Keeping the VC-30 in Perspective

By Douglas C. McGill

(Shanghai, March 19) It took me a big trip, halfway around the world, to get a little perspective on the Virtual China 30.

Reading an e-mail here in my Shanghai hotel room brought the point home.

It was from a 24-year-old single mother in the U.S. who'd sunk all of her savings into Vertical Computer Systems (ticker: VCSY), a Los Angeles-based Virtual China 30 company that recently opened www.TheChinaBridge.com, a bilingual portal Web site.

The stock was trading as low as 25 cents in February before it became the China Internet flavor-of-the-week in January and shot to more than 6. Then reality set in (as is its habit), knocking VCSY back to around 1.6, where it sits today. My correspondent bought at 5 "amid all the hype" as she said, then watched the stock crash as quickly as it had climbed.

"The money was for my daughter's education," she wrote. "I'm in a panic, I don't know what to do. Do you think it will go up again? Can you help?"

I only wish I could.

Then there was the fellow who wrote a few weeks back on a Raging Bull bulletin board about another VC-30 company, a would-be China Internet holding company, a la CMGI, called The Hartcourt Companies Inc.

The gentleman was so impressed with Hartcourt's 5,000+% share price rise in 1999, and so taken with the company's grand plans for building an Internet empire in China, that he postponed paying all of his monthly bills for two months (except his mortgage payment) to buy Hartcourt stock.

Another of my correspondents bluntly wrote in an e-mail: "Can you tell me which of the Virtual China 30 stocks you would recommend for my retirement fund?"

In the measured language I attempt to muster in all my e-mail correspondence, I suggested to the gentleman that these stocks were hardly the best way to guarantee financial security during one's Golden Years.

That's what I wrote.

But here's what I was thinking: "Are you nuts?!@#!!"

I guess it's time to get a disclaimer on the record again:

Folks! IMHO! These are inherently risky stocks, in a ferociously fickle industry, in the middle of a bubble! Ninety percent of them will be roadkill on China's information superhighway within five years! Spend on them only what you would spend playing 21 on a once-a-year Las Vegas gambling vacation!

Does anyone here remember TheGlobe.com? (Was: 43 Is: 7) @Home? (Was: 99 Is: 28) Netscape? (Was: The Microsoft-killer company. Is: Absorbed by AOL.) Pointcast? (Was: The revolutionary "push" technology company valued by Rupert Murdoch at $450 million in cash. Is: Defunct after being bought by Entrypoint for $10 million in cash and shares.)

Any one of these companies, at their peak, had more capital, more manpower, more management, and more of a potential market within a five-year time span than any of the Virtual China 30 companies has today.

What's more, every one of the Virtual China 30 companies are facing a barrage of risks that none of these U.S. companies ever had to face.

In the past couple of days I've interviewed or chatted with executives at a number of Internet companies in Shanghai including Haisong Tang at etang.com, Gao Limin at stockstar.com, Kirk Jobsz at postkard.com, and Andrew Tsuei at M18.com.

All of these executives stress ever-present, China-specific risks including: 1) The notoriously difficult consumer market in China, which has frustrated hundreds of "old economy" Western companies going after the elusive 1.4 billion consumers, and will likely do the same with "new economy" ones; 2) China's poorly developed Internet infrastructure; 3) The profound reform of the country's entire banking system that is needed before significant e-commerce can occur; and 4) The ever-changeable regulatory environment in China concerning control of Internet and Web site content, eligibility for foreign listings, online security and encryption, and a host of other issues.

Finally, many of the VC-30 companies are designed to make their owners and select "friends-and-family" a bundle in the primary equity market. The lack of attention to building a strong sales focus in these companies' early days could leave public shareholders holding the bag. Of course, this is true for many companies world-wide and is not just the case with some China Internet companies.

Okay, I'll stop being a fogey now.

After all, there is a point to the VC-30. They are the vanguard of what will one day be the world's largest population of Internet users, spending online an amount second only to what will be spent in the United States. All this within a time frame of, say, 15 to 20 years. The social, cultural, and economic changes that the advent of the Internet in China will bring, not only to the Middle Kingdom but across the world, will again in its magnitude be second only to changes wrought by the Internet in the U.S.

Maybe only two or three VC-30 companies will survive to the year 2020. But those companies could change the world.

As for all the companies that don't survive, their life cycles of rising and falling will chronicle the development of a new world- and life-changing technology.

It will be an education to watch them closely.

It could even be profitable -- if everything's kept in perspective.

To reach Douglas C. McGill: dmcgill@virtualchina.net