Tuesday, October 04, 2011

Caught in the Chinese Web

By Eric Jackson10/04/11 - 07:45 AM EDT
NEW YORK (TheStreet) -- A few months ago Facebook was rumored to be close to a deal with Baidu (BIDU_) about setting up a joint venture.

At the time, I said I thought that it was a smart move on the part of Facebook (although the rumors of the day then said it was something that Mark Zuckerberg was insisting on over objections by Sheryl Sandberg). I remember a friend of mine, Bill Bishop, an American venture investor based in Beijing, was very skeptical at the time of such a deal working out. Bill pointed out then on his blog how many American Internet JVs had driven on the rocks of China over the last 5 years.
I was reminded of Bill's thoughts last week when I watched an interview of Qunar co-founder, Fritz Demopoulos, who recently sold his Chinese travel business to Baidu.
Fritz is a German, who got his MBA in the U.S., and then promptly went to China. He started two companies over there in the last 10 years. He has a uniqueperspective on the country and what it takes to succeed there.
Fritz says flat out in the interview that he doesn't think that any U.S. internet company will ever be successful in China through a JV.
His reasoning was pretty simple. Even six years ago, China's infrastructure was pretty immature vs. the U.S. Remember that was the time when Jack Ma sold 40% of his company for $1 billion to Yahoo! (YHOO_). Baidu and Tencent were early days. Sina (SINA_) was a boring AOL(AOL_)-type company.
When big U.S. brands came to China -- whether MySpace or Google (GOOG_) -- they brought capital, know-how and coolness.

That Was Then

Today, things are much different in China. The market is flooded with capital. Any private company with a decent business plan can come up with some money.
There is tremendous technical talent available and it is much cheaper than in the U.S. It is getting a little competitive for the best talent in Beijing, Shanghai and Shenzhen but the costs are still far lower than the U.S. and the supply is very high.

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