New China entrepreneurs harder to unearth

SAN FRANCISCO (Reuters) - Chinese entrepreneurs are increasingly grown entirely at home and not educated abroad, making it tougher for outside investors to track them down in the early stages of their businesses, U.S. venture capital firm DCM said on Monday.

The first generation of Chinese entrepreneurs were few in number, educated in the United States or Japan, and tended to keep in touch with venture capitalists as they struck out on their own back home, DCM co-founder David Chao told the Reuters Venture Capital Summit.

But that has changed as China enjoys the strongest economic growth of any major country and as the government loosens its grip over business activity.

"Chapter two is unfolding, which is the next generation. These are people that have never stepped out of China. They learn what is necessary, then they go off and start new companies," Chao said. "They are harder to reach for the typical Silicon Valley VC."

In terms of transparency and management savvy, these new entrepreneurs fall short of their predecessors, yet rate higher than executives of state-owned enterprises, Chao said.

Chao said DCM, which has invested in Chinese job site 51job Inc. (JOBS.O: Quote, Profile, Research, Stock Buzz) and online retailer DangDang.com, aims for a 10-fold return on its investments and does not think China warrants a premium.

"Is there political risk? Yes. Is there a corporate governance risk? Yes. But that is outweighed by the fact the economy is growing at more than 10 percent, the growth rate is faster than the U.S., and it's much easier to raise money," Chao said.

"Those two sides really neutralize each other," he said.

Chao said that what's hot in the United States is not necessarily what's hot in China, which tends to follow trends from Japan our South Korea.

"The Chinese Web sites we see getting hot are mimicking the Japanese ones. There's a lot of me-too," Chao said, adding that many U.S. investors are fooled into thinking that China is a hotbed of innovation when oftentimes it is following in the footsteps of its neighbors.

Chao warned of an emerging recklessness among venture capitalists with regards to China that resembled the fervor during the dot-com boom when VCs set up company "incubators" to nurture fledgling businesses. Those projects failed.

"Incubators ... every single one became incinerators. The same phenomenon is happening with China. Every fund in the Valley now has to have a China strategy and they are repeating the same mistakes as they did with incubators," Chao said.