China is viewed as a source of profits - and frustration

If you asked Leslie Valdasz, an Intel Corp. founder and head of the chipmaker's venture group, where on the globe he sees the greatest possibilities for technology, you might be surprised by his answer.

''China,'' he said.

OK. What about his other top picks?

''First, second, and third - China,'' he said. ''If I was a 30-something, I'd be working in China.''

Take that, Silicon Valley. One of your own is now looking across the Pacific for the next big thing. Sure, they censor the Internet. But it's a massive country that's young, technologically savvy, and bursting at the seams to earn money and make a mark on the world. On the heels of China's admission to the World Trade Organization last year, foreign capital is pouring into the country from high-tech companies, developers, banks, and others at a pace that's likely to hit $50 billion this year.

But China is no simple destination for venture capital, as anyone who has studied the giant knows.

There are big universities and lots of talent. There are engineers motivated by sheer intellectual curiosity to pursue new technolgies. And the economy is still growing at a searing rate, nearly 8 percent this year.

But the market economy that's trying to get off the ground in China is burdened by the awkward grasp of a Communist regime. Capital markets there are still in the formative stages, making it impossible for investors to be sure they could exit any companies in which they invest. And corruption, incidentally, is rampant.

Bottom line: This isn't a market to rush into. But what frontier has not managed to pique the imagination of Americans? Dell Computer makes PCs in Xiamen, China. (The populous nation is the third-biggest consumer of computers in the world.) A site called VCchina.com has ads posted on it by EMC, Hewlett-Packard, Oracle, and accountants PricewaterhouseCoopers who have big business with VCs and tech companies in the states. A book is due out in China by year end, called ''Chinese VC Investor'.'

There are several homegrown venture groups, including companies based in the financial metropolis of Hong Kong. IDG, the big US tech publisher and venture group, has China operations. Vertex Venture Holdings, founded in 1988 as the venture capital arm of Singapore Technologies Group, has offices in Beijing and Hong Kong. KLM Capital Group of San Jose, Calif., has a Hong Kong office. H&Q Asia Pacific has an office in Beijing as well as in Hong Kong.

Tom Claflin, a Boston-based venture capitalist, is an investor in some China funds (Tang Mei Funds) that deal in publicly traded stocks. He said of China: ''It's very difficult to do venture capital there. There's really no way out of companies.''

Chinese companies that have managed to go public so far have been mainly state enterprises, like the Bank of China, despite a spate of bad loans on its books, in July. The strongest Chinese companies aim to go public also in London, New York, and even on the Nasdaq exchange. But the goal, people who follow the country say, is for China to have its own strong markets. And if public markets are young and volatile in China, private equity is still a brand new concept. By some estimates, China is a couple of decades behind the West in the raising and deploying of venture capital.

Claflin says he can't predict when, if ever, China might be a money-making site for VCs. But it's not a country to ignore, he warned. At the very least, it's a huge potential market in which to sell goods. And it could ultimately be a place where foreigners can invest as partners or owners and reap profits.

But there's another reason for US businesspeople to keep their eyes on China.
''Americans have got to wake up and understand that its already a powerhouse and it's getting to be more powerful every minute,'' Claflin said. ''It's ultimately going to be a huge competitor of ours.''

MDS Capital has hired Gerry Brunk to open a Cambridge office for the life sciences venture firm, which until recently has focused on Canada and Seattle. Brunk, 34, was previously chief operating officer at a local bioinformatics company, ActiveCyte Inc. Before his stint in a few medical-related start-ups, he was in the health care practice at the Boston Consulting Group and in investment banking at Credit Suisse First Boston.

MDS has $900 million under management and will soon close its eighth fund, which should exceed $200 million.

Copyright © 2002 The Boston Globe

This story ran on page C3 of the Boston Globe on 9/9/2002

Beth Healy is a business reporter for The Boston Globe. Her Venture Capital column appears regularly. Beth can be reached by e-mail at This e-mail address is being protected from spambots. You need JavaScript enabled to view it