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The Shanghai scene -- phallic symbols, and my encounter with Mark Hsu

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Toast to Shanghai
Here is our initial impression of bustling Shanghai. Our encounter with venture capitalist Mark Hsu also gave us insights into the differences between Asia's hottest business capital and good 'ol Silicon Valley.

We've reported several Mercury News stories about Silicon Valley's venture capital rush to China over the past two years, not to mention dozens of blog posts. One thing people keep telling us about is the buzzing nightlife of China's major cities. Deal-making gets done in bars. And throw in the other benefits you get in this cheap-labor economy, you can see why many several West Coast expat entrepreneurs say they're having a hard time going back to the valley. Nowhere is this truer than for those in Shanghai.

I (Matt) arrived in Shanghai weekend before last, and was immediately swept up by...

the energy and pride of the city's people. The vast majority is upwardly mobile. Peasants come in from the countryside, and take low-level manual jobs. They take the place of the city's bottom stratum of workers, who have moved up to the next level, aided by economic expansion. And so on. Salaries are creeping upward. No groaning here about decline, like in Germany.

My host, Sean Liu, who works for a start-up here called Hengbang, took me to a massage place ($11.50 for an hour and a half), and then we hit the town. We arrived at hopping "Bund" district at 11pm, and that was just the beginning. We headed into Bar Rouge, where pounding music greeted us. Waves of young professionals were drinking and dancing. More chatted on the patio outside, which looked over the Huangpu River. And, there, across the river, our eyes befell the real estate edifice reflecting the best and worst of China's stupendous growth: the skyscraper district of Pudong.

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Oriental Pearl
In the late 1980s, Pudong was waterlogged land where water buffalo trudged. Just a decade later, the government of Deng Xiaoping, in military style, had drained marshes and built a new city lined with a steel-and-glass phalanx of eighty-story skyscrapers. And there, in full view from our patio, arose the grotesquely phallic 1,535 foot tubular Oriental Pearl Television Tower --complete with giant testicular-like spheres supporting it below. I almost blushed. One of tallest towers in the world, it is a statement of China's lust for prowess.

Meanwhile, here in the pulsating Bar Rouge, the sexual revolution in China unfolded before me as scores of young Chinese men and women hooked up. Here's a good place to mention the intriguing story in the New York Times (subscription required) last week about the self-described Communist Party member blogger from Shanghai who goes by the pseudonym Mu Mu. "The 25-year-old Mu Mu appears online most evenings around midnight, shielding her face while striking provocative poses." Unfortunately, perhaps to shield her identity, the NYT doesn't provide web site.

It was said, ten years ago, that half the cranes in Asia operated in Shanghai (though no one is sure where the statistic comes from). Today, there are still hundreds, if not thousands, toiling away. Ken Rippen, an Australian engineer recruited to advise the government, had originally warned the government it would be impossible to complete the elevated Pudong roadway network within the deadlines planned. But he didn't appreciate the ability of the Chinese state to steamroll protesting property owners. Within thirteen months, the inner ringroad was finished.*
(Perhaps in a later post we'll try to mention more on the environmental cost of the Pudong growth.)

bar rouge.jpg
Back to the bar. Ever so often, the bartender would light the bar afire, and do some juggling with bottles (see photo here; sorry, view of fire is obscured by people, but juggler is the guy in distance, second to left). Won't bore you with the details, but the night went on, and we basically circulated through throngs of business people -- mostly single -- from all walks of the Shanghai business life, from Russian glamour models, Dutch packaging traders, Norwegian shipping executives -- and, of course, a melange of local Internet entrepreneurs and investors.
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Mark Hsu
At 3am, I found myself chatting with an ambitious young Chinese woman -- in her 20s -- who is setting up the Shanghai office of an outfit linked to the Nederlander Group, a theatre property group out of New York. Over a drink, coincidentally, we fell upon a common link with Mark Hsu, vice president of private equity firm H&Q Pacific. Now, this is significant because I'd heretofore been trying -- unsuccessfully -- to meet Mark. He is son of Ta-Lin Hsu, one of the earliest venture capitalists to create a pan-Asian investment strategy, and who entered China 12 years ago. Before I left from the U.S., two friends had recommended I look up Mark, a passionate and plugged-in young man of 35. However, despite emails back and forth, we'd missed each other -- he is a busy guy.

Then here I was, being introduced to him at 3am in a bar with next to some Ukrainian and Brazilian models. This wouldn't have happened in Silicon Valley -- namely because there's no such thing as a hip bar that jams until 5am -- or at least one that I know of, or which VCs frequent. And alas, no Ukrainain or Brazilian models.

A couple of days later, I met up with Mark, at his office at H&Q. Mark is pretty plugged in across Asia: We've mentioned his father, Ta-Lin. But his grandfather, on his mother's side, had been the personal secretary for Chiang Kai-Shek, and his uncle started the first English newspaper in Taiwan in the 1960s.

