Venture capital in China

I recently caught up with my friend Derek Sulger, founder of Linktone (Nasdaq: LTON) and current founder and CFO of Smartpay, a Paypal-like play in China (I really like what Derek is doing with this one-no credit in China, use the mobile phones for debiting from bank accounts).  Derek and I are college friends and we certainly have come a long way from college when he finds my email on Google under a heading "Geeking out with Ed Sim" (thanks to Jeff Clavier for this one!) because his mobile device with all of his data on it is cracked on his flight from China.  That being said, we had a great chat on VC in China and opportunities he sees there.

First, from his perspective, he would rather pick one or two ventures at a time then spread out investments VC style.  If you think about it, there have only been around 7 or 8 internet-type companies that have gone public in China since the last bubble in the US (Linktone is one of those) when the Sina.coms were out in the market.  Given that, he would rather pick a couple sure bets and really work with them cradle to grave.  It is also tough to have any real governance and control of an investment by just sitting on a board in China, especially if you are monitoring a deal from thousands of miles away.  Secondly, he said it is tough to find good, experienced talent.  That is one of his gaiting factors in ramping up his ventures.  Finally, from an investment perspective, he would rather go consumer than enterprise.  His first business was a systems integration play which spawned Linktone and Smartpay.  He said it was difficult because the private companies you are selling to are really quasi-government agencies.  It is tough to get paid and very tough to protect your intellectual property.  At least on the consumer side, if you price your product or service appropriately, you can build a real PAYING user base and protect yourself from competitive threats with your base of subscribers.  Look at the history of China going from Boeing to the automakers like GM which did joint ventures with companies in China only to have their IP recreated and used against them.  I am sure GM could have protected themselves by charging less for their Buicks!

So there you have it from an experienced entrepreneur in China.  His thoughts make a ton of sense.

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This post was written by who has written 358 posts on BeyondVC.

5 Responses to “Venture capital in China”

  1. isaac Apr 29, 2005 at 8:50 am #

    Derek Sulger’s years experience is a good case to learn China’s hitech market. Just in these 5 years, more and more teams in China learn how to start their business like Derek. Derek is right, the consumer market(based on it’s huge comsusing population) still has many niches to be explored and invested. Anyway, other segments, are all showing it’s strong growing potential in these 2 years. You may heard of Focus Media case from anywhere, which will go public soon in US.

    At the same time, China’s VC industry is growing. From oversea’s VC offloading to China, to some local born VCs, people started to know how to screen and evaluate and exit in this market. Many overseas VC firms started to seek local partners to prevent from missing the opporutnies in this hot land.

  2. Sandeep May 4, 2005 at 5:44 am #

    How can any paying subscriber base shield an entrepreneur from intellectual property violations and policy upheavals.
    You are assuming it is easier to copy technology if you have access insider information (like specs, blueprints, etc.), than by reverse engineering them.
    Is it always?

  3. Brad Bowers Jul 20, 2005 at 1:27 pm #

    Thanks for passing this on Ed. For anyone that’s looked to do busines in China, it’s clear that there are a lot of issues that need to be considered, whether they be investors or companies looking to build out their efforts in that market.

    In our efforts with BlackInc China we’re defintely seeing our partners and potential partners being very interested in finding someone who can help them make sense of all of the complications that present themselves in this market.

    There was a great interview with the head of EA in China recently where he said “For us, launching and being successful in China will almost certainly require partnerships. China is such a fundamentally different world from what we know in North America–not just because it’s online games versus retail games, but also from a cultural perspective. Everything about China is different from what we see in the United States or even in Europe….It’s a long laundry list of challenges that we face in China.”
    link to gamespot.com

  4. Martin Tibbitts Sep 6, 2005 at 11:48 am #

    As an outsider it is quite difficult to protect IP and business processes in China. I’ve held back from doing business in China due to the fact that it can be a fool’s errand to enter into competition with state sponsored entities…who don’t have to show a profit.

    Yes, I know that adversity creates opportunity and that there is usually a several year lag before the state gets interested in a market, bt it certainly reduces the potential reward in ways that you don’t find in other countries.

    Martin Tibbitts

  5. REobert Rosenthall Feb 10, 2007 at 12:34 pm #

    The Entertainment District of New Orleans

    EXECUTIVE SUMMARY
    FOR
    The New Orleans Music Hall of Fame
    Information provided by
    Robert Rosenthall for RNCDC

    APPLICANT
    Regional Neighborhood
    Community Development Corporation (RNCDC)
    4008 Windmere Street
    Harvey, Louisiana 70058
    Elder Joseph Roberts – Developer
    Developer of the New Orleans Music Hall of Fame
    Phone: 504.912.7379 or 504.957.4217
    E-mail: [RNCDC@bellsouth.net] Web: RNCDC.org
    Robert Rosenthall – Project Manager – 601.918.9035
    [rrosenthall@msn.com]

