Toast to Shanghai

Here is our initial impression of bustling Shanghai. Our encounter with venture capitalist Mark Hsu also gave us insights into the differences between Asia’s hottest business capital and good ‘ol Silicon Valley.

We’ve reported several Mercury News stories about Silicon Valley’s venture capital rush to China over the past two years, not to mention dozens of blog posts. One thing people keep telling us about is the buzzing nightlife of China’s major cities. Deal-making gets done in bars. And throw in the other benefits you get in this cheap-labor economy, you can see why many several West Coast expat entrepreneurs say they’re having a hard time going back to the valley. Nowhere is this truer than for those in Shanghai.

I (Matt) arrived in Shanghai weekend before last, and was immediately swept up by…

the energy and pride of the city’s people. The vast majority is upwardly mobile. Peasants come in from the countryside, and take low-level manual jobs. They take the place of the city’s bottom stratum of workers, who have moved up to the next level, aided by economic expansion. And so on. Salaries are creeping upward. No groaning here about decline, like in Germany.

My host, Sean Liu, who works for a start-up here called Hengbang, took me to a massage place ($11.50 for an hour and a half), and then we hit the town. We arrived at hopping “Bund” district at 11pm, and that was just the beginning. We headed into Bar Rouge, where pounding music greeted us. Waves of young professionals were drinking and dancing. More chatted on the patio outside, which looked over the Huangpu River. And, there, across the river, our eyes befell the real estate edifice reflecting the best and worst of China’s stupendous growth: the skyscraper district of Pudong.

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Oriental Pearl

In the late 1980s, Pudong was waterlogged land where water buffalo trudged. Just a decade later, the government of Deng Xiaoping, in military style, had drained marshes and built a new city lined with a steel-and-glass phalanx of eighty-story skyscrapers. And there, in full view from our patio, arose the grotesquely phallic 1,535 foot tubular Oriental Pearl Television Tower –complete with giant testicular-like spheres supporting it below. I almost blushed. One of tallest towers in the world, it is a statement of China’s lust for prowess.

Meanwhile, here in the pulsating Bar Rouge, the sexual revolution in China unfolded before me as scores of young Chinese men and women hooked up. Here’s a good place to mention the intriguing story in the New York Times (subscription required) last week about the self-described Communist Party member blogger from Shanghai who goes by the pseudonym Mu Mu. “The 25-year-old Mu Mu appears online most evenings around midnight, shielding her face while striking provocative poses.” Unfortunately, perhaps to shield her identity, the NYT doesn’t provide web site.

It was said, ten years ago, that half the cranes in Asia operated in Shanghai (though no one is sure where the statistic comes from). Today, there are still hundreds, if not thousands, toiling away. Ken Rippen, an Australian engineer recruited to advise the government, had originally warned the government it would be impossible to complete the elevated Pudong roadway network within the deadlines planned. But he didn’t appreciate the ability of the Chinese state to steamroll protesting property owners. Within thirteen months, the inner ringroad was finished.*
(Perhaps in a later post we’ll try to mention more on the environmental cost of the Pudong growth.)

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Back to the bar. Ever so often, the bartender would light the bar afire, and do some juggling with bottles (see photo here; sorry, view of fire is obscured by people, but juggler is the guy in distance, second to left). Won’t bore you with the details, but the night went on, and we basically circulated through throngs of business people — mostly single — from all walks of the Shanghai business life, from Russian glamour models, Dutch packaging traders, Norwegian shipping executives — and, of course, a melange of local Internet entrepreneurs and investors.

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Mark Hsu

At 3am, I found myself chatting with an ambitious young Chinese woman — in her 20s — who is setting up the Shanghai office of an outfit linked to the Nederlander Group, a theatre property group out of New York. Over a drink, coincidentally, we fell upon a common link with Mark Hsu, vice president of private equity firm H&Q Pacific. Now, this is significant because I’d heretofore been trying — unsuccessfully — to meet Mark. He is son of Ta-Lin Hsu, one of the earliest venture capitalists to create a pan-Asian investment strategy, and who entered China 12 years ago. Before I left from the U.S., two friends had recommended I look up Mark, a passionate and plugged-in young man of 35. However, despite emails back and forth, we’d missed each other — he is a busy guy.

Then here I was, being introduced to him at 3am in a bar with next to some Ukrainian and Brazilian models. This wouldn’t have happened in Silicon Valley — namely because there’s no such thing as a hip bar that jams until 5am — or at least one that I know of, or which VCs frequent. And alas, no Ukrainain or Brazilian models.

