Venture investors have traditionally focused on the Bay Area and Boston, though certain other cities, like Austin, New York, and Seattle have always attracted interest. Israel has been hot, also; last year, foreign investors pumped about $625M into IT and life sciences companies there, according to the IVC). But China is arguably generating more buzz than any of these cities, even though last year US venture firms invested only $557M. And that sum was actually a decrease from 2003, when US firms invested $725M (WSJ’s StartupJournal). Still, the amount of new activity is astonishing: Accel and IDG formed a $250M China fund. Doll Capital Management recently joined forces with Legend Capital. Gary Rieschel moved to Shanghai. Fred Wilson, in his great series of VC Cliches, says China may be today’s most interesting investment theme. We’ve participated, also: in 2001, Venrock helped form Granite Global Ventures, a late stage venture firm with a particular focus on China, having invested in Alibaba, Hurray, and recently Bokee, among others.

Why all the activity?

Growth.

A few statistics, courtesy of Foreign Affairs:

• Since 1978, China’s average GDP growth has been 9.4%.
• In 1978, China accounted for less than 1% of the world economy and its foreign trade was worth $20.6B. Today, it accounts for 4% of the world economy and its foreign trade is worth $851B (third largest in the world).
• In 1990, China had almost no mobile telecom infrastructure. Today, it has more than 300M cell phone subscribers (most in the world).
• As of mid last year, almost 100M Chinese citizens had internet access.

Growing pains are likely; Zheng Bijian, the article’s author, has concerns about scarce natural resources, pollution, and, in particular:

[the last] challenge is reflected in a series of tensions Beijing must confront: between high GDP growth and social progress, between upgrading technology and increasing job opportunities, between keeping development momentum in the coastal areas and speeding up development in the interior, between fostering urbanization and nurturing agricultural areas, between narrowing the gap between the rich and the poor and maintaining economic vitality and efficiency, between attracting more foreign investment and enhancing the competitiveness of indigenous enterprises, between deepening reform and preserving social stability, between opening domestic markets and solidifying independence, between promoting market-oriented competition and taking care of disadvantaged people.

Talk about management challenges. Still, risk and reward are generally tightly correlated. As a result, due to China’s strong recent economic performance–and massive potential–it’s likely that many more US venture investors will rack up frequent flier miles as they scout out opportunities there.

Posted by Dan Grossman on Wednesday, August 31st, 2005 at 12:46 pm.