    PROJECT DESCRIPTION
    Location, Location, Location Imagination

    RNCDC is a non-profit, 501-C-3 organization and project developer for the New Orleans Music Hall of Fame. RNCDC is seeking $732 million to a $1 Billion in a JV, debt-equity or specialized financing to develop this outstanding venture. Entertainment and tourism is the foundation of New Orleans’ economy. The Music Hall of Fame will be a major contributor to the economic growth and the rebuilding of the city.
    The site is located on Rampart Street across from City Hall. The Hyatt Regency Hotel will buy City Hall and convert the site into a City Jazz Park. The renovation of the hotel and the Jazz Park will be close to a Billion Dollar development. Just behind Rampart Street, Donald Trump will develop a One Billion Dollar Trump Plaza. This action will provide a 24-hour high dollar walking traffic flow through the Hall of Fame site. This downtown prime location will be the center of New Orleans’ entertainment. Our current goal is to create an entertainment, music and cultural district that extends 3 square blocks in the heart of Downtown New Orleans. This district runs along South Rampart Street corridor, Louis Armstrong’s childhood neighborhood and the historic hub of the early days of jazz and blues in New Orleans. On the 300 and 400 blocks of South Rampart St., there are several historic landmark buildings significant to New Orleans Culture, Heritage and the origins of jazz. The Smithsonian Institute has designated these buildings as historical site.

    PRODUCT DESCRIPTION
    The Music Hall of Fame will be unique to other music hall of fames in the United States. Cleveland, Ohio has the “Rock and Roll” Hall of Fame, Nashville, TN has The “Country-Western” Hall of Fame and Seattle, WA has a “Hard Rock” facility. The New Orleans Music Hall of Fame will pay tribute to all forms of music such as Jazz, Blues, Gospel, Classical, Rock and Roll, Hip Hop, Rap, Zydeco, Country, Blue Grass, Western and other forms of music that is deemed popular by the American public. The New Orleans Music Hall of Fame is highly differentiated by being an entertainment center that the entire family can enjoy.
    The Music Hall of Fame’s multimedia component will consist of radio, TV, movie, printed media, state of the arts recording studio and recorded music with worldwide distribution. The multimedia division is projected to produce over $50 million in annual sales.

    The Music Hall of Fame’s Auditorium will host weekly events of artists who are in the Top 40 of their respective charts or classical icons. The Auditorium will host special events for all major attractions in town, such as, the Jazz Fest, Mardi Gras, sports events’ after parties, and holidays. The Auditorium will be a national focal point with the annual music awards. This event will have top artists and advertisements covered by MTV, BET, HBO, Cox Cable and other national entertainment/music outlets and sponsors. To ensure the success of these events, the New Orleans Music Hall of Fame will have a National Advisory Board of Directors from leading sectors of the music and entertainment industries. Annual induction ceremonies will also be a major event with high profile sponsors. Other products are restaurants, retail shops, photography studio, Mardi Gras shop, Artist & Musician Studio and the marketing of many local arts and products.

    NEED FOR THE PROJECT
    Tourism and entertainment are the foundations which support New Orleans’ economy. The New Orleans Music Hall of Fame will be the center of the entertainment district. All major attractions, such as the sporting events in the Super Dome, Mardi Gras, Jazz Festivals, family fun, local and national events will take place in this area. This profound development will play a major role in rebuilding the city’s employment and economy as it involves a philosophical approach as well as a business solution to strengthening the city’s quality of life for its residents and tourism.

    In addition, one of the overarching public policy objectives from the City’s Office of Planning, in terms of re-population, or recapturing a portion of the 300,000 citizens lost over the last year after the Hurricanes. This project will also enhance the New Orleans’ human capital by creating and rehabilitating business opportunities for a wide spectrum of individuals and families”.

    The Music Hall of Fame on Rampart Street is design to provide the quality of life enhancements necessary to draw new residents and world-wide tourism to the area. A high-rise quality hotel will grace this pinnacle community created by Hyatt Regency and Donald Trump. Attracting a new and different customer will add to the diversity and revitalization of the city.
    The project site is located in the downtown quadrant of the city on Rampart and Loyola Streets as the gateway into New Orleans’ Entertainment District. New Orleans will have over eight million persons per year to target for business. This development will substantially compete with attractions in Las Vegas, Los Angeles, Paris, London, Hong Kong and Miami. This time has come to redevelop the area into a profitable place of pride for the world to see. The shortage of available national attractions, concurrent with increasing need, has created a strong demand for family entertainment.

    The demand for new quality entertainment with new construction in the city currently outpaces supply. This project is consistent with the overall developmental needs and objectives of the Entertainment District, as well as the forecasted business market. The Music Hall of Fame is prepared and committed to collaborating with all related enteritis to develop, implement and support the ongoing activities required to assure historically, economic, culturally and logically compatible development in rebuilding New Orleans.

    TYPE OF FINANCING
    We are looking for funding from humanitarian sources, joint ventures, debt-equity, specialized financing or a combination of these. We are requesting $732 million to $1 Billion for this development.

