DCM’s David Chao On Investing In China, And VR, And, Oh, Hey, Cannabis

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DCM Ventures, the early-stage, cross-border venture firm, has scored many hits by sticking it out in China since nearly its 1996 founding, even as many competing firms – because they were unable or unwilling to invest the time in local relationships – have come and gone.

Among the many China-based companies backed early on by DCM are Renren, Dandang, and Vipshop, all of which held highly successful IPOs and have since grown into far bigger outfits. Vipshop, for example, went public in 2012 with a market cap of $600 million. Today it’s valued at $8.4 billion.

Still, even DCM cofounder David Chao acknowledges that right now, investing in the country has more than a few challenges. Yesterday, we chatted about the current turmoil there, as well as where Chao plans to focus more of his attention this year.

TC: Happy New Year. Also, how nervous are you about what’s happening China right now? You spend a considerable amount of your time there still, don’t you?

DC: I spend between 30 and 40 percent of my time there. Look, there’s a definite slowdown, but I do think the world is a bit too jumpy. You’re talking about an economy – the second largest in the world — that’s still growing 6 to 7 percent annually, compared with a lot of developed countries like the U.S. and Japan that are barely growing. Also, if you look at Japan or the U.S., when it went through a recession over the last 10 years, we lowered our interest rates and we pumped a lot of money into the economy through [quantitative easing]. Meanwhile, China has a lot of room still to lower its interest rates. It has a lot of macro cards left to play.

TC: So its slowdown is overblown, in your view?

DC: There’s no question that it has hit a hew phase. For a decade, it was growing at 10 percent. Now it’s 6 or 7 percent. Of course you’re going to feel a slowdown. Labor costs in major cities are rising rapidly. A good programmer or engineer in Beijing used to cost a quarter of a Silicon Valley engineer and now, arguably, for junior employees, it’s maybe 80 percent. A lot of areas, including smart phones, are also slowing down in terms of penetration. Even still, I think these market jitters are exaggerated.

TC: What about valuations? There are still enormous deals being announced out of China. Are you still shopping as actively there?

DC: The last two years, there was a bubble in the U.S., China, Japan, and even Korea. It’s kind of unusual to have all go through a bubble at the same time, but it was all growing overheated.

A lot of the financing announcements that you’re seeing now were probably deals that got done in September or October of last year and finally closed. In the U.S., you’ve had these companies going public below their private market price, and in China, there’s kind of a similar phenomenon going on in the later-stage market where people are much more cautious about paying into high-priced rounds. A lot of the term sheets that were out in Q4 haven’t closed, and there’s been a lot of pricing negotiations going on.

In terms of harvesting, it’s a little tougher right now. But we stick to our knitting. We’re still investing in [regional] seed and Series A deals and new companies.

TC: What else are you investing in, or planning to invest in?

DC: VR is a new platform that was underrated for a long time and is finally coming to fruition. [Our investment in] Matterport in the real estate space [it creates 3D visualizations of physical spaces] is doing well.  Everybody is making cheap VR machines, like Google. The smart phone guys are making their products adaptable to VR. It’s going to go from an esoteric technology to something real and usable and I think it has a much better upside than any platform to come out in the last two years.

TC: Is it still largely a U.S phenomenon?

DC: The hardware is being manufactured in Asia but the applications, the newest greatest developments, are happening in the U.S.

That said,  I think China and Japan will catch up quickly because the killer app will probably be games and these vertical solutions [like Matterport’s] and movie-like content, and a lot of that will start to be produced worldwide, just like mobile apps were produced worldwide.

TC: What other than the budding VR ecosystem are you tracking? 

DC: Cannabis. California is about 50 percent of the U.S. market, and a ballot that would legalize the recreational use of marijuana for adults in California will most likely pass in November, just like in Colorado, and we see a whole new economy growing around that.

Just like you have smart phones, you’ll have certain vaporizers and other hardware that will be easy to use. Like you have VitaminWater and soft drink brands, you’ll have cannabis brands. There hasn’t been a lot of investment so far; people have been conservative because of the nature of how it would be perceived, but come November, a new world will open up.