Joe Tian, founder and managing partner of DT Capital Management, a Shanghai-based private equity firm which manages over US$500 million in three funds, has devoted his career to the China venture capital industry since returning to China following his graduation from Wharton in 1998. Before founding the firm in 2006 with his partner Shao Jun, he worked as chief investment officer and managing director for Dragon Tech Ventures, a corporate-sponsored VC firm focusing on China.
As one of China’s early returnees from school abroad and also one of the first batch of venture capitalists in the country, Tian has witnessed the emergence of China’s venture capital industry in the midst of several ups and downs in international capital markets, including the still-unfolding global financial crisis. In a recent interview with China Knowledge at Wharton, Tian talked about the challenges of being a venture capitalist in a rapidly growing, uncertain market like China.
The following is an edited version of the interview.
China Knowledge at Wharton: Can you give us a brief overview of DT Capital and your personal background?
Tian: I have lived in the U.S. for almost ten years and worked in investment banks such as Merrill Lynch and JP Morgan, and I’ve also worked as a management consultant at McKinsey. Following my graduation from the Wharton School in 1998, I returned to China and subsequently started my career in the PE/VC business focusing on China. I have worked as chief investment officer and managing director at DragonTech Ventures, a venture capital firm sponsored by Shanghai Industrial Investment Corporation, a Hong Kong-listed company. In 2006, my partner Shao Jun and I set up DT Capital, and our first fund was US$130 million, our second fund was US$350 million, and we also raised one of the first RMB fund in China with a size of RMB 250 million. So, all together, we manage over US$500 million investment funds.
As one of the early [venture capital firms] in China, we witnessed the emergence of China’s venture capital industry and we learned a lot from real cases while seeing very good returns.
China Knowledge at Wharton: How you differentiate yourself from American investment firms?
Tian: We are different because we are a local firm with international standards, which means we understand China and we operate in a flexible way based on China unique characters. Although our funds come from the U.S. and one of our key investors is the Walton family (which started Wal-mart), and although we have a LP/GP structure and our internal process is in full compliance with international standards, we are a local investment firm because we are based here in China. Our team members are all local talent, we deal with local entrepreneurs and we have local investment strategies.
China Knowledge at Wharton: What is your local investment strategy?
Tian: In the venture capital industry in China, especially for projects in seeds stage, there has been a strategy called “Me Too” — i.e., if you have Google in the U.S., you will invest Baidu [China’s largest search engine company] here. We actually have a partner who is an early investor in Baidu and he still sits on their board today. This strategy still works, but it only represents one category of opportunities — a small portion. The majority of investment opportunities at this moment belong uniquely to China.
For example, we have invested in SunTech, a solar manufacturer based in Wuxi, the first Chinese private company that launched its IPO on the New York Stock Exchange. There are no such public companies in the U.S., nor in other countries, I think. So, SunTech is a very China-unique model. Global demand on clean-tech, alternative energy, strong technical know-how, high value-added manufacturing enterprises — these elements have made the market capital of SunTech once the highest among Chinese private companies who went public abroad.
China Knowledge at Wharton: Does SunTech have proprietary technology? What’s your view on those projects with no patented technology?
Tian: Surely it has. Just like me, Dr. Shi Zhengrong, the founder of this company is also a returnee [from a university abroad] who has studied solar technology and worked in Australia for more than ten years and then came back to China to start his own business. The products have high-tech content; [the company] was expanding when we invested, and later on it went public on the NYSE.
On non-high-tech projects, our strategy is local because we focus on China-unique opportunities. For example, earlier last year, I invested in a TV shopping company called LuckyPai. You know, TV shopping is already a very mature business in the U.S. and European markets, but in my view, the market has just begun to explode in China.
LuckyPai is based in Shanghai and it was only started last year in Shandong Province. Now the company’s coverage has been expanded to around 500 million viewers in Shandong, Henan, Yunnan, Heilongjiang and Jiangxi provinces. This is another example where we looked for China-unique opportunities.
China Knowledge at Wharton: Had the company already started up when you invested?
Tian: It was in a seed stage, just two people and a business plan. We mainly were confident about the team. One of them is a second-time entrepreneur and his first company went successfully public; I had worked with him on his first enterprise when I was with Merrill Lynch. The other one has worked in McKinsey and China Netcom; we were neighbors when I was working in Hong Kong.
China Knowledge at Wharton: What is China-unique about this company?
Tian: It’s China unique because it has managed to set up joint ventures with local governments in different province to own the TV channels. This is different model than buying air time, because in China, media organizations, especially TV Stations, are all state-owned and monopolized; it’s very hard to control the cost if you want to buy air time. But LuckyPai’ model makes it fully adapt to this reality and takes advantage of it to prosper.
So, you need to understand what’s unique about China, why it is different, and how to adapt to that reality.
China knowledge@Wharton: What are the major industries or business models you are focused on?
Tian: We are looking for new industry and business models all the time and most of the time we are ‘touching the stones to cross the river’ [a Chinese adage]. Clean tech/clean energy is an important focus of us. Except solar power, we have also invested wind power projects and other clean tech enterprises.