Mark also has a good basis with which to compare Shanghai and other major business areas such as Silicon Valley or New York. He's been in Shanghai for nine months, having previously worked in the H&Q office in SF for four years (though taking most of last year to work full-time for the Kerry presidential campaign), and before that, New York for five years.

And here's what Hsu says about Shanghai: "I can't imagine being in any other city of the world, from a business, social or cultural angle." New York, he says, has become "pretty stable." It still has energy, but is no longer as dynamic as Shanghai. Everyone in New York he knows works for a big investment bank, a multinational, an accounting or law firm. Here, in Shanghai, everything's changing. People circulate, move in and out of new ventures, and all economic fundamentals are growing -- despite temporary "bubbles" here and there in real estate or technology. Shanghai, he said, "brings New York to Silicon Valley in the best way." It has New York's cosmopolitan offerings, but blends that with the entrepreneurialism of Silicon Valley. As for investment potential, the major story in the world is China, "and within China, it's Shanghai," he says.

He points out two major downsides to Shanghai: the relative lack of nature, and a troubled healthcare system. These are not be underestimated.

Sorry to meander here, but it worth noting that Hsu has been politically active (Kerry campaign, etc) because he says he fears the Asian-American community, having attained relative prosperity, has become too politically complacent. Moreover, they need to participate in a dialogue about the relationship with China. China is emerging as the primary threat to U.S. world hegemony, bringing clouds to U.S.-Chinese relations. A growing trade deficit, conflicts over exchange rate policy, and military-foreign relations (i.e., Taiwan or North Korea) are all sore spots. "We're going to see China flex its muscles," Hsu says.

He and his firm are participants at the World Economic Forum, the Council of Foreign Relations and the Pacific Council of International Policy. That same evening, Hsu was headed off for more socializing, this time to celebrate a twin city event (SF-Shanghai) where SF mayor Gavin Newsom and U.S. Senator Diane Feinstein (D-Calif) were visiting the Bund.

China now makes up about 50 to 60 percent of his firm's activity, Hsu said. But like most firms active in China for a while, H&Q has moved up-market. It has raised more and more money to invest, so it needs to find bigger deals to put the money to work. It isn't doing much seed funding, but invests into later-stage companies -- those mature enough to soak up millions of H&Q's dollars.

H&Q owns much of China's Starbucks chain, including the one across from the Great Wall. It has invested in real estate in Shanghai (for example Shanghai Links, the golf course designed by Jack Niklaus), biotech, manufacturing technology, financial services, and branded consumer/media companies. With China's expanding middle-class, and rapid process of deregulation, a lot of these sectors are white hot.

This focus on later-stage deals means, however, a lack of sufficient seed funding, according to people here -- which we'll try to explore in a later post.

That, despite the flood of capital coming in from other sources, namely classic US buyout firms, domestic state-run firms, European firms, hedge funds, and other institutional investors. All of this money means entrepreneurs have the advantage. They can negotiate high valuations, forcing investors to pay big-time in order to play. "There are not a lot of other places in the world to put money in right now," Hsu says of China. "The downside is the valuations. Lots of money chasing late-stage deals."

So Hsu says he's going after the large number of mid-sized companies, many of them family owned or state-affiliated. Many of them are profitable. Notably, though, Hsu says he doesn't like to invest in Chinese companies run by Chinese entrepreneurs with no outside managerial help. He calls these "Chinese Chinese" deals. For anyone questioning this caution, read the unending number of fiascos documented by Clissold and Studwell (referenced below) involving foreigners losing their shirts on China investments -- despite hundreds of years of trying.

Of course, all that is changing now that China has joined the World Trade Organization, and is reforming its economic and financial laws -- grist, perhaps, for a later post. Suffice to say that dozens of U.S. venture firms have shown up over the past two years to exploit what appears to be -- finally -- the China investment dream. If you come here, you will see why.

*The following books are helpful for background on the folly of foreigner investment in China during the mid 1990s, where most lost millions of dollars. They also both contain brief summaries of Pudong's amazing growth.

-- Mr. China, by Tim Clissold. (HarperCollins 2005)
-- The China Dream, by Joe Studwell (First Grove Press, 2003)


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Comments

Great post, Matt! What will it take for Silicon Valley to regain such vibrant energy?

Mark Coker on December 6, 2005 7:26 AM
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To answer Mark's question, SV should target the China booming market, and plug more capital and human resources to harvest the potential gains. Technology channels and investment channels are readily available. It takes daring entrepreneur spirit and humbleness to win deals in China. Regarding foreigners lost investment money in China, it is a risky business no matter where you put your money, of course, bank is a different story. We chinese believe the ritual of Given and Take. So as an investor, one needs to understand this principle and try to build a long-term investment theme. The last thing you definitely do not want to do is being perceived as exploiter or "GuiLao". It's very costly to regain your credibility in Asia.

