By: Chris Evdemon

CHINA has provided — and will continue to provide — the most exciting market opportunity for early-stage ventures.

The Chinese market is booming for all industries. With sizeable government spending — over a third of gross domestic product — helping to pave the way, domestic consumption is rising. And there is plenty of capital for qualified projects.

Yet start-ups will not find it plain sailing in the Chinese market. China’s venture capital (VC) market is already the world’s second biggest, but it’s only one-quarter the size of the biggest: the United States market.

The VC market in China is dominated by growth stage and pre-IPO opportunistic funds looking for ‘long-hanging fruits’ — growth companies with well-established products, usually in traditional industry sectors, and ready for public listing in a couple of years.

China’s ecosystem for entrepreneurship and early-stage venture creation — especially in the technology, media and telecommunications (TMT) sector — is only beginning to emerge.

In the US, the angel financing network is estimated at more than 250,000 individual investors — and Silicon Valley’s best known companies are supported and funded by angels. In China, the seed investor and angel network is still small, highly fragmented and relatively immature.

In addition to a funding gap, a start-up in China faces many other challenges in taking off: a complex and fluid legal environment, restrictions on foreign capital inflow and outflow, and a lack of acquisitive interest in start-ups.

Where are the biggest opportunities in China in the next few years?

Early-stage venture capitalists in China are currently not focusing on first institutional investment opportunities in TMT, cleantech and healthcare companies, but on those in phases a little later.

China’s TMT sector is now entering its third phase of growth in the online software market, which is expected to be dominated by the consumer Internet, mobile Internet and cloud computing services.

China has 338 million Internet users — more than any other country in the world. There are over 220 million mobile Internet users, the latter with a striking, average age of just 21 years.

E-commerce usage has grown almost four times in the last three years. Propelled by the simultaneous explosion in mobile Internet and e-commerce, as well as increasing consumer spending power, the market and investment opportunities are unbelievable.

While China may seem like a market ripe for the taking by global Internet giants and other established players abroad, there are major differences that give Chinese domestic firms a ‘home-court advantage’. These include demographics, usage habits, government regulations and an ever-important distinct local mindset.

Anyone who has recently surfed one of the popular Chinese websites would immediately notice the differences in user interface aesthetics and overall user experience. These pose a big hurdle for major Internet companies in building a presence in China, with most failing to make it ultimately.

Local firms have an unprecedented and invaluable opportunity to capture this upside with customised products and business models that fit China’s distinct characteristics, although this window of opportunity may only exist for the next 3-5 years. On the other hand, the global economic crisis in the past two years has reinforced the need for investors to manage risk in their portfolios.

To capture these opportunities and address the challenges outlined above, Lee Kai-Fu left his position as CEO of Google China last summer in order to start Innovation Works, a unique hybrid model of a true incubator coupled with a captive early-stage fund. Innovation Works focuses on building China’s next generation of e-commerce, mobile Internet and cloud computing companies. It has already kicked off six exciting projects.

How can Singapore start-ups enter the Chinese market?

In the past decade, Singapore has focused on bringing in ‘foreign talent’ and attracting large multinationals to set up their Asian headquarters or manufacturing base in the country. Singapore’s investments in regional countries have been led largely by Temasek and other state-owned companies.

Although this strategy has worked well so far, it appears timely now for Singapore to export its best talent, innovation and start-ups to the Asian growth markets.

Singapore entrepreneurs have lots of opportunities to venture into the Chinese market and ‘fight’ for a share of it, like many of the Chinese ‘returnees’ flocking back to the mainland.

In infrastructure, organisation, retail and TMT services, Singaporean entrepreneurs are already familiar with the way most Chinese urban areas are developing. But they still need to make careful preparation and plan well — and they must be ready to commit themselves to the market.

Any venture in China invariably requires patience and a long-term view. Foreigners entering the Chinese market must identify and work with the right local partner — the ‘identifying’ part being one that can take much time and effort, including making many trips to China.

Singapore investors venturing into China must constantly ask themselves: ‘What do I bring to the table that my Chinese partner needs from me?’

It’s a question that will have varying answers over the course of the business partnership.

The writer is investments & business development manager at Innovation Works in Beijing and a speaker at the upcoming echelon 2010 (www.amiando.com/echelon2010), a Web technology event organised by e27 and supported by NUS Enterprise

This article was first published in The Business Times.