Venture Capital is still relatively new in China. For a lot of entrepreneurs in China it’s a buzz word but they still don’t really understand the principles or intricacies of it, and to be honest neither did I. But as start-ups sprout up in China, it really is important to understand. That’s why I interviewed Peng Ong of GSR Ventures recently to unravel some of the unknowns of the VC world.

Peng Ong is someone with experience on both sides of the track. He has been successful serial entrepreneur and has now crossed over to become a partner of GSR Ventures, with a focus on the internet, wireless and software sectors. Peng’s experience means he has deep insight into what entrepreneurs think and feel. As an amazingly successful entrepreneur, he founded match.com (sold to IAC), Interwoven (NASDAQ listed) now called Autonomy, and Encentuate (sold to IBM).

Coming to China

Interestingly unlike many foreigners, Peng didn’t originally come to China to chase the lucrative potential of the Chinese market. It was a more personal connection. When he lost his father in 2007, he tried to reconnect with relatives in Fujian, China. It was difficult for him to not be able to communicate with his relatives so decided he wanted to learn more about his heritage.

Getting into VC

Whilst in China, an old friend and co-founder of GSR ventures, Richard Lim asked Peng to get into VC and join GSR. Peng felt comfortable in transitioning into VC because of his experience as an entrepreneur and wanted to help the next generation of entrepreneurs which is now his mission.

Getting to know you

Peng mentioned that as a VC you are doing well if you do 1 or 2 investments a year and in the first year you shouldn’t do any. When it comes to investment cycle times, it varies but for Lashou (Groupon clone) for instance it took 6 weeks from meeting the team to funding. But a typical investment would take 4 months. For early stage investments it often takes a bit longer because they want to spend time getting to know the founders and vice versa. Peng says the “faster they go, the more careful they get.” It ultimately comes down to the start-up team. If the VC has confidence in them, then they will be more ready to sign the term sheet.

What I look for in the founder and team

The reality is for these VC’s is that they are looking for big returns. They are really looking to make big game changing companies and huge results, like billion (USD) dollar exits. For this reason, they are looking for people who can scale up to that level of success.

Team leadership is something they have to scrutinize carefully to see if the leader can manage a large team – can you cut it? Intelligence and smarts about the industry and technology and the ability to scale are also vital components. “These characteristics are often reflected in one’s emotional intelligence, how you can handle yourself, your team and the market. If the market or sector is not right, this reflects on the judgement of the team. If a team is going to spend 3-5 years intensely focused on one area, a smart team would figure out if it’s the right area.

“Some teams are very passionate about something and not because they want to make lots of money. I applaud these teams because ultimately that’s what it’s all about. Go with your passion and often the financial rewards will often come. That doesn’t mean we’ll invest in all these teams because some areas just aren’t going to be huge.”

How VCs differentiate themselves

As the number of start-ups rise in China, the number of VCs looking to make a big profit from them rise too. So how do entrepreneurs know which VC is the right one for them? Peng chose GSR because “nearly all the partners have venture experience and have all built successful companies and they’re not just theoretical.”

“VC is a service business. The service is not just funding but helping entrepreneurs build successful companies through networking, finding them the right partners, helping them go public and not many VCs have done this; it’s a very complex process. Without any background in it, how well can you do it?”

To some degree many VC’s will argue the same thing for their VC. So it’s better for you start-ups and entrepreneurs to shop around before you commit to anything.

How do you value a company?

“It’s usually a factor of relevant revenues. If you’re doing something more like a Facebook, it’s about how sticky your business is e.g. how often do registered users use the site. Depending on the business, there is no one right answer. The best teams will figure out what is relevant to their business, they measure it and tell us what it is. We will challenge them if it is the right things they are looking at.”

VC – art or science?

“A lot of later stage investing is more science and financial modelling but in early stage it’s more strategy. It’s about your read on the market, what are the trends and your predictions about where the future is. You have to think about where the market will be in 4-5 years out, what are you going to invest in today that will go public in 5 years time and that’s really tricky. The typical target for an investment is to go public in 5 years. The good news for companies in China is that a practical outcome is IPO unlike the US where a lot of them get acquired.”

When is the right time to get VC help?

“It comes back to what services the VC can provide. Beyond the basic funding if you need the help and experience of VCs, like strategy or networks you should seriously consider it.”

What areas excite you in China?

“I think there will be explosive growth in internet, mobile and cloud computing and saas. I have a theory that the internet will be a very interesting place for a very long time. The gap between software capabilities and human capabilities represents a huge entrepreneurial opportunity. I think another area is enterprise. Chinese labour is no longer cheap, so what you need is to increase productivity and software can do this.”

To copy or not to copy

“Copying is a form of innovation. The best company’s never just copy, they copy and the localize. It’s like jazz, you have a basic rhythm and structure and you move around that. Is jazz copying? I don’t think there is any original idea. Google is a copy.”

How should entrepreneurs get your attention?

What I filter out very quickly is that people that don’t know what they are talking about and think they do. What I’m looking for are people with an idea of what business they want to start, a plan for what they want to do, ask for advice. I only have so much space in my head so entrepreneurs have to figure out how to stick at the top of my mind.”

What stage is investment in China at now?

“It’s starting to get professionalized. It’s getting harder now, there are many very experienced people now investing in China and many people are trying to figure out how to come in. What I worry about is if it creates too big of an IPO bubble, it flows back into the later stage funding bubbles and there’s always a risk of it collapsing and that always turns the industry back. If you have a lot people just throwing money at businesses for the returns but have no clue about the business, that’s not the healthiest thing, and that is happening now. I would advise serious entrepreneurs that want to build big global businesses to think very thoroughly about how they get their investment and who they want to work with. The ones that want to build visionary Asian global companies that dominate and change the world, those are the people I love to work.”

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Peng was great to talk to, very approachable and full of wisdom. He cleared some of the fog around what is often a mysterious industry. If you are interested in talking to Peng as a start-up, you can contact him at peng[at]gsrventures[dot]com. But if you read this post carefully, he warned you – know what you are talking about!