India and China aren’t just attracting entrepreneurs who are returning from overseas, but also venture capitalists. During a panel discussion at INSEAD’s Asia campus in Singapore, Chan Tze Hoe, a former investment manager in Singapore, said that as markets grow in both countries, people who were born there but then educated in the West are “coming back to join the scene.”

He noted that Asia is seeing a transition to venture capital-backed businesses from home-grown ones. Speaking about the regulatory framework and environment for venture capital, he said that while this is well developed in the the US and Europe, it has only emerged in the past ten years in India and China.

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Chan said that, regarding China, it’s important to understand the culture and build up a network: “A VC fund, previously based in London, was trying to set up a China office. They’ve actually set up their presence there for two years but haven’t invested in a single deal … They told me they are taking a watch-and-see attitude. When you want to start up a business in China, you really need to build up your contacts and find someone who is familiar with the environment to partner with you to achieve some sort of success.”

Chan says that most of the active investors have been in China for some time: “You probably need a lot of local knowledge (in terms of business culture, local language, deal sources, regulatory framework and government/industry networks) to source … deals that are not only right … but also where the business can grow or lead even with potentially undiscovered limitations/conditions. It is unlike Silicon Valley where the industry is well developed and structured so that information generally flows quite quickly among the few top VC shops.”

Chan told Knowledge: “China, in my opinion, is building up such a system of deal flows – not just in VC but also gradually in private equity ... Having said that, I personally do not think one can force-fit Silicon Valley’s style of venture capital on the Chinese model, since investment success is very much driven by the people on the ground and when the cultures are different, rules have to be set differently.”

Chan said that most foreign VCs are still adopting a wait-and-see attitude regarding China, although the advantage of having a local partner is that the initial deal sourcing process is generally accelerated: “The question is whether these foreign VCs can use the same business principles (investment culture/methodology, corporate governance practices) in the Chinese context.” 

Phil Anderson, Professor of Entrepreneurship, who hosted the Quality of Management panel discussion, points out that many Western VCs are opening offices in China to help their portfolio companies – not to do deals as such – and these are taking time to learn about the region before raising funds to invest in mainland companies.

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Another speaker at the Quality of Management session, Jayesh Parekh of Sony Entertainment Television and MobiApps, advises venture capitalists to spend a lot of time in India and China. He says he has VC friends who go to India twice a year but that’s “not sufficient to discover” that country. As for geographic location, “each one has a nuance.” The West and North of India, he says, are more entrepreneurial, while in the more risk averse South and East, you’ll find “a lot of loyalty and excellent skills, especially for technology, so it depends on what kind of start-up you want to do.”

However, he adds that companies are finding it difficult to attract talent with share options in places like Bangalore, as most people want to work “for a stable, major corporation that pays good salary and perks, rather than take the risk with start-ups. Hence share options do not really help in attracting good talent. Given a choice between more money or upside with share options, most professionals will chose cash.”

Parekh told Knowledge that venture capital firms in India are mostly interested in retail, real estate, information techology/business process outsourcing/call centre and services, rather than high-tech or intellectual property-related businesses. “I think the private equity (rather than VC) scene is developing rapidly in India.  Both locals and foreigners are getting involved, and in some cases foreign VCs are partnering with locals as well. I think the time is excellent for VCs to go into India,” he says.

Harish Parameswar, Managing Director of financial advisory and asset management firm Lazard Asia, echoes Parekh’s views about private equity in India: "I would say you've seen a lot of private equity and buy-out firms come up in India but venture capital is relatively tough if you're at an early stage, unless you have some Indian investors who are from (Silicon) Valley. It's relatively difficult to get early stage financing."

Parameswar told Knowledge that Indian venture capitalists have an edge over their Chinese counterparts in terms of networking in the United States: “If you look at the Silicon Valley Indians, they set up this organization called TiE (The Indus Entrepreneurs, also known as Talent Ideas and Enterprise). This is a very, very influential organization, which is primarily run by successful Indian entrepreneurs in Silicon Valley.” The organisation helps VCs meet prospective companies, Parameswar says. “I would say the Indians have had a bit of an advantage over Chinese companies on that front. It’s more organised, I would say.”

Silicon Valley companies have been looking at India as an outsourcing development centre, Parameswar says, with “almost every start-up in the Valley” having back-end offices in India. “So when it comes to technology development, because of language and skillsets, India seems to be the preferred option. But when it comes to manufacturing and production, China still has the edge on that front.”

He adds the biggest difference between Indian and Chinese VCs has been that many of the companies that were set up in India have been developing technologies for the global markets rather than for the domestic market. “In China the market has been pretty much geared to the domestic market and that’s been a huge, huge plus, because a lot of these companies are able to get revenue traction without having to spend as much money.”

Consequently, China has been able to attract a lot more venture capital than India, he says: “Because of the domestic market, (companies) have managed to scale much more rapidly and therefore venture capitalists exit much faster as well.”

This article was first published in March 2007.

Chan Tze Hoe is a former Singapore-based investment manager focusing on analysing and executing investments across various technology sectors. His professional interests include strategic investments, valuation and corporate strategy.

Jayesh Parekh is a founder and director of MobiApps, a Singapore-based technology company and is also a founder and director of Sony Entertainment Television, a major cable & satellite television channel launched in collaboration with Sony Pictures Entertainment (Columbia/Tristar).

Prior to those ventures, he spent 13 years at IBM in various positions based out of Houston, Texas in USA and in Singapore, where he was involved in technical, sales and marketing roles. He is an angel investor, with investments in venture capital funds in Silicon Valley and India.

Harish Parameswar, Managing Director of Lazard Asia, has been overseeing the expansion of the firm’s Southeast Asia advisory business and also covers the technology and media sectors across Asia for Lazard. Before joining Lazard, he was the founder and Managing Director of Beacon Advisory, a boutique Asian advisory firm, and has also worked for Deutsche Bank and JPMorgan/Jardine Fleming in various corporate finance roles in Asia.

The views expressed in this article are the personal opinions of the individuals concerned and do not reflect those of their employers or their portfolio companies.

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