Tech Boom Sweeps China, But Some Sense a Bubble

David Chao, co-founder and general partner of DCM Capital Management, a venture-capital firm that has heavily invested in China, said he has started pulling out some of the company's money. "Many domestic Chinese companies that have recently gone public are getting crazy [valuations]. No matter how you see it from the outside, it certainly looks like a bubble," Chao said.

Sohu.com, an online portal similar to Yahoo, for example, has recently been trading at 74 times projected 2007 earnings. Tencent, whose instant messaging service QQ is the rage in China, and Ctrip.com International, which, like Travelocity, Expedia and Orbitz, provides comparison-shopping for airplane tickets, has been trading at 92 times earnings.

Baidu.com, China's biggest rival to Google, has been trading at a price-to-earnings ratio of 159. Google, by comparison, has been trading in recent weeks at 50 times projected earnings.

"While everybody believes the growth is going to be extraordinary, it's going to have to be really, really extraordinary to justify some of the valuations that are beginning to be seen in China," said Colin C. Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business. "Going into China right now might end up with some bad results."

Joseph Chan, a managing partner for Pillsbury Winthrop Shaw Pittman who moved from San Francisco to Shanghai in 2006, said there are differences between the U.S. dot-com bust and what's happening in China.

"The scope of investment is much greater in China. In the U.S., it's all tech," said Chan, who published a book about venture capital and private equity in China.

In China, Silicon Valley VCs are pouring money into more traditional businesses like restaurant chains and educational services, in addition to tech. By the end of November, venture-capital firms invested $3.18 billion in China, up almost 80 percent from the year before, according to Zero2IPO Research Center in Beijing. Money going into technology, however, was just 42.5 percent of all investment this year, down from 61.5 percent last year.

But in other respects, there are parallels between the dot-com booms. Many entrepreneurs here are inexperienced and young; chief executives say the average age at their start-ups is in the mid-20s. Their offices are filled with Ping-Pong tables and stuffed animals. And like their U.S. predecessors, many Chinese start-ups are learning that a high number of "eyeballs," or Web-site visitors, doesn't necessarily translate to cash.

BabyTree (modeled after social-networking site Facebook), Baihe (similar to matchmaking site eHarmony) and Tudou (like video-sharing site YouTube) are among the most popular sites in China, but all are struggling with how to make money from their users.

BabyTree, funded by Matrix Partners, based in Boston and Silicon Valley, targets young parents who discuss, shop for, and exchange pictures of, their children. The site, which recorded more than 900,000 users last month, is not profitable and does not expect to be for at least three years.

Allen Wang, chief executive of BabyTree, said that the company hopes to bring in a mix of advertising revenue, e-commerce and unspecified experimental offline ventures. "BabyTree is a community. For a community's development and construction, you need a long, healthy environment," Wang said.

Matchmaking site Baihe has raised a total of $11 million from Silicon Valley's Mayfield Fund and other venture capital firms. While most of the site is free, several thousand users pay $1,000 a year for a VIP plan -- a major source of the company's revenue. Tian Fanjiang, co-founder of Baihe, said the company remains in the red mostly because of high spending on a national advertising blitz. He hopes to be profitable next year.