Never mind the Great Firewall

There’s a memorable scene in The Social Network, the film detailing the rise of Facebook, when the site’s founders meet early on with Napster creator Sean Parker.

“This is no time to take your chips down,” Parker tells them. “A million dollars isn’t cool; you know what’s cool?”

 His next words – “A billion!” – leave them awestruck.

Whether or not that exchange actually took place, it seems pretty quaint now, given the social networking site was valued at around $70 billion in late June when GSV Capital, a publicly traded investment firm, purchased a small batch of the company’s private shares via Second Market. That in turn caused GSV’s stock to soar 42 percent in one day, creating $14 million in new value in just under seven hours, the Wall Street Journal reported, noting the “Facebook fever” gripping investors.

That enthusiasm certainly isn’t limited to Silicon Valley-based internet companies. It might even be greater in China, where the venture capital industry has been rapidly expanding as domestic start-ups proliferate. China-focused VC funds are on track to raise a record amount of capital this year – $8.1 billion was garnered in the first half of the year alone, putting the sector on track to significantly surpass the $10.3 billion raised in the whole of 2010, according to Chinese data provider Zero2IPO. And that of course doesn’t count the numerous angel investors, high-net-worths and other providers of capital eager to back promising Chinese entrepreneurs.

The country’s booming internet sector is driving much of the innovation and investment. At the end of June there were 485 million internet users, according to the China Internet Network Information Center. The number may seem high already, but internet-focused data provider Internet World Stats notes that China’s total Internet penetration is just 36.2 percent; equivalent ratios are much higher in developed markets like the US, where penetration is 77.3 percent, suggesting ample room for growth in China.

One of the groups hoping to capitalise on this projected growth is former Google China head Kai-fu Lee’s investment firm, Innovation Works. It recently raised $180 million from a group of heavy hitting investors to target Chinese internet start-ups. Demand was so high, the fund thrice raised its target, having originally intended to collect just $100 million, Lee says. Innovation is also reportedly raising an RMB-denominated fund.

The US dollar fund garnered commitments from renowned investors like Silicon Valley “super angel” Ron Conway – an early investor in Google, Facebook and Twitter – and Russian entrepreneur Yuri Milner. Big name groups including Silicon Valley Bank and Sequoia Capital, which has its own China arm, also backed the fund.

Their interest is not difficult to understand – internet usage, mobility, monetisation and e-commerce are all expected to grow more rapidly in China than they have in the US, Lee has said.

Though surely, part of the pull was also because of Lee himself. Having returned to China after studying and working in the US, he’s one of China’s most prominent ‘sea turtles’. And his resume is impressive: he led Google China from 2004 to 2009; spent the seven years prior working for Microsoft in both Beijing and the US; and he also spent six years working for Apple’s interactive media group.

And then there’s also the firm’s incubator approach to consider, which has likely piqued interest as well. Innovation Works keeps businesses in a ‘captive pipeline’ for a six- to 12-month period, giving companies support and advice as they develop. Thereafter the firm chooses to fully back only the best performers with “billion-dollar potential”, Lee says.

Billion-dollar potential is nothing to sniff at. But given how rapidly China’s internet sector is growing, it’s not far-fetched to think that some companies, like Facebook, will soon look back on that figure and laugh.