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Venture Capital - Why Crystal Ventures Says Invest Now, Invest in China By Andrew Batson Dow Jones Newswires February 13, 2003

BEIJING (Dow Jones)--Faced with the wreckage of small technology companies left over from the bursting of the Internet and telecom bubbles, one group of U.S. venture capitalists sees only one hope for them: China. "A lot of successful U.S. companies have got stuck, they can't grow anymore because of the market in the U.S.," said Joseph Tzeng, managing director of Crystal Ventures LLP. "A lot of them will have to find new markets." He said Crystal Ventures, a $250 million venture fund founded in 1997, will soon be looking to raise money for a new fund that will "take these companies and re-engineer them to relaunch in China." "They are very late-stage startup companies with revenues of $20 million to $30 million, but they simply can't grow anymore," Tzeng said. Such smaller niche companies have been especially hard hit by the slump in U.S. spending on information technology and telecom equipment. "China represents a huge future for a large batch of companies. If they don't do that, they have no option but to shut down," he said in a telephone interview. "We don't just move the company over, we have to create a new operation to get new revenue with an enhanced product line." Crystal Ventures' admittedly risky plan attempts to tap the growing scale and sophistication of China's technology market, a development that has attracted increasing media attention on both sides of the Pacific. After several years of rapid expansion, China now boasts the world's largest population of mobile phone users at 206 million - not to mention more than 90 million cable TV subscribers. The country has also become a major manufacturing base and significant market for global firms like Alcatel S.A. (ALA) and Motorola Inc. (MOT). And China is no longer playing technological catch-up with the developed world. For instance, it now has the world's largest GPRS network, a high-speed mobile phone technology that enables the exchange of digital music and pictures between handsets. Previous Venture Investments In China While Crystal Ventures is working with other venture capitalists and former executives on the new fund, it is drawing on its own experience investing in China. "You can't do it if you have no connections and no prior experience," said Tzeng, noting that about 25% of his existing fund is invested in companies located in mainland China, Hong Kong, Taiwan and Singapore. Crystal Ventures was an early investor in Chinese-language Internet portal Sina.com (SINA), and currently has investments in two other China-based companies: Powerbridge, a software company in the southern city of Zhuhai, and Afanti Technology, a videoconferencing company in Beijing. It has a total of 35 investments in its global portfolio. Tzeng said Crystal Ventures is now also evaluating a few China-based companies as possible investments, including an insurance software company in Shanghai, a wireless software company in Beijing, and a computer distribution company in Beijing. Crystal Ventures' most recent deal came in January, when it invested in a San Jose, Calif.-based company named Exavio. It is developing products to help support video-on-demand on cable TV systems, but while focusing initially on the U.S. market it is using Beijing as a base for research and product development. Tzeng said the company had been favorably impressed not only by their low cost - about one- fifth of the U.S. cost - but also by the quality of their work. The "China re-engineering fund" aims to bring those same benefits to other struggling U.S. technology companies. The unorthodox venture could help Crystal Ventures recover from the backlash against the venture capitalists that helped inflate the Internet bubble. "No company will put a penny into traditional VC anymore," said Tzeng.

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