    ITEMIZED USE OF FUNDS
    The acquisition of site (site control) five blocks is $60 million .
    The sites are located on Loyola and Rampart Streets and include the acquisition of a functional Holiday Inn Hotel on Rampart streets (attached)

    Demolition, infrastructure and clean up $ 2 million
    Construction & design of facilities $ 500 million
    Other $ 238 million

    MONEY INVESTED
    The developer Elder Joseph Roberts, Sr. – RNCDC $ 400,000
    The City and State $ 6.2 million
    In-Kind $ 2 million

    PARTICIPATING COMMUNITY INSTITUTION
    The New Orleans Music Hall of Fame, Inc. – 501c3
    Regional Neighborhood Community Development Corporation – 501c3
    The Greater Rose Hill Baptist Church – 501c3

    DEVELOPER LOAN
    (RNCDC has a loan with the Greater Rose Hill Baptist Church for $400,000 on the behalf of The New Orleans Music Hall of Fame Inc.)

    COLLATERAL
    The prime locations of real estate equity will collateralize 60% of the investment. The other 40% will be low risk factors based upon the activities and projected sales of events, products and corporate sponsors.

    CREDIT RATINGS
    N/A new venture

    MANAGEMENT BACKGROUND
    The management team is composed of top professionals in the entertainment, music and leisure industries. The experience ranges from world-wide concert management, national marketing of major record companies and sales to banking. We are proud of our outstanding Personal BIO’s and related experiences will be provided upon request.

    NOMHF Executive Committee/Board of Directors
    PopAgee Johnson, Founder & CEO
    Pastor John Pierre, Chairman
    Robert Ice, Vice-Chair
    Richwell Ison, Treasurer
    Liberty Rashad, Secretary

    Legal Team
    Atty. Jane Booth
    Atty. Bruce Williams
    Atty. Wayne Garrett
    Atty. Lawrence Blake

    Project Development Team
    Developer: Elder Joseph Roberts, Sr., CEO, Regional Neighborhood CDC
    Architects: Perez & Assoc.
    Hewitt, Washington & Assoc.
    Robert Rosenthall – Project Manager

    Finance Team
    Robert Rosenthall
    Gerald Johnson, Small Business Exchange
    Audry Musgrove, Boeing Corporation
    Elder Joseph Roberts

    IMPLEMENTATION STRATEGY
    The task of this management team is to take specific steps to assure a successful long rang plan for the Music Hall of Fame. The team is identifying specific short/long term projects and the financing strategy needed for implementation. Potential funding at the State and Federal level will be included as well as local public and private investment. The New Orleans Music Hall of Fame’s guidelines are being set for both public investment and private development. The Team will work with Partners, national trade originations, City/Federal Agencies and Institutions to include tax incentives, grants and other creative financing.

    MARKET DEFINITION
    The targeted market is national and international tourists who enjoy New Orleans music and quality entertainment. This action will provide a 24-hour year round market of music and entertainment.

    MARKETING PLAN
    Our National Board of Directors will help develop the total market plan. The Music Hall of Fame Board of Directors will be composed of leading professional in the music, entertainment and leisure industries. We have formed agreements and partnerships with national organizations, trade groups and related coalitions to provide year-round support. The music Hall of Fame will be divided into several divisions. Each division will have a definitive marketing plan to generate revenue. The divisions are;

    1. Hotel
    2. Roth Center (Musician residence 250 rooms)
    3. Brownstone – Housing
    4. New Orleans Music Hall of Fame – Auditorium – Large sale displays
    5. Multi-Media Ventures ( Radio, TV, Movies, printed publications, Recorded music, and collectives )
    6. Concerts (Katrina Annual Homecoming)
    7. Major event Auditorium
    8. Internet and digital marketing

    We will have wide use of internet and digital music service. Last year alone, more than $8 Billion was spent in the mobile content services market. The recent explosion of the Digital Music Download Market Reflects Widespread Consumer Acceptance of the “Pay As You Go’ Business Model. Both Digital and Physical Opportunities to Profit from Small Payments Abound. The Music Hall of Fame will use its daily growing database for digital marketing of downloading and linking with other companies.

    DOCUMENTATION AVAILABLE
    OTHER INFORMATION
    ( See Attachments)

    PROPERTY DESCRIPTION / ADDRESS

    ( See Attachments)

    NEW UPGRADE
    a. anticipated gross revenue after conversion ( Developing )
    b. anticipated net income ( Developing )
    c. anticipated property value after conversion ( TBA )

    EEO POLICY STATEMENT
    The following policies affirm this management team’s dedication to equal employment opportunity. This non-discriminatory policy, covered by Executive Orders, has been in affect though the firm since it was formed, and is set out below:
    • It is the our policy to give equal opportunity to all qualified without regard to sex, age, race, creed, national origin, marital status, or sexual orientation in recruitment, hiring, assigned, advanced, compensation or any employment related actions.
    • All individuals with disability are protected against discrimination by the American With Disabilities Act (DAD) and out team.

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