VentureBeat

Updated

The U.S. venture capital industry is seeing a slow and steady recovery.

China, however, is roaring like a dragon. Venture capital investments in mainland China companies rose 47 percent in the quarter, compared to the same quarter last year — and total investments for the year should shatter last year’s levels.

Venture capitalists pumped $361.1 million into 54 companies during the quarter, according to Ernst & Young and Dow Jones VentureOne.

Through the first three quarters of the year, investors have committed $1.18 billion to 145 deals, almost matching the entire year of 2005, which saw $1.2 billion invested in 151 deals.

The median round size reached $5 million, the highest on record.

There’s more action to come. Seed and first-round deals made up the majority (70 percent) of the quarter’s deal flow, suggesting that these companies will grow into larger companies and get more cash.

And venture-backed companies are comparatively more mature than U.S companies, the survey found. For example, 69 percent of the companies funded in the third quarter in mainland China are already shipping product, compared to 56 percent in the U.S., and 22 percent of the Chinese companies are already profitable compared to 7 percent in the U.S.

By industry, information technology investments remain dominant in China, and within that area, Internet services saw the most action — with 22 deals and $136.2 million invested.

Update: We should note that investment levels will most likely not break 2003’s record level of $2.4 billion. As a reader points out below, many of these investments aren’t into high-tech companies, and are being made in older industries. On the other hand, the investments are still being made at much lower valuations than in the U.S., so there’s more activity going on than you might think based merely on the dollar levels. Finally, it is not clear how accurate these statistics are. Presumably, as more money is invested by local investors, these deals will not be tracked as easily (VentureOne gets much of its data — though not all of it — from ties with U.S.-based venture firms).

Update II: The biggest players are IDG Ventures China, which made 17 investments during the quarter, and Sequoia, which made 13 investments, according to the DowJones data.

Zhou Hongyi, chairman of Chinese search engine start-up Qihoo, defended himself Sunday against allegations that he may have embezzled from or defrauded Yahoo China before leaving that company last year.

In a phone interview, Zhou (pictured here) responded to VentureBeat’s article on Friday that reported Yahoo China is about to file a lawsuit against him. That article was based on an interview with a source close to Yahoo China familiar with the suit preparations.

Zhou dismissed news about the suit, saying it was yet another behind-the-scenes effort by Jack Ma, the chief executive of Yahoo China’s parent company Alibaba, to tarnish Zhou’s reputation. Ma’s motivation, Zhou said, is to make Zhou a scapegoat for Ma’s own failures. Ma has made several missteps since taking over Yahoo China last year, Zhou said, which have resulted in declining market share.

The skirmish is significant because the stakes are high in China’s fast growing Internet economy. The red-hot search engine market is still wide open, by most accounts, even if Baidu enjoys a significant lead — because millions of new Chinese are coming online each year.

Jack Ma is one of the most respected figures in China, because he embodies the successful Chinese entrepreneur — able to hold his own against US competitors such as eBay. He is revered in China like Bill Gates and Steve Jobs are here in the U.S. Some say pissing him off is like committing political suicide.

Zhou formed Qihoo, a competitor to Yahoo China, last year after he was ousted from Yahoo China by Ma (pictured left). The ouster came after Yahoo paid $1 billion to Alibaba to take over its China operations last year. Yahoo, in turn, negotiated a 40 percent stake in Alibaba.

Since leaving, Zhou has hired about 100 employees from Yahoo China.

VentureBeat’s article on Friday outlined the legal complaint being prepared by Yahoo China and Alibaba. The complaint will allege Zhou fostered a poor business culture while at Yahoo China, and that he became defensive as pressure mounted from U.S headquarters, according to the source. It says he built a moat around his China operations and started cutting his own deals on the side • taking kickbacks and making strategic investments for his own good - in preparation for his exit. It says he paid Yahoo China employees to leave the company.

Zhou said that Ma has no proof of any of these allegations. He said Ma is resorting to a desperate media campaign, knowing the charges won’t hold in court. “They’re all lies,” said Zhou, adding he wasn’t surprise to hear about them because Ma had spread other allegations about him for some time. A spokesman for Alibaba declined comment on Zhou’s comments.

