Silicon Valley venture capitalists are desperate to take part in what looks to be the biggest economic bonanza going on right now: China. The Chinese semiconductor company SMIC was the fastest company ever to hit $1 billion in annual sales, and there looks to be a lot more to come — even if some skeptics say there’s a huge bubble (third item down) emerging in the short-term. The potential for Silicon Valley VCs to lose their shirts is indeed huge.

That’s why all these China newbies are hunting down Lip-bu Tan, partner at Walden International and one of the first U.S.-based venture capitalists to begin investing in China.

He was one of the early backers of SMIC. Back in 2002, we wrote about the risks of investing in China, and how Tan’s early efforts met with failure.. But slowly, all that early work building up contacts and experience is paying off. As China opens up its economy to free trade and more foreign investment, its fast-growing tech companies are going public — adding to the drive by VCs to participate in the goldrush (as we wrote about here) — and Tan is benefiting the most.

Now the deals are coming to him. Take the $11 million investment in a Chinese semiconductor equipment company AMEC, which has yet to be announced. Tan is leading the deal, but has brought in a group that includes a few first-time Silicon Valley investors in China: Interwest Partners, Lightspeed and Bay Partners. Also in the deal is Redpoint Ventures, which has recently started scoping out China more seriously, and which made an earlier investment in China’s BCD Semiconductors.

The list goes on. China novice Robert Chaplinsky, of Mohr Davidow Ventures, teamed up with Tan to invest in a different fabless chip design company, also to be announced. David Britts, over at ComVentures, found another fabless semiconductor deal, but sought out Tan for help in doing it. And Tan is investing $15 million, with New Enterprise Associates, into Telegent Systems, another fabless chip company that enables TV broadcasting on mobile devices — also yet to be announced. Tan recently helped bring in Silicon Valley firms Morgenthaler Ventures and NEA to invest in a Beijing software service company called UPTech. He also partnered with Doll Capital Management, a Silicon Valley firm which has been active in China for a few years now, on a deal with a Shanghai fabless developer of analog, mixed-signal integrated circuits, Apexone Microelectronics

All these VCs are lining up at his door for a good reason: Hand-holding. They want a trusted partner in doing deals, want help meeting Chinese entrepreneurs, and want Tan to put in calls to his government contacts to make sure a prospective start-up’s technology isn’t on the state’s blacklist. Tan’s contacts run to the highest level. He hates to talk about who he knows, and how he knows them, saying that they are secret “trump cards.” Let’s just say that one of his employees in China is related to a VERY high official there, and that a former partner at Walden is also VERY well placed. Tan calls on his connections to perform due diligence on a company and to get the official Chinese line on important policies: “It’s still a Communist country,” he says. “You have to know where to land.” He has learned the hard way. There’s so much risk in China that he’s hired his own accountant to constantly double-check the books of the companies he invests in — something Sequoia Capital partner Don Valentine cited as a reason why Sequoia won’t be investing in China anytime soon.

Tan said it used to be difficult to get Silicon Valley VCs interested in China deals. Now, they’re bringing all the business to him. “For the last ten, fifteen years, I’ve been building my China network. It was pretty lonely,” he says, with his easy smile. “Now, if other venture firms find a good Chinese deal, we’re the partner of choice.”

Tan agrees there is too much hype around China’s Internet related companies, including in companies like 51job, or even his own Their shares are trading at 20-30 times revenue, “crazy levels” he says. Another company, Shanda, has a total estimated market of $1 billion, but its market valuation is trading at $2.4 billion. “You know something’s wrong,” Tan says. He says these sorts of companies need to work on building deeper, more experienced management, and on diversifying their products, something he says his company (it is public, but he is on the board) is working hard to do.

But the bubble in Interent companies is why he’s focused on the chip sector. China’s huge tech-friendly and increasingly wealthy population is gobbling up TVs, cellphones and DVD players, driving demand for chips that make them work. “That’s why I decided to invest big time,” he says, picking at his curry lunch while looking out of his SF office overlooking the San Francisco Bay. He predicts a fourth of the world’s consumer electronics consumption will be in China within a few years. Besides chips, he says he’s also interested in what he calls “software/services.”

Anyone who meets with Tan say he is a friendly guy. He’s considered a straight shooter, which is why people like to team with him. He also speaks Mandarin and Cantonese, having learned them at school in Malaysia and Singapore before coming to the U.S. He travels to China every month, and has a penthouse apartment in Shanghai. But he wants to keep his base here, saying his wife and kids like it too much to leave. Besides, he’s on the board of the SF Opera, is a fan, with his sons, of the Giants, Raiders and Warriors, and he’s heavily involved in a church group here.

So he’s not going anywhere. And by the way, this isn’t all there is to Tan’s efforts right now. We’ll follow up soon on one of his latest endeavors, which may become one of his biggest bets yet. Stay tuned…

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