So what has really worked and what has not worked? Especially when you compare the U.S., India and China scenarios?

When we started in China we thought it was best to invest in the best “state-born enterprises.” Pick the best company owned by the state, invest in them and help them be more efficient. That philosophy turned out to be okay. We backed a couple of companies like the largest washing machine maker and the largest refrigerator maker, but the problem is that the return is not quite there. Second there are the social aspects of those state-born companies. They have a lot of mouths to feed and they don’t lay off people to be more efficient. So it is just difficult to make things happen.

This is despite the fact that China supposedly has the largest middle class and the largest potential consumer market?

This is just the state-owned enterprises. The culture is very different. Moneymaking is not the first priority. It is important but there are some other areas that they have to take care of. So that doesn’t make sense for us going forward.

As a second strategy, we always thought that if we entered into a joint venture with leading industry groups in China to address the local market it could be very attractive for us. That turned out not to be the case. The culture is different and it takes an average of more than a year to sort out what the expectations are so that people aren’t pointing fingers, and accusing each other. The other thing is that the industry groups have much longer horizon. They can lose money for 10 years and its fine. That doesn’t make much sense for us. So we have also ruled out joint ventures with local industry groups.

What really worked for us was what we called the “returnee.” The Chinese entrepreneur, educated in the U.S., who has worked in the U.S., going back to set up a company in China. That is very similar to what we have seen in Taiwan for the last 20 years. That was the best source of returns for us and we are focused on that area.

In India, it is very much similar. If you focus on addressing the local market, it is not easy. We made investments in local pharmaceuticals, in a big drug manufacturer. We also invested in the local media, in productions. And it was just difficult to make the returns we wanted. In India now we only focus on IT outsourcing, software and semiconductor development. Those are the big areas for us. Biotech, medicine, and life sciences and other areas we are looking at that, but we have not made any investments yet.

In India’s case, what seems to have worked is cross border business between India and U.S. So when you translate that to a Chinese or a Malaysian scenario, what is the model?

It is about the same. For example, in Malaysia we backed one of the largest packaging companies for semiconductor packaging called Unisem. Because of the excess of low cost labor, intensive packaging material experience, government support in terms of financing and so on, the company was able to address customers from Japan, the U.S. and Europe. So it’s really just outsourcing, and the end product is selling outside the country. That turned out to be a huge winner for us.

What are the key differences you observed when you looked at India versus China as a VC?

I think there are similar strengths, similar weaknesses and some differences. So I will talk about some of the strengths. One is the huge market. Those two [India and China] are very big markets — for example when you talk about wireless subscribers or other market opportunities.

One weakness common in both countries is the scalability of management. In China the bottleneck is experience of the management that you have to recruit. In India it is about the same. Both have a tremendous network in the U.S. That is again a very big asset.

In terms of differences, I think India is a little bit better in terms of listing. You can have a local market and you can list and have liquidity. In China it is restricted for foreigners to do that. So there is a very limited window of opportunity for foreigners to play in the market. Secondly the legal system in India is much better and more mature. In China it is rather new. Enforcement of IP protection is less effective. But that is improving.

What about the role of government in India and China?

I think China has a much stronger government initiative, which is more organized and more centralized. When they make a decision and they want to promote something, they are very rapid, aggressive and capable. The mission is done. I think India is perhaps too democratic. A lot of the time people are debating. Somehow progress is slower than in China. In China the central government may decide and get the funding ready. You can see measurable results and make it happen. So that is a big difference.

There is a lot of talent in the Indian community in Silicon Valley. Not a lot are going back and building companies in India. There is so much talent and it is not capitalized on. That can be made worthwhile. In contrast there is a major movement of Chinese entrepreneurs in Silicon Valley moving back to China because they see the opportunity. Capital is available, the government is supportive and the infrastructure is building up and they are moving back.

That’s a big difference. And if the Indian government doesn’t make some changes they are losing out, because of entrepreneurs not moving back.

In terms of VC returns, what are the challenges of exiting an investment in India?
On the exit side, in the IT services area, big cap software companies like Wipro and Infosys enjoy a very nice multiple of revenues. But the medium and smaller ones are not able to get the liquidity in comparison. That is one area that I hope the Indian government will start to address. Hopefully the Indian markets will get more responsive and more mature, to appreciate small up and coming companies— like Nasdaq in the U.S.

So people talk about the challenges to the Indian IT services industry from Chinese IT services and consulting forms. What is your take on that?

I went to visit a software park in China. One of the big areas that they are focused on is IT services. IT outsourcing in China is going to be big. A couple of IT outsorcing companies will come up in China, and I know a couple of companies are being set up as startups. They will be competing with some of the Indian outsourcing companies.

You pointed that one of the key challenges is the management. What are VCs doing to help companies scale?

I think it is a bottleneck. It is a phenomenon throughout Asia, not just India and China — management scalability. In the U.S., when you build a company, you go to a search firm, find the best person you can and bring them in. In Asia it is not as easy to find those individuals. Even though there are some working for multinational companies, they are very one-dimensional. They are either very strong in manufacturing or in sales but not “all round.”

It will continue as a bottleneck for venture guys investing in companies. There are very few CEOs that you can really back. I think there is a lot of effort to try and recruit some good CEOs from the U.S. and attract them to move into some Asian country.

And how successful that has been? How has the experience of going back been for those people?

They had to have passion to go back and do something in their country. There has to be the drive at this juncture of their life to do something meaningful and big. Morris Chang [founding chairman of TSMC] quit a good job in the U.S. and moved to Taiwan because he saw how foundry services was going to be big. And it turned out to be the right decision.

This is a huge market. Otherwise why would they quit a job in the U.S. and move to India, China or Malaysia. They have to know that they can make a name for themselves and make a lot of money. And very important is government support. The government can give them incentives, tax incentives, housing, or something that will make them excited to move back to their country.