It's not hard to see why investors continue to flock to China. It has more than 125 million Internet users, the country's gross domestic product is projected to exceed that of Germany by the end of 2006, and early-stage opportunities are abundant.

But investing in China is not without its challenges. It has been seen this firsthand as a managing director at Mayfield Fund. Over the last year, Mayfield and its local partner, GSR Ventures, have invested in approximately eight companies in the Chinese wireless, Internet, and semiconductor sectors. Here are some lessons we have learned, particularly in the Internet.

The first wave of Internet investment in China, which created giants such as search engine Baidu, portal leader Sina, and instant messaging powerhouse Tencent QQ, is over. Finding another Web-related giant will take patience and often the right connections.

For instance, sports lotteries were an underground market in China until the government, seeking revenue and control over the industry, decided to make them a legitimate business. The government granted an online and mobile sports lottery license to startup SportsGG. Another startup, SMIT, holds one of the few licenses to provide digital security chips for encryption in televisions.

One of the biggest challenges for a company in China is hiring the management team. In the U.S. we almost take great management for granted because there are so many experienced managers here. In China, the Internet, and even capitalism, is relatively young, so finding talented executives is more difficult.

For cultural reasons, replacing the CEO of a Chinese startup is often next to impossible, therefore that individual is a critical hire and will be a long-term partner. Investing in startups run by U.S.-educated native Chinese, or "sea turtles," as they're known colloquially, helps mitigate risk. These executives understand how business works in China, but also studied at top U.S. business schools and gained experience in U.S.-based or multinational companies.

Jason Tian is co-founder of Baihe.com, a company in our portfolio. He previously worked for consulting giant Accenture (ACN), while PingCo co-founder Charles Wang was an executive at Yahoo! China (YHOO) before moving on to a startup. It helps when CEOs speak fluent English too. It makes it easier for U.S. investors to add value as board members and advisors.

Baidu, for example, travels door to door to sell ads to local businesses, not only because it's cost-effective, but because the personal relationship is valued in China. The country's largest travel Web site, Ctrip, delivers tickets via bicycle courier to sidestep a dodgy postal service and because the labor pool is plentiful and affordable.

With millions of Chinese relocating from rural to urban environments, Baihe.com understood that the Internet would supply one of the few ways for the masses to find marriage partners. The company avoided a casual dating Web site, instead launching a relationship-focused service that took off.

General regulatory obstacles make the Chinese market unpredictable for investors. For example, state-owned China Mobile, the world's largest carrier, can decide to change revenue splits overnight, as it recently did, or bar a company from the industry for alleged infractions, creating havoc.

Since rules can change overnight, you have to anticipate that risk going into the investment. This doesn't mean you don't do the deal. You just have to have a plan B. Any successful plan requires working with people who have relationships with the right government officials to navigate the waters and can think several moves ahead.

Consumer adoption can be easier in China. One advantage of investing in Internet startups in China is that there are fewer consumer habits to break. There hasn't been a proliferation of media, and people are eager to try new things.

However, as the Chinese market matures, it's requiring larger investments than previously believed necessary to fund growth. Short message service provider PingCo, for one, received $1 million in a first round last December and will likely get more next year. Currently, on average, including hardware sector investments, we think it will take $6 million to $8 million to fund an early-stage company in China, whereas in the U.S., our target is $8 million to $10 million.

The good news is that early-stage investment is less competitive in China, where most VCs are investing at the later stage. And early-stage opportunity in China still abounds. Digital TV, Internet protocol TV [IPTV], and the increasing use of broadband PC connections open new forms of media and entertainment services. China also lacks a dominant social network such as MySpace or an e-tailing industry that matches the maturity of the market in the U.S. and Europe.

Source:佚名