China's New New Economy

China has a new breed of investors and wireless startups. The good news is, they've avoided the dot-com hangover.

Where's the cash?
Given the numbers, the environment and the expectations it would not be surprising if China's wireless world went the way of the Internet. But while the young and eager wireless companies have a lot of similarities with their predecessors, they are fundamentally very different. Their executives may come across as the reincarnation of the dot-com animals, but they are not the same.

What separates them is simple: money, or the lack of it. These people are not a part of an industry that is driven by the weight of money. Indeed, they are part of an industry that is defined more by the absence of it. Before, during the Internet days, it was almost impossible not to raise cash. Now it is almost impossible to get it. Before, the initial public offering was around the corner. Now, a stock sale of a high-tech startup is little more than a dream. This has had a great impact on the way the companies operate and the way their executives act. They are engaged in less of a financial exercise and marketing event and far more focused on actually doing business and making money.

"The difference between the wireless days today and the Internet days of before is that there is a lot less funding but more revenues," says Robinson.

"More down to earth, nuts and bolts business building," says Sulger. "People are doing things here almost purely for the bottom line. You won't hear how much money they are going to burn or months to go and all that kind of crap. They are much more focused on when is the first month in which they are going to break even, where they have broken even, more on what their margins are.

"There is a great disconnect between equity valuations and the health of a business," says Sulger. "In 1999, equity valuations where too high compared to base financials. In 2002, equity valuations have gotten too low. I tend to believe that the only constant you can really focus on is the bottom line."

If it smells like a dot-com...
Sulger's group is a good case study of the new New Economy in China. Dot-comish elements are still present. The offices are 'funky.' Sulger dresses casual. One of the subsidiaries is a bar. And some of the products are tough to take seriously. For example, the Lunar Group's Linktone subsidiary offers a 'pet park,' whereby subscribers can take care of virtual tigers, koalas and pigs, feeding them, sending them to bed and reassuring them.

But the former Goldman Sachs banker (who says he prefers suits anyhow) makes sure that people understand that he is running a real business. He'd rather talk about the minutia of his operations than the big picture. He prefers to discuss the sale of products, not the sale of stock. The conversation gets, at times, refreshingly boring.



Eric Rosenblum, CEO of Sumit, one of Lunar's subsidiaries, says he is quite happy that the go-go days are over. "I did the '99 boom thing too," he says. "You could raise money, but you had to spend the money on marketing. You could not concentrate on the business. You had to buy the market."

Dot-com ghosts still linger. No matter how competent these companies may be, or how well they are doing, they have to face skepticism. They have too much in common with Internet startups not to be mistaken for them. And in the post-Enron world, where whole numbers have lost their absolute qualities, even a profitable company has to contend with doubts. Indeed, the apparent success of these companies can be a hurdle: They have a good story, strong management and lots of customers. It all sounds too familiar. Some people are defensive: "If this is another dot-com rising from the ashes story, I want nothing to do with it," says a wireless entrepreneur in China.

But in the spirit of the new age, most just soldier on. Faith is not the key element of these companies. They live for a giant and very real market. So these companies go about building their systems and selling their services. It is the kind of world where IPO as exit strategy is at the bottom of the list. At the top, or at least near the top, for anyone who is honest, is profit: making money from the business.

Humility is the new currency; hyperbole avoided. "I am surprised at myself for saying this," says Thomas D. Kirkwood, managing partner at Mint. "We are comfortable."

Regular trips to Tokyo
Japanese companies are showing a good deal of interest in China's wireless world and in the small companies taking a shot in it. Since China is largely working off the DoCoMo model, a lot of companies involved in i-mode see China as a natural place for their businesses to grow, an economy where they can leverage what they have already built. Investors in Japan meanwhile understand the market and have already seen the success of the model in Japan.

Index, for example, has put some cash into Linktone, the Lunar Group subsidiary. At the same time, the wireless entrepreneurs in China say that Japan is one of their focuses. They make regular trips to Tokyo, seeking a broad range of relationships and opportunities. "We look out into the rest of the world for leading edge concepts and business models that have been successful," says Atkeson. "Obviously Japan is one of the primary places we look."

"Our interest with the Japanese is across several fronts. Japan has a fairly good selection of Java-related content as well as sophisticated ringtones," he adds. "In terms of content, that relationship can go both ways," he says. "China can be a low cost source for development of content for Japan, Korea and Taiwan. So we are interested in meeting with and working with Japanese content developers and aggregators."

"At an investor level, the Japanese are interesting strategic investors," he says. "They understand this space very well." @