Written by: Simon Lee

One of the most interesting roundtable sessions on day 2 was the engaging and sometimes heated discussions about the trends of venture capital in Asia. Participants on the board inlcuded managing partners of big name venture capital in Asia including James Ding from GSR Ventures, Joe Zhou of KPCB China, Andy Yan from SAIF China, and Yoshihisa Ueno of TOA Capital. Rounding out the discussions was Dilip Mistry from Microsoft Asia to bring a leading company’s perspective.

RH CEO Alex Vieux hosted the roundtable session with his characteristically challenging questions, and brought up some real issues that startups and VC’s alike may be concerned about. I’m sure that anyone who owns a startup in Asia is dying to know what the biggest investors are thinking. Here were some of the main issues that they brought up:

The venture capital industry in Asia is just beginning. What we’ve seen is only the tip of the iceburg, and the numbers support it. For example, in a later roundtable session, Baidu CFO said that internet penetration in China is currently only at 11%. So there’s still huge growth potential.

Venture capital in this region still has a confined focus within countries. Chinese VC’s only focus on China, Indian VC’s on India, etc. Dilip of Microsoft called for venture capital to have a wider view of the asian market as a whole, because many innovative tech startups have an inherently global reach. For these companies to reach their full potential, the VC’s that invest in them should expand their horizons and look outside their own countries.

Alex stated that Japan accounts for around 40% of the GDP of the entire Asia pacific region, but is lagging far behind in terms of innovative tech startups. While tens of billions of dollars (US) are going into China and India, there is only about 2 billion dollars worth of venture capital available in total within Japan. When Alex used the word “diseased” to describe the state of Japanese entrepreneurship, even Yoshihisa Ueno was hard pressed to answer. According to Yoshihisa, it is the infrastructure and cultural mindset that staunches Japan’s entrepreneurial flow. New technology development is dominated by the large corporations, and money is focused on large corporate engineering ventures rather than on the small enterprising startups.

There is a huge amount of venture money within Asia, but very low allocation. In other words, lots of money but most of it still hasn’t being invested. Why is this? We could only get a perspective from the Chinese VC’s. According to them, venture capital in China is a lot more risk averse than their American counterparts. In general, startups in China have not yet achieved the massive returns that American startups have created (such as MySpace). Also, the abundance of clones (especially in the web space) makes it more risky for VC’s to invest in a startup in the early stage. Instead, they go for later stage funding where a company already has a track record and is a much more well known player within its space. Lower returns, but less risk. This means it’s a bit more difficult to get seed or first round funding if you are a startup in China.

In conlusion:

The startup environment in this region is hot, and getting hotter by the day. A lot of venture money is flowing into Asia, fueled by the enormous potential of China and India as they become economic powerhouses. Start ups face a lot of challenges in getting investment, and must be careful when choosing the right partner for venture capital. They must have a clear understanding of where they want to grow or risk being confined to a single market. They must stand head and shoulders above their competitors to attract the best investors. However, there is enormous potential here in Asia, and everyone at the RH conference agreed that there is no better place to start than here.

Simon Lee is one of the folks behind the social network for investors, BullPoo. He also helps out as a contributing writer covering industry events in Hong Kong.

Possible related posts:

• Red Herring 100 Asia 2007 - Winners
• $60M for Facebook from HK
• Red Herring 100 Asia 2007
• Announcing Open Web Asia 2008 Conference