typically have no long-term strategy, too few barriers to competition, and a dim chance of getting any kind of return on investment comparable to a traditional high-tech startup.
Ironically, for such a venerable society, long-term business planning is not a strength of most Chinese startup companies, Doerr says.
Rather, too many companies there have uncertain business models, are focused on short-term transactions at the cost of long-term growth, lack a strong and experienced management team, and suffer from uncertain business models.
Making matters worse is the fact that most must do business in an unstructured business environment -- i.e., without rules -- that works against planning more than one day at a time.
Still, Doerr adds, some companies have managed to succeed in the face of these obstacles, many of which are cleverly adopted me-too business models based on Western companies adapted to fit the unique nature of the Chinese market.
Examples include search-engine company Baidu (market cap: $3 billion), which outdraws Google in the Chinese market; New Oriental Education (a $3.4 billion franchise teaching program); and C-Trip, a billion-dollar online travel agency.
Western Investors Need to Understand Market
But if Chinese entrepreneurs are still learning their way in the world of modern tech startups, they certainly aren't getting much help from Western investors, Doerr says.
He has even come up with nicknames for all of the disastrous ways that Westerners think they can break into the Chinese market:
- The Grand Hyjack: In which investors fly in, meet, greet and eat -- and close the deal -- all without ever leaving the lobby of the Beijing Grand Hyatt Hotel.
- This Dragon Roll: This is when you create a joint venture with a Chinese company and stick your own, naive Western managers in the middle, guaranteeing that you will never know what is going on, and your partners won't be able to tell you.
- The Hot Pot: When you admit you don't understand the Chinese market, but instead of taking the time to learn, merely dump your money into someone else's fund.
- The Rent-Some-Locals: You hire some Chinese businesspeople to run your operation in China, give them a bag of money, slap your logo on the subsidiary, and pray they succeed -- or even just stick around.
In the end, Doerr says, the only way to succeed in the Chinese market is to be fully committed to long-term success in that market.
And that means being on the ground in China, meeting with entrepreneurs, studying new business plans, and "identifying early and then betting on key industry sector leaders."
It also means working closely with entrepreneurs, teaching them how to be flexible in a dynamic market, and helping them develop sophisticated long-term business strategies.
Finally, it means staying on top of the startup, making sure that it "stays focused on middle-management execution."
In other words, there is no easy path to riches in the China market, no matter how many consumers are there.
But smart investing and a real hands-on approach -- i.e., acting like a real venture capitalist -- can yield impressive results.
China is the hottest market on Earth right now. The trick is not to get burned.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
Michael S. Malone, once called the Boswell of Silicon Valley, is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News, as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is best-known as the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNEWS.com "Silicon Insider" columnist since 2000.