A couple of days later, I met up with Mark, at his office at H&Q. Mark is pretty plugged in across Asia: We’ve mentioned his father, Ta-Lin. But his grandfather, on his mother’s side, had been the personal secretary for Chiang Kai-Shek, and his uncle started the first English newspaper in Taiwan in the 1960s.

Mark also has a good basis with which to compare Shanghai and other major business areas such as Silicon Valley or New York. He’s been in Shanghai for nine months, having previously worked in the H&Q office in SF for four years (though taking most of last year to work full-time for the Kerry presidential campaign), and before that, New York for five years.

And here’s what Hsu says about Shanghai: “I can’t imagine being in any other city of the world, from a business, social or cultural angle.” New York, he says, has become “pretty stable.” It still has energy, but is no longer as dynamic as Shanghai. Everyone in New York he knows works for a big investment bank, a multinational, an accounting or law firm. Here, in Shanghai, everything’s changing. People circulate, move in and out of new ventures, and all economic fundamentals are growing — despite temporary “bubbles” here and there in real estate or technology. Shanghai, he said, “brings New York to Silicon Valley in the best way.” It has New York’s cosmopolitan offerings, but blends that with the entrepreneurialism of Silicon Valley. As for investment potential, the major story in the world is China, “and within China, it’s Shanghai,” he says.

He points out two major downsides to Shanghai: the relative lack of nature, and a troubled healthcare system. These are not be underestimated.

Sorry to meander here, but it worth noting that Hsu has been politically active (Kerry campaign, etc) because he says he fears the Asian-American community, having attained relative prosperity, has become too politically complacent. Moreover, they need to participate in a dialogue about the relationship with China. China is emerging as the primary threat to U.S. world hegemony, bringing clouds to U.S.-Chinese relations. A growing trade deficit, conflicts over exchange rate policy, and military-foreign relations (i.e., Taiwan or North Korea) are all sore spots. “We’re going to see China flex its muscles,” Hsu says.

He and his firm are participants at the World Economic Forum, the Council of Foreign Relations and the Pacific Council of International Policy. That same evening, Hsu was headed off for more socializing, this time to celebrate a twin city event (SF-Shanghai) where SF mayor Gavin Newsom and U.S. Senator Diane Feinstein (D-Calif) were visiting the Bund.

China now makes up about 50 to 60 percent of his firm’s activity, Hsu said. But like most firms active in China for a while, H&Q has moved up-market. It has raised more and more money to invest, so it needs to find bigger deals to put the money to work. It isn’t doing much seed funding, but invests into later-stage companies — those mature enough to soak up millions of H&Q’s dollars.

H&Q owns much of China’s Starbucks chain, including the one across from the Great Wall. It has invested in real estate in Shanghai (for example Shanghai Links, the golf course designed by Jack Niklaus), biotech, manufacturing technology, financial services, and branded consumer/media companies. With China’s expanding middle-class, and rapid process of deregulation, a lot of these sectors are white hot.

This focus on later-stage deals means, however, a lack of sufficient seed funding, according to people here — which we’ll try to explore in a later post.

That, despite the flood of capital coming in from other sources, namely classic US buyout firms, domestic state-run firms, European firms, hedge funds, and other institutional investors. All of this money means entrepreneurs have the advantage. They can negotiate high valuations, forcing investors to pay big-time in order to play. “There are not a lot of other places in the world to put money in right now,” Hsu says of China. “The downside is the valuations. Lots of money chasing late-stage deals.”

So Hsu says he’s going after the large number of mid-sized companies, many of them family owned or state-affiliated. Many of them are profitable. Notably, though, Hsu says he doesn’t like to invest in Chinese companies run by Chinese entrepreneurs with no outside managerial help. He calls these “Chinese Chinese” deals. For anyone questioning this caution, read the unending number of fiascos documented by Clissold and Studwell (referenced below) involving foreigners losing their shirts on China investments — despite hundreds of years of trying.

Of course, all that is changing now that China has joined the World Trade Organization, and is reforming its economic and financial laws — grist, perhaps, for a later post. Suffice to say that dozens of U.S. venture firms have shown up over the past two years to exploit what appears to be — finally — the China investment dream. If you come here, you will see why.

*The following books are helpful for background on the folly of foreigner investment in China during the mid 1990s, where most lost millions of dollars. They also both contain brief summaries of Pudong’s amazing growth.

— Mr. China, by Tim Clissold. (HarperCollins 2005)
— The China Dream, by Joe Studwell (First Grove Press, 2003)