Payback Time

Henry Wong knows the art of the deal. Like many venture capitalists, he also knows a hot market when he sees one, and he's now looking for a big payoff by funding wireless ventures focused on the Chinese market.

The difference is that Wong understands how much the art of the deal can change according to the canvas on which it's painted. His edge is his unique knowledge of the unique rules that govern the world's fastest growing wireless market — and his willingness to use every tool at his disposal to maximize his chances of winning.

Wong has already founded and nurtured three upstart equipment vendors into existence, later selling them or taking them public. Late last year, his current firm, Crystal Ventures, launched a drive to create a $150 million venture fund that will invest about 40% of its capital in start-ups based in Asian locales such as Hong Kong, Taiwan and Singapore, with the biggest emphasis on China. The rest is earmarked for U.S. entities trying to break into the same Asian markets, as well as India. And while the fund — officially labeled the Crystal Internet Ventures Fund III (CIVF III) — isn't specifically shooting for wireless vendors, that's where most of the action is going to be, Wong said.

“Wireless is a hot, hot word in our vocabulary right now,” he said. “China has become the number one wireless population this year, and it's growing so fast. It's an unbelievable opportunity.”

How hot?

The fund, which opened in December, already has raised $100 million and could be fully subscribed by the middle of the year. It represents not only Crystal's first significant foray into wireless, but also a big strategic departure for the company. Typically associated with early-round funding, Crystal's previous two funds provided the money behind several successful telecom vendors, including Cobalt Networks (acquired by Sun Microsystems in 2000) and LGC Wireless. But this time, Crystal isn't looking to be a seed or angel investor. CIVF III wants to be the venture partner that adds the finishing financial touch.

“They have to be shipping a proven product,” Wong said. “Maybe all they need to do is customize it locally. But I don't have the patience to wait another 18 months.”

Wong said he's really looking for companies that have been selling telecom equipment in the U.S. but need some handholding in China. Having spent a good portion of his career in China, Wong not only speaks the language, but he also knows the right things to say. And if experience has taught him anything, it's that business in China is very much based on relationships.

“I call this ‘smart business development,’” he said. “Dumb VC development is giving you money and tell you to go do it yourself. People need introductions. I will hand-carry the CEO and CTO [of CIVF III portfolio companies] to China with me and get them through the rapport and smiling faces first.”

It's not just the introduction and formal dinner that Wong will handle. In many cases, he said, doing business in China requires making sure you have the right people on your side — even if it means hiring the sons and daughters of the politically connected. While that's not the only entry into a large customer's stable of vendors, it often can be the tipping point, he said.

“His or her function is to open the door for you and shut the door for you,” Wong said. “Imagine if you are among five [softswitch] vendors standing in front of China Telecom. They all sell basically the same softswitch, and they all work. They can get a packet from A to Z. Who do you think is going to get the contract?”

And while such an attitude might raise eyebrows in the U.S. market — particularly given the recent spate of ethics charges against public company executives — Wong believes hiring insiders to get the sale is part of the American business tradition.

“There's nothing unethical about it,” he said. “Having someone to hold your hand while making a sales call is what we as Americans have done in the past. It's only been through the dotcom go-go years that people started buying things without thinking.”

Wong, who came to Crystal Ventures after serving as founder and chairman of signaling vendor SS8, isn't just spouting bravado. His experience has proved that getting into China pays off.

Prior to SS8, Wong co-founded XaQti Corp., a network processor manufacturer acquired by Vitesse. XaQti's sales mostly came from the Asian market, and Crystal Ventures has also seen early signs of positive returns from the Far East: LGC Wireless, which developed a solution for indoor wireless coverage (among other technologies) and got its seed funding from Crystal, now brings in about $25 million per year in revenue, with a large percentage of that coming from China and Korea.

In fact, the market has become so attractive that, while CIVF III may fund some Chinese companies wanting to go public on Nasdaq in the U.S., the vast majority of capital and products will be flowing to China. It's no secret to anyone making a paycheck by selling wireless equipment: Most of the largest vendors have been knocking on Chinese carriers' doors for years. Nortel Networks just celebrated its 20th anniversary in the market, and Motorola has been there even longer.

The draw always has been the potential. It's just now starting to blossom in a big way, said Bob Mao, president of Nortel Networks, China. “In five years, China has gone through a tremendous growth that even the greatest predictions could not have imagined,” he said. “The numbers are astounding.” At the end of 1998, China represented about 10% of the worldwide subscriber base for wireless users. By the end of last year, that percentage had jumped to 20%, he said.

However, the chance to score big in China will be limited for small vendors, according to Mao. “No foreign supplier is going to win new technology contracts without demonstrating a history of winning in the G7 countries,” he said.

Wong, of course, thinks such talk is nonsense, noting that given the speed at which the Chinese market is growing, there is plenty of room for vendors of all shapes and sizes — provided you know the secret words, that is. Among the technology verbiage getting the best response right now in China is text messaging and press-to-talk. Though not committed to any one company in either market, Wong said he's hot on the hunt in both sectors. Broadband wireless also will be a huge market in China — the lack of wired infrastructure is going to demand such technology. “Text messaging is hotter than hot in China right now,” he said. “As soon as they figured out a way to type in Chinese, it just took off.”

Finding the next big technology shouldn't be difficult, Wong insists. Although CIVF III is looking for later-stage investments, he said his modus operandi would remain relatively the same as with previous start-ups. That likely will mean helping a company though the first stages of introduction and then letting the management team handle the “bits and bytes” stage.

Given his experience and familiarity with both the language and the customs, Wong is convinced he can be an asset. “I've got one foot in Beijing,” he said, “and one foot in the U.S.”