Venture capitalist is 'brother' to ideas

Updated: 2013-06-07 12:12

By Zhang Qidong in San Francisco (China Daily)

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Venture capitalist is 'brother' to ideas

Bobby Chao, a tech guru in Silicon Valley, is also a well-known venture capitalist in China. Zhang Qidong / China Daily

DFJ Dragon Fund China, one of the first US dollar-denominated venture funds to enter China in 2005, just had a first closing of 200 million yuan-based venture fund on April 15, 2013.

Bobby Chao, founding managing director of DFJ Dragon, said a Chinese domestic registered venture fund can access even more China-based investment opportunities that would be otherwise restricted.

Such an RMB investment-based capital structure would also be easier for investee companies to access the growing Chinese stock markets to do IPOs.

According to Chao, IT and healthcare are the top tier investment portfolios DFJ Dragon is focusing on in the current market, and last year, the liquidity from investment in both industries was a proven success.

"There is an increasing older generation population in China and the society needs an infrastructure to support that," Chao explained. "On top of the infrastructure 'hardware', the healthcare system is the 'software'. You need to have both to make the system complete."

Chao believes that China, being the world's largest emerging market (or re-emerging market), offers plenty of opportunities in a variety of industries for a venture capitalist like him to tackle.

A joint venture between DFJ and Dragon Venture, Chao's firm is currently focused on coastal city investment in China. DFJ has had an established presence in Chinese technology investment since the early 1990s and is the only venture capital firm with a presence in more than 30 Chinese cities with more than $6 billion in capital commitments.

"Bobby Chao and his DFJ Dragon Fund is a pioneer in terms of bringing US venture capital to China," said Eugene Zhang, President of Santa Clara, California-based InnoSpring, one of the largest US-China tech startup incubators in the US.

Born in Chongqing, Sichuan province, Chao came to the US in 1973 and earned a master's degree in physics at Georgia State University and later studied aeronautical engineering at Stanford.

Chao's Chinese given name "Guangdou" is unusual in Chinese, but actually came from a famous piece of literature by Wang Bo of the Tang Dynasty, Preface to the Prince of Teng's Pavilion, and, according to Chao, naming him after a character in that book was his father's way of showing off his high standards and understanding of Chinese literature. And his English name Bobby was not chosen without a rationale either. He said he was called Bao Bei (the precious baby) by his parents since he was little.

Friends, however, like to call him "Bubba" ([buhb-uh] noun, Chiefly Southern US brother) to show their affection for him. After all, he is something of a beloved "brother" in Silicon Valley, not only for the fund he leads and the entrepreneurial triumphs he achieves through it, but also for the mentoring role he has played in the lives of hundreds of entrepreneurs.

Chao became a tech guru in Silicon Valley after gaining a long list of operational, entrepreneurial, and investment experience in the semiconductor, hardware and software industries over the past three decades, including stints with Cadence Design System, OCRON, Umax Group, VA Linux(LNUX), AboveNet(ABVT), Oplink(OPLK), Omnivision(OVTI) and NetScreen(JNPR).

He began his career as one of the founders of Cadence Design Systems (1988), an electronic design automation software and engineering service company, and served as its vice president and general manager, responsible for sales, marketing and operations in Asia and Japan. A roadmap on the wall of Chao's office shows numerous acquisitions the company went through after it went public in 1987. Chao said he was proud to be an entrepreneur back then and would always remember the glory for the rest of his life.

After Cadence, Chao founded and served as chairman and CEO of OCRON, a pioneer in the optical character recognition and document management space. That company was eventually acquired by Umax Group.

Chao's landmark experience was being the first incubator for and investor in VA Linux, which was started in 1995 in a dorm room at Stanford by Jim Vera and Larry Augustin. Their idea was to make a high-power Linux-based server for the booming internet network market. A name card printed back then shows Chao as the "CEO" of the company instead of "Founder", which he said was the result of the "sloppiness regarding titles of any startup company back then". He left the company after Sequoia Capital and other institutional investors took it over and went public on the Nasdaq in Dec 1999, opening at $30 a share and hitting $320 before the end of the first trading day, a record in US IPO history.

"It (VA Linux) literally started from a shack and rose to its ultimate glory just like a typical Silicon Valley fairytale," said Chao.

Chao went on to become an early investor and board member of AboveNet, Oplink, Omnivision and NetScreen.

In 1999, Chao decided to concentrate his venture capital in China. He co-founded Dragon Venture as chairman that year, and later co-founded DFJ Dragon Fund. First fund of DFJ Dragon in 2006 raised over $100million, which was invested in 24 companies, and second fund raised $30millionin 2010 that went to seven companies. Chao said the newly raised Dragon RMB Fund with its initial closing of RMB200million will give the company a kind of ultimate freedom when it comes to investment in China.

"All of our partners have enterprise or entrepreneurial backgrounds and years of experience in venture investment," he said. "We are fully aware of how bridging China and the US with entrepreneurial projects can enhance innovation and efficiency in China. We will be the ones that further expand our cross-border investment activities."

China's laws governing venture capital, however, can be a challenge for investors, he said. Compared to his experience in US investments, Chao finds it can be "tricky" facing the restrictions in China.

"There is no specific law to restrict venture capitalists in the US," Chao said. "We are already regulated by tax law and a complete set of laws regulating limited partnership. If you were to copy the US law to China, it might be a mess, but if you utilize a system that suits China during its evolving period, it might work, but not too much, not too little. It's kind of tricky to balance the market. In the meantime, we accommodate and compromise."

Howard Chen, a partner of K&L Gates, one of the largest law firms in the US, agreed and said the laws in China restricting venture capital investment will change with the time.

"All the past regulations or laws over venture capital investment in China will change and have to change along with the maturity of a global stock market and exit strategy of all venture capitalists," Chen said. "The security regulation, which regulates the fundraising part of the venture capital fund, will also gradually be deregulated with the maturity of a market economy."

Another problem Chao encountered in China is a common one for all foreign investors --a market of "not freely exchangeable currency", which makes VC investment an even more challenging task, he said.

A Chinese currency that is not freely exchangeable, to him, is a barrier that affects the growth of economies, not just China's, but also globally. Although the liquidity from the "exit" event may pose some complexity in the currency issue, the overall trend can only be better and more favorable for the business, he believes.

Ken Wilcox, Chairman of Silicon Valley Bank, which works closely with VCs from US, said his bank has to convert offshore dollars to onshore dollars and finally to RMB before an RMB investment can be made, a process that can take up to six months. That definitely is not helping the efficiency and innovation of a fast growing economy such as China's.

With the 200 million RMB fund recently raised by DFJ Dragon, however, Chao is able to better strategize."In China, we know more about the US than most of the Chinese," he said. "In the US, we know more about China than most Americans. Our cross-border position really distinguishes us from anyone else around."

As well known as Chao is in the Silicon Valley venture capital world and beyond, he deliberately keeps a low profile because he prefers to be thought of as a 'big brother' or 'mentor'. What he really enjoys, he said, is just working with young people full of great ideas.

"VCs like us usually do not get recognized or remembered," Chao said. "People remember Elon Musk, Mark Zuckerburg, Sergei Brin, Steve Jobs and even Bill Gates. The VCs that invested in their early rounds were at best recognized as kingmakers. They will never be kings. I am content with that."

(China Daily USA 06/07/2013 page5)