Biggest Silicon Valley hit in China

Psst. Don’t tell the Chinese government this, but Silicon Valley investors are beginning to make some big quick money in China.

Look at the initial public offering of 51Job, a Chinese job search and recruitment company backed by Silicon Valley venture capital firm, DCM-Doll Capital Management.

The Shanghai company is so named because “5-1″ sounds something like “”I want” in Mandarin. It went public on Sept. 29, and its share price has since more than doubled � fueled by the company’s first earnings announcement Thursday showing strong profit growth.

China’s fast-growing economy is driving robust demand for job search services, quickly turning 51Job into the “”Monster.com” of China. DCM, of Menlo Park, invested $14 million in 2000 in return for a 30 percent stake in 51Job. That stake has since ballooned to a value of around $250 million in stock holdings in 51Job, representing a gain of about 18 times its original investment.

That’s likely a record gain for a Silicon Valley venture firm in China. “For a Silicon Valley-based venture capital firm, it’s probably the biggest,” said David Chao, the DCM venture capitalist who is leading the firm’s China effort.

DCM is prohibited from selling its shares for six months after the IPO, and so its profits are still only paper.

There are other U.S. players who have had big hits in China, including IDG Ventures and Walden International. But IDG and Walden have been active in China for a decade or more, opened up offices there and throughout the Asian region, and long paid their dues by being more diplomats than profit-makers. We recently wrote about the tough road traveled by Lip-bu Tan at Walden International here. IDG, which has offices in San Francisco, invested in several deals lately where it has recouped many times its original investment. But IDG generally invests less money � between $1 or $4 million � and so gets less back after its companies become successes.

The recent slew of companies to go public, including 51Job, online gaming company Shanda, online travel company CTrip and semiconductor company SMIC have been much quicker � and bigger � successes. And in many of them, Silicon Valley venture capitalists with little experience in China are benefiting.

True, of this latest wave of entrants into China, DCM has the most experience. Chao, who is ethnically Chinese and grew up in Japan, speaks Chinese “80 percent,” and worked at a Japanese recruitment company before becoming a venture capitalist. That experience taught him that both the Japanese and Chinese are avid readers of magazines and newspapers, and would be inclined to look for jobs offline as much as online.

So in 1999, when he was looking to invest in, as he puts it, “”the Monster.com of China,” he was sold by a presentation by 51Job executive, Kathleen Chien. “”She was the only one who talked about offline,” Chao recalls.

From the beginning, 51Job offers offered both online and offline services for job seekers and recruiters. It has offices in 17 cities, and plans to expand that number by three to five every year.

51Job is also significant because it is the latest example of how venture capital profits from investments in China are rivaling those made from investments in U.S. companies. The $244 million net return on DCM’s books from 51Job is as good, or better than any of DCM’s U.S. investments over the past eight years, says Chao. The company’s stock rose 51 percent on its first day of trading, unheard of in the U.S. since the Internet bubble. (Some say the Chinese are superstitious; the link between 51 percent and the company’s name may not be coincidence.)

Chao, though, sees himself contributing to China as much as taking from it. He spends much of his time explaining corporate governance standards and business culture to Chinese middle managers � and cajoling them to accept shares in the companies he invests in, he says. Until now, few Chinese have understood the worth of options. Chao says that with success stories like 51Job, Chinese will learn how hard work can pay off handsomely, and that through a general “Siliconvalley-ization,” make China’s economy more efficient.

Chao says he’s awed by the emergence of China as a rival to the U.S. He sees sees a “fundamental paradigm shift” in the information technology world, as the U.S. slowly loses its dominance in major markets like personal computeres, telecom, Internet use and mobile. “For the first time, a non-western country is going to be dominant in certain IT segments,” Chao says. “That’s a big deal.” Venture capitalists and entrepreneurs in Silicon Valley have been wringing their hands over the past two years, trying to finding the next technology wave, Chao notes. It’s been there the whole time — China.

Chao won’t be resting anytime soon. “I feel like I’m still running a hundred miles and hour, and not taking a breath.” He adds. “I just don’t want to take a breath, it’s really exciting.”

UPDATE: We’ve made some minor edits, including adding the fact that 51Jobs offered online services from the beginning.

For the latest Silicon Valley business news, check out today’s Mercury News business pages.

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