Consumer service is another focus. As we have just discussed, TV shopping might be already old-fashioned in the U.S., but at this particular stage of China’s growth, this business still has a lot of room to grow. We figured out that China needs many more channels and better models to provide service for its domestic consumers. China’s domestic consumption only accounts for less than 40% of GDP, compared with 70% in the U.S…. If this percentage can go up a little bit, there will be a lot of things for us to do.
High value-added manufacturing is another direction. People say that China is the world’s factory; that doesn’t make you feel good, because it somewhat implies that we are the sweatshop for the world. Therefore, what we are looking for is not a factory of low-skilled labor; we are looking for a business that can help develop China’s economy and at the same time has certain technical entry barriers.
So … we hope to explore China-unique opportunities, which are not really the same hot cases as in the U.S. market. You can only invest in cutting-edge technology in the U.S. We don’t necessarily focus on the companies that have cutting-edge technology, but they have to be technically strong enough for commercial return. In summary, to invest in China, you have to do things that fit China’s market at the right time.
China Knowledge at Wharton: Are you looking for projects based on these guidelines, or is it that you happen to know the people [doing these things]?
Tian: We have top-town strategy and bottom-up strategy as well. China’s market has been open for 30 years, and the country has been growing 10% in recent years. Lots of industries are moving fast and make a lot of profit, not just the Internet. Surely, the internet is very important, but it’s not everything. We look at the other aspects of the economy. Why invest in clean tech? Because over 30 years’ of economic development, China has not done much in environmental protection and the pollution in some industries is severe. The 11-5 Strategy Plan has placed high priority on energy savings and environmental protection. Surely, we haven’t anticipated the precise policies; we just thought that at a certain point, based on observation and reflection from different angles, this clean tech, alternative energy industry has a lot of market potential and it has value and makes sense in today’s China. So we have started to allocate resources and energy in this direction.
China Knowledge at Wharton: As one of the first batch of venture capitalists in China, you have witnessed the emergence of the industry in China. What you have learned in the past decade?
Tian: One of the things I have learned is on how to be value added to the entrepreneurs and how to achieve win-win for more parties. Venture capital, in its nature, is a financial service industry. You have to become a good partner for entrepreneurs. One of the important points in a cooperation is what value can you provide, and why should [an entrepreneur] cooperate with you?
The international and local background of my team is very important as you have to get your own edge to play in the industry in China. Most of our portfolio companies are domestic companies. By investing capital, we have connected them with the other side of the globe. Furthermore, Chinese entrepreneurs all wish to operate big in capital markets, and we can help them to reach that goal. To invest the money is the basic point; as an investor, you have to provide value in other aspects. The other thing is that we could sit down with these executives to talk about strategies. You know there are a lot of changes and uncertainties in China; as a CEO or chairman, an executive can be lonely sometimes, so as an investor we can sit with him to chat. Our suggestions may not be right every time, but at least they help to clarify his mind.
So, you have to provide value-added service to your partners on top of the capital. Only by doing this, the partnership will make sense and create value and it can bring high returns for the shareholders. As one of the early venture capitalists in China, we can provide this kind of service based on our experience and expertise.
China Knowledge at Wharton: What are the other traits that are important for a venture capitalist to have?
Tian: I think that to be a successful investor in China, one of the most important traits is your handling of people or entrepreneurs. Both of you need to have mutual understanding and create value together. This is a very important capability. You have to be able to find a certain industry, and to understand the future of this industry. Take SunTech Solar as an example: At the time we invested, solar manufacturing had just started, but it’s now a fairly big industry…. We are looking at clean tech/energy is because after so many years of rapid growth, it was now time to manage pollution in our view. But how to clean the environment? You must have people involved, companies involved, and the investment must have returns. This is a rising market. Only when you have a certain understanding about an industry’s prospects can you find the right people by the top-down or bottom-up approach. But after you have found those entrepreneurs, how can you cooperate with them? Why must they cooperate with you?
SunTech, at that time, had a state-owned background. Some foreign big-name PE firms had also talked to them, but they didn’t take the right approach and the decision makers were far away from China. We make decisions here in this office, all of the time. [Again,] to do business in China, you need to find ways which fit well with the reality and do it in a Chinese style. Another example is that we also invested a wireless service project in 2002 and then sold it successfully to Sina [the biggest portal website in China] in 2003 and it’s now call Sina Mobile. So these projects are all China-unique. At a certain stage of China’s development, there will be certain kinds of opportunities, but you have to able to find them.
China Knowledge at Wharton: What are the biggest challenges of being a venture capitalist in China?
Tian: There are challenges all of the time. First, China’s market is growing very fast; you need to have a very strong ability to adapt to change. The wireless business, for example, was on rise in 2002 and got very hot at 2003, with four or five companies going public, and now there are already a dozen public companies so it’s growing very fast. If you enter into it now, my view is that you will lose money. So how can you find the right opportunities？How do you know when the timing is right? How can you explore these opportunities and find the right partners to do these projects? These are all very important challenges.