No Mas Kapital

In the Hutong

Listening to the dulcet tones of the jackhammer

1554 hrs.

Rocker-writer-marketer Kaiser Kuo quotes me generously in Ogilvy China Digital Watch on the prospects for venture-funded Chinese Web 2.0 startups who are staring down the gullet of the Global Financial Kraken. What prompted Kaiser’s article was Sequoia Capital General Partner Michael Mortiz’ come-to-Yeshua talk with the CEOs of his portfolio companies last week, letting them know that it is time to get religious about revenues and profits.

(Nota bene, I expect that this is not the first time said entrepreneurs have heard this refrain from Moritz. Indeed, I wonder how much Moritz and his Menlo Park neighbors really see capital to be a problem, and how much they are taking a singular opportunity to use the FUD-whip to great effect. I figure it is a bit of both.)

Mortiz’ comments and those of his partners at the meeting are here. I suspect – as, I believe, does Kaiser – that there are a lot of similar conversations taking place in cold-sweat enfragranced boardrooms in the world’s financial capitals.

The dragon in the outhouse is how much this all applies to companies in China. Or, more accurately, whether investors will see China as an exception to the thick cloud cover over the world’s financial markets, and thus keep the cash flowing into China.

Kaiser and I agree that things are going to get tight for the time being. While the Hutong is far removed from both Silicon Valley and Wall Street, the picture we are getting is that Wall Street is still trying to keep liquid, unwind some arcane financial instruments, clean up the subprime mess, and lobby Washington for more help as the water rises. Everyone else is either hunting for carrion in the wreckage or hunkering down for the next round of bad news. “Flight to safety” seems to be the order of the day, not “what the hell, Frank, let’s pump another couple hundred million of our cash into some cool stuff in China.”

The key question is how long this will all last.

My bet is that the longer the downturn goes – and the longer that U.S. and European investors stick with conservative investments – the louder the capital sucking sound from China’s online and technology ventures. With less offshore venture capital chasing Chinese investments, valuations will come down, and at some point those valuations will reach a point where local capital will start to get interested. The business cycles in China are fast, but I figure if local ventures face an extended capital drought – say, 18 months or more – we are going to see a flowering of China’s domestic venture capital business.

RMB funds will come from a variety of sources, including large investment houses, state-owned banks, and possibly even purpose-built policy banks created by the government to funnel a modest chunk of China’s US$2 trillion capital reserves to local ventures. All of this would dovetail nicely with China’s commitment to independent innovation, and with what Paul Denlinger expects will be a tsunami of government cash into neo-Keynesian infrastructure spending across the countryside.

This is a golden opportunity for China to build a robust venture capital industry with Chinese characteristics.