On a separate note, investing in late stage ventures is still more safe and controllable. However, the ROI premium is increasingly becoming smaller and smaller. In addition, the innovation environment has matured to a level that more and more promising startups can survive and provide meaningful exit options for investors. I have a similar post on comments made during the Asian Venture 2005 conference. You may want to check it out.

Overall, Matt a job well done! Hope to read more following up pieces on your trip to China.

David Gong on December 6, 2005 12:04 PM
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Great post! It's interesting to see a report of Mark Hsu from this angle...

Helen Wang on December 6, 2005 12:21 PM
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Good post and thanks for all of your previous posts on China and the investment market.

I was in Shanghai just a couple of weeks ago and agree about what a vibrant, ever-changing city it is.

However, as I posted on my blog just the other day, we are seeing more deal flow coming out of Beijing vs. Shanghai. This was also confirmed with some VCs my partner and I met with in the Valley last week.

The issue is that many VCs and others apparently don't want to live in Beijing due to pollution, traffic, and the fact that Shanghai is more cosmopolitan and perhaps a more liveable place.

Many Chinese entrepreneurs will no doubt get funded, regardless of the location of the VCs, as there is already more money than there are good deals. But beyond funding still lies the issue of management experience and this is an area where Chinese companies will struggle.

The culture has been one of top-down management (and rule) for so long, that even today many Chinese managers struggle with allowing (and fostering) the decentralization of ideas and decision-making, both of which are crucial for expanding, competitive businesses in the long-run.

Further, many of the new Chinese CEOs (especially in the Internet space) have never managed companies before and will need a lot of advice and direction to do so successfully (like most first-time entrepreneurs).

Ultimately the successful investors will be the ones who are willing to roll up their sleeves and work with the entrepreneurs and/or tap others who posses this type of experience in China to work directly with their portfolio companies.

As most VCs are just starting to get people on the ground in China, it will be interesting to see how they figure out the best way to work with their portfolio companies and how they will transfer their valuable knowledge to them. Especially as most are accustomed to being in close proximity to their investments and are able to visit their portfolio companies with relative ease, and with regular frequency as needed.

Brad Bowers on December 6, 2005 2:05 PM
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Your assessment of the Oriental Pearl Tower in Shanghai is right on. It's atrocious. I thought it belonged in a chemical refinery plant.

Jeff Kang on December 6, 2005 6:45 PM
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great post matt! really felt like i was there with you (and wish i were too). sounds like we all need to make a trip to shanghai to catch the vibe. can you recommend hotels, restuarants, tour guides? i'm ready!

mark pincus on December 6, 2005 7:36 PM
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Hey Matt!

Great to hear about Shanghai! It sounds like the go-go times of Hong Kong 10X.

Chris McKenney on December 7, 2005 6:17 AM
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"GuanXi" is essential conducting business in China. Matt had a head start with Sean Liu (Henbang President) being his local guide.

Don Hsi on December 7, 2005 7:39 AM
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I am actually investing in Mexico. It is right next door, I speak the language, the salaries are reasonable and the education can be very good. A friend of mine has started two "WIPROs" and sold one of them for a tidy profit to a US corporation. I outsource some engineering development and market research.

Raul Lopez on December 7, 2005 9:46 AM
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Matt,

I spent four years living and working in Asia - Hong Kong and Beijing. But I was in Shanghai almost every other week. It was fun while it lasted and everything people say about China is true, especially your great post. It sounds like you're having the fun I had while there. But nothing beats the fresh, clean air and beauty of Silicon Valley. Good luck to Shanghai and good luck to Silicon Valley. We'll both do well.

David Oro on December 7, 2005 1:54 PM
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I have to say, I love the write-up on life in Shangai - but next time, can you ensure:

a. That you have a proper photographer
b. That you time it to talk with Shak, and report on what he's learned over there. :)

Brian on December 10, 2005 10:32 AM
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Great story Matt. I have been in Kuwait/Iraq for over 2 years and I am planning a trip to Shangai to scope out the VC contacts to start my own business. I have high hopes that an international office in Shangai will help out coupled with a home office in the U.S. along with a fat contract deal with DOD will pay off! So far so good......

Great insight, thanks! Write back if you get a chance.

Randall
Kuwait City, Kuwait

Randall Tedder on January 2, 2006 3:12 AM
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Great story. But it might have offered the readers an inaccurate impression on the venture capital community in China. Most successful VCs actually need to do some real work (to find the right entrepreneurs and the right deals and work with them to make sure the companies are on the right track to profits, IPO, and beyond). They don't just hang out at bars and night clubs every other weekday.

Ted Zhao on March 3, 2006 2:47 AM
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