Ma has come under increasing pressure from Yahoo, Zhou said, because of flip-flop decision-making. As Zhou explains it, in August 2005, Ma declared a new single focus on search. For example, Ma said Yahoo China would stop operating Yisou, a separate search engine Zhou had built up within Yahoo China’s portal offerings. Ma also said he’d discontinue the brand of 3721, which was the search engine Zhou had built years earlier (Yahoo bought 3721 in 2003.). Ma further said he’d change Yahoo china’s homepage (Yahoo.com.cn) from a portal into a simple search page; he eliminated Yahoo China’s portal staff. He also cut Yahoo’s wireless division, even though it was bringing in sizeable revenue and had cut deals with Chinese providers like China Mobile, Zhou said. (Chinese report on all this is here).

But then in Sept of this year, Yahoo resumed its homepage strategy, and began promoting a separate search engine page, Zhou said. “Now he [Ma] has completely flipped back and wants to rebuild Yahoo China into a portal. As a result, there’s no search strategy,” Zhou said. “He continues to lose market share. There’s brand ambiguity. No one’s sure whether its a search engine or a portal.”

Alibaba has already filed suit against Qihoo in a separate case, claiming Qihoo has inappropriately been labeling Yahoo china’s toolbar as malware and prompts deinstallation • and has hurt Yahoo china’s market share.

Zhou, meanwhile, has sent VentureBeat several documents, translating Chines media and other third-party research reports that say Yahoo China’s toolbar is spyware and deletes applications that try to remove it.

Yahoo China has lost more than 150 employees since Alibaba took over last year, Zhou said. They went to several companies beside Qihoo, including Google, Zhou said. He said such a significant exodus shows the problem is at Yahoo, and the defections to Qihoo testify to Zhou’s credibility and integrity. Many of them have worked with Zhou for years, he said.

Yahoo’s $1 billion investment is the largest in China’s Internet industry, Zhou notes. This had meant “a tremendous amount of pressure placed on Jack Ma’s shoulders to prove he’s doing the right thing,” Zhou said. “He needs to find a scapegoat.” Zhou said he had “huge respect” for Yahoo’s co-founder Jerry Yang, who has helped oversee Yahoo’s China strategy. However, “Jerry backed the wrong person, Jack ma. Willingly or unwillingly, Jerry is being held hostage, he’s being used as a tool.”

Zhou said Yahoo China had even resorted to taking an anonymous report critical of Qihoo from a Chinese online forum, translated it into English, and sent it to Yahoo’s Yang. Yang, in turn, forwarded it on to Michale Moritz, a venture capitalist who is backing Qihoo. These efforts are designed to persuade Moritz and other investors to forsake backing Qihoo, Zhou said. “Ma has truly become irrational abuot this campaign.”

Zhou said Qihoo’s reference to Yahoo China’s toolbar as a malware is justified by third-party reports • such one performed by Russian company Kaspersky — consistently listing Yahoo’s toolbar at the top of the list of about 200 popular malwares. “It’s in the top three, Zhou said. Qihoo is not unfairly targeting Yahoo, he said.

Zhou disputed allegations that he waged an anonymous public relations campaign in an effort to hurt Yahoo China’s contracts with companies like MSN. On the contrary, he helped Yahoo China renew contracts with companies before he left, he says. The contracts were terminated a year later because Yahoo China’s good-will has run out, and because MSN was launching its own search efforts, Zhou said.

Zhou rejected claims he’d taken kickbacks or used Yahoo resources to enrich himself or create a competitor to Yahoo China. He’d helped form partnerships with more than 20,000 Web sites while running Yahoo China, he said. Qihoo was one of those. Only after his exit did he become chairman of that company, he said.

(VentureBeat also spoke with Fan Zhang, a partner at Sequoia’s China operations. Zhang said he was puzzled by Alibaba’s use of the anonymous online forum posting, and was dismayed that Alibaba was also spreading untrue rumors about Sequoia • i.e, that it unfairly coerces entrepreneurs to work for its companies.)

