CREATING A TECHNOLOGY HOTBED IN CHINA: Lessons Learned From Silicon Valley and Israel V ENTURE C APITAL A DVISORY G ROUP S EPTEMBER 2005 Summary Report and Suggestions to the CVCA SUPPORTING ORGANIZATION

2 Introduction ½-day strategic brainstorming session - April 6 th – Shanghai. Funds represented: –3i, Accel Partners, Acer Technology Ventures, Apax, Bessemer, Carlyle, Carmel, Ceyuan, DragonTech, Granite Global, HQ Asia Pacific, IDG Ventures, Intel Capital, JAFCO Asia, Legend Capital, NEA, Softbank Asia Infrastructure Fund, Walden Int’l, Warburg Pincus, Yozma and more. Program included: –Hotbed criteria –The evolution of VC in Silicon Valley and Israel –From innovation to growth –How do VCs stay ahead of technology changes and create businesses that ride the right waves –Going global

3 Sessions’ Objectives What does China need to do to turn its emerging innovation centers into sustainable hotbeds? Where is China in the process of developing an active venture capital market? What is the current direction of China’s venture capital development and is it the correct direction? What should be the role of venture capitalists and the CVCA in helping to develop technology hotbed communities in China?

4 The Session Report It is: –Summary of the discussion. –Collection of view points of the participants. –Suggestions to the CVCA based on participants’ input. –The suggestions relate to: Goals that the CVCA could pursue with industry stakeholders. Operational activities that the CVCA could undertake to continue to act as a catalyst for the VC industry. It is not: –Prescription – it is for CVCA to determine their best application to the Chinese market. –Defined timeline and priorities. –Academic research.

5 E&Y Hotbed Criteria Capital Sources –VC, PE, government funding for R&D, capital markets Intellectual Capital –Universities, research institutions, pillar companies Social Dynamics –Entrepreneurial spirit, risk taking, acceptance of wealth creation and failure Tax Legal and Regulatory Environment –Property and IP, tax incentives, stock options Infrastructure –Advisors, physical infrastructure Market –Domestic market, early adopters Attractive Environment –Nice place to live, role models, political stability

6 China Challenges Lack of a Nasdaq-like exchange. Legal restrictions on establishing off-shore legal structures. Weak IP regulation and protection. Lack of comprehensive VC law: structure of taxation. Shortage of management talent needed to build growth companies. Underdeveloped systems for transferring technology from research institutions. Large degree of control exercised by the central government in the venture ecosystem.

7 VC Industry – Policy-Oriented Suggestions 1.Lead the discussion on the establishment of a growth company stock exchange in China. 2.Promote the establishment of a strong national venture capital association. –Promote industry collaboration and give the venture capital industry more influence in the issues affecting it. –Be a catalyst for the VC community in China by leading open collaboration and dialogue with other associations, industry leaders and stakeholders. –National association with affiliate local associations. 3.Promote IP protection. –Litigation is no substitute for education.

8 VC Industry – Policy-Oriented Suggestions 4.Encourage a government focus on the macro-level issues that affect the venture capital ecosystem. –Government’s role is to provide the right conditions to foster vibrant entrepreneurship and investment. –Government need to avoid micro-managing companies and investments. –CVCA can lead the discussion on innovation clusters. Moving existing manufacturing clusters toward a focus on innovation. Proactive and ongoing collaboration among pillar companies (MNCs), universities, entrepreneurs, investors and government. –Keep it simple.

9 VC Industry – Policy-Oriented Suggestions 5.Promote the creation of the conditions necessary to attract and retain foreign investors (VCs, PEs and LPs). –Provide the right tax, legal and corporate governance infrastructure. 6.Promote trust. –Promote confidence building measures such as good business practices, transparency, IP protection and regulatory predictability. 7.Attract MNC core research centers. –Tax incentives and improved legal infrastructure. 8.Ease capital restrictions affecting domestic VC fund size.

10 Association Operational Suggestions 1.Build consensus on a definition of success / vision for venture capital in China. –CVCA can help build consensus around a policy vision and a time-defined roadmap for achieving it. 2.Leverage VC training and best practices education. –NVCA and EVCA educational programs. –Exchange programs with NVCA and EVCA. 3.Establish a Kauffman Fellows-like exchange/fellowship program with the US and other mature VC hotbeds.

11 Association Operational Suggestions 4.Promote and support entrepreneurship / management courses in university engineering programs. –Kauffman Foundation. 5.Establish a global Chinese expatriate and entrepreneurs association similar to TiE. –The contribution of the returnees. –Currently, too many not-for-profit organizations that focus on the China-overseas relationship within the investor-investee community.

12 Association Operational Suggestions 6.Facilitate entrepreneur/VC networking. 7.Facilitate China / India collaboration in the VC/ startup ecosystem. –CVCA can serve as a broker in the China-India corridor to link startups, investors and corporations.