In 1979, China glanced into America’s creative soul. President Nixon had invited a Chinese delegation to see the happenings of Silicon Valley. The delegation’s leader, Chen Chunxian, a member of the Chinese Academy of Sciences, was blown away by what he saw.
And how could he not be? What a spectacle it must have been, seeing giants in their emerging moments. Apple had just prototyped the first computer with graphics. Oracle was shipping the first software. Atari had introduced the first video game console. Dave Smith had invented the first programmable music synthesizer. And, Berkeley researchers had just launched a search for extraterrestrial life. (CITE)
Chen Chunxian returned to a China in flux. The Cultural Revolution had not brought the “Great Leap Forward” promised by its leaders, only famine and war. As industries faded in China, America was imagining new ones.
And so Chen Chunxian offered a bold suggestion: build a Silicon Valley in China. At first, the central-planning policymakers of China resisted. Under the grip of the Communist Party of China there was no room for industry fueled by private capital.
That changed on August 6, 1988. On that day, Xuer Li, a director of the State Science and Technology Commission, announced the creation of the Torch Scheme, allowing local governments to establish Silicon Valley-like technology zones. (CITE)
Why the change of heart is not clear. But it was a policy landmark in China. For the first time, China would allow a few foreign venture capitalists to fund in China the kinds of early-stage projects that were transforming America. This was the beginning of what Barry Naughton has called a “small but lively venture capital industry in China.” (CITE)
So who were these early American venture capitalists in China?
One of them was Tom Darling, who in 1988 while with Citicorp Venture Capital started working with Chinese entrepreneurs and venture capitalists in Taiwan. “My approach has been to establish a basic tool kit of US VC best practices for either the entrepreneur or VC and see how much of it I can get to stick.”
Darling, who helped launch China’s first incubator Innovation Works in 2010, initially focused on implementing three best practices gleaned from venture capitalism in the US:
- Western form of due diligence supported by extensive backup data
- Western best practices (including meetings, committees, and the fundraising process)
- Government mechanisms such as Audit Committees and Compensation Committees to give comfort to Western participants that transparency, objectivity in numbers—both reporting and forecasts, and planning are being introduced
According to Darling, Chinese entrepreneurs and venture capitalists are driven to absorb these lessons of Western private growth. There are still some obstacles, miscommunications, and misfires. And, there is certainly some reluctance to work with outsiders as private equity continues to be a function of state owned enterprises. Still, the Chinese government is learning from American venture capitalists. And it is paying off.
Today, China’s venture capital industry is massive. Over the last decade, Preqin reports 324 venture capital and 250 growth funds have been raised to invest in Chinese companies. For example, today, the Shanghai DOBE Cultural & Creative group manages over $4B USD (26,900M CNY). In the first quarter of 2016, Greater China recorded $12B or 36 percent of the global aggregate value of venture capital financings. The result: “China’s government-backed venture capitalists have amassed the world’s biggest startup pool.”
As we consider the “pivot towards Asia” announced by the Obama administration, it is important to remember China’s own “pivot towards America” that came over two decades ago. Inviting American venture capitalists like Darling to build out an innovation ecosystem was bold policymaking for China’s government.
However reluctant leaders of the Communist Party of China were to accept outsiders, their eventual concessions of ideology for innovation has now revived their nation. Embracing the lessons of American enterprise building, China now seems finally to be taking its long-awaited “Great Leap Forward.”