On Google and China, U.S. investors mostly mum

Many U.S. venture capital and private equity firms remained silent last week as Google continued its stand-off with the Chinese government over censorship of its search results and cyber attacks against its and other companies’ computer systems, raising questions about the long-term impact on U.S. investments in China.

At PE Week’s press time late last week, Google was preparing for talks with the government on these issues and on the status of its operations in China, where it has offices in Beijing, Shanghai, Guangzhou and Hong Kong.

A Google spokesman says he couldn’t speculate on what impact Google’s actions might have. However, a pullout of Google from China seems likely.

One source who works with U.S. venture firms says the confrontation may be “a watershed moment” for these investors, who have been lured to China over the last decade by the country’s rising standards of living and more open and liberal central government.

“As much as China has advanced over the last several years, it still has a Communist government, and that government can change policy on a dime,” says the source, who spoke anonymously to preserve relationships with the firms.

“I think the Chinese government knows exactly what it’s doing with Google, and it’s the first time that U.S.-based VC firms with interests in China are seeing how strong this government can be when it wants to be. Their investments may be more risky than they thought.”

Nearly a dozen firms with Chinese funds or investments—including DCM, Draper Fisher Jurvetson, GGV Capital, Intel Capital, Kleiner Perkins Caufield & Byers, New Enterprise Associates and Sequoia Capital—either declined to comment for this story or did not return calls seeking comment.

Accel Partners, however, points to an acquisition earlier this month of one of its investments as proof that Google’s actions will probably have little impact on U.S. companies doing business in China, whose economic growth seems unstoppable.

San Francisco-based Mochi Media Inc., an online gaming network that previously raised $14 million in venture funding from Accel and Shasta Ventures Management, was acquired this month by Chinese gaming company Shanda Games Ltd. for $80 million in equity and cash.

In the last six to nine months, Ping Li, a partner at Accel, says the firm has had a lot more business opportunities and conversations with Chinese gaming companies. He says the Internet has democratized gaming, and that a lot of Mochi’s traffic came from overseas, especially China.

“Also the rise of social games on sites like Facebook draws China’s interest. Virtual currency started in Asia, and is now [growing] more popular here,” he says.

“Our team in China continues to invest,” he adds.

“Google has a unique philosophy they’ve carved out for themselves—do no evil,” says Douglas Tucker, an attorney who heads the China Law group at Quarles & Brady in Chicago and does not represent Google.

“They’ve set an expectation among their stakeholders that this is their operating philosophy, and I think they’re stuck with it,” he says. “They feel compelled to take steps that other companies wouldn’t feel compelled to take.”

Tucker, whose firm’s clients include private equity funds, institutional investors and large publicly traded companies, says that many government officials in China are “very nervous” about the Internet’s potential to spread fraud, pornography and dissent in China.

“It’s going to take [the China government] awhile to get the level of comfort with the Internet that Western businesses would like to see them have,” he says.

Despite that, Quarles & Brady’s China practice has grown rapidly over the last four years and now also represents Chinese clients who want to do business in the United States.

U.S. venture capitalists and private equity firms have also been more active in China this last year. Sequoia, for instance, invested $63 million in American Dairy during the summer in exchange for common stock in the company, which distributes infant formula in China. Intel Capital took a couple of its portfolio companies public on Chinese stock exchanges.

DCM co-founder Dixon Doll told Bloomberg News earlier this month that he expects there will be more IPOs in China over the next few years, although a DCM spokeswoman says it would be “out of context” to apply his comments to the Google-China situation.

“DCM is not comfortable commenting, even in a general sense…given the fact that they have many partners [in China],” the spokeswoman says.

Tucker says American companies have to deal with China because they can no longer count on the United States being the world’s number one producer of goods and services. China is overtaking Germany as the biggest exporting nation and now has a car market larger than the United States’.

“China has a burgeoning domestic entrepreneurial and venture capital community, and this government will do like any other government —it will protect its own at the end of the day,” says the venture capital source. “If they see an opportunity to boost their internal technology or venture capital companies at the expense of outside interests, they’re going to do that.”