Finally, Zhou said that Jack Ma has used a similar personal strategy against eBay’s Meg Whitman. He cited reports that show Ma has tried to shake the confidence of eBay employees in China. (See reports here and here for example, where Ma is declaring victory, and where rumors are circulating about eBay’s departure, even though Whitman says she’s committed to China). “He spread false rumors about Meg Whitman,” Zhou said. “It’s his strategy. He thinks, if he does this to someone long enough, they’ll self-destruct.”

(Updated below with comments from chief executive George Garrick)

Jingle Networks, a Menlo Park start-up which provides free phone directory assistance, has raised a whopping $30 million more in venture capital — upping the ante in what is now a crowded field.

This area has become popular because people find this an easy way to avoid the $1 to $3 they get charged using regular DA service.

Jingle, which markets itself as 1-800-Free-411, supports the free service by injecting advertising snippets in it responses. If you call them at 1-800-Free-411 looking for a particular local pizza company, for example, you may be offered a voice ad from a competing pizza company.

Competitors (see our early stories here and here), include San Diego’s 800ideas.com, which provides different 800 numbers depending on the city you are in, and Palo Alto’s 1-800-411-Save. (Update: InFreeDA, a San Francisco start-up that went live earlier this year with 1-800-411-METRO, has effectively closed shop. Thought he company told us in August it hadn’t closed down — and was just doing a major restructuring — we just tried using it, and got an “all circuits are busy” message, twice.)

The venture round is significant because it brings the company’s total funding up to about $30M over the past year (it got $26 million in April, and $5 million in December, three months after launching).

This latest third round was led by Goldman, Sachs & Co. and Hearst Corporation. Previous investors Comcast Interactive Capital, First Round Capital, IDG Ventures Boston and Liberty Associated Partners also participated.

Jingle says it now enjoys three percent of DA calls in the U.S., accounting for more than 13 million inquiries from more than four million consumers each month.

Among its advertising customers are CBS, which promoted its fall lineup with audio spots in the DA responses, and 1-800-flowers.com and 1-800-Mattress.

Chief executive George Garrick told VentureWire in a story (sub required) this morning that the company’s post-money valuation was “about $150 million.”

[Update: We just got off the phone with George Garrick, who confirmed the valuation was "slightly higher" than $150M. The large amount of cash is needed, he said, to build out the service. Advertisers come later, because they don't take a company seriously unless it can show five to ten million calls a month, he said. And he says Jingle has hit the tipping point, with about 450,000 calls daily. He expects revenue of between $1 and $5 million this year -- he wouldn't specify further -- and "ten times" that next year, he said. He said Jingle is the clear leader in free DA service, in part because of its more recognizable number. InFreeda has shut down, in part because of its less memorable name, he added. Palo Alto's 1-800-411-Save, meanwhile, is only placing between 5,000 and 10,000 calls a day, he said. We've reached out 1-800-411-Save for comment. No one else has raised close to this $30M, he pointed out. His real fear (he corrects; he did not say he feared them) assumption is that the carriers will unveil an ad-supported free DA service, he said.]

FBI investigators want to charge two men for spying in Silicon Valley to benefit China, and they say it is just the tip of a massive effort by the Chinese government to set up front companies to do this sort of thing.

In the latest case, they say Lan Lee, an American citizen, and Yoefei Ge, a Chinese national, stole chip designs and software from their employers NetLogic Microsystems of Mountain View and Taiwan Semiconductor Manufacturing Co. in San Jose, and planned to go into business with the Chinese government. The Mercury News has the story about it today (reg required):

The case highlights China’s role as the main adversary in a complex game of 21st-century espionage where many agents aren’t trained spies in trench coats but businessmen, students and researchers. Silicon Valley, counterintelligence experts say, is ground zero.

“Silicon Valley is a hotbed” of economic espionage, said Don Przybyla, who heads a FBI counterintelligence unit in San Jose. The valley is home to many of the estimated 3,000 Chinese front companies nationwide set up to steal secrets and acquire technology, according to the FBI.