Telstra Ventures isn't worried that China's regulatory overhaul will wreck the country's thriving tech scene—far from it.

The venture capital arm of Australian telecom giant Telstra has been investing in China for the past six years. To date, three of its Chinese portfolio companies have become billion-dollar startups.

The firm has a running bet on the future of enterprise tech in the country, and it has already started to pay dividends. Cloopen, a Telstra-backed cloud communications company, went public at a reported valuation of more than $2 billion earlier this year.

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In an interview this week, Telstra managing director Mark Sherman and head of Chinese investments Chris Pu discussed how they view China's ongoing policy shifts spanning competition, consumer protection, cybersecurity and privacy. The interview has been condensed and edited for clarity.

PitchBook: Will the new rules change how venture investors approach deals?

Chris Pu: For a Chinese investor, the previous 20 years have been a Wild West. People are starting to become more rational in terms of how they want to invest. You want more modest growth with a reasonable responsibility to the tech ecosystem, rather than just spending a lot of marketing money to grab users. I think that's not really the mentality anymore.


How heavily will the regulatory changes impact venture capital?

Mark Sherman: I would use a weather analogy. This is not a tornado, this is like light rain. Could it be three, six, 12 months? Yes. Is it going to be 18 months? Two years? Or more? No.

Chris Pu: In the short term, investors may wait and see. For example, there's a data security law coming out in September. Maybe they decide not to do data security right now and wait until the regulation comes out.

I think most investors are continuing to move along, and the pace of investing will pretty much stay as usual, given we are looking at the long term.


Can entrepreneurs balance the demands from Beijing and from investors?

Mark Sherman: Building a successful, growing economy for the whole society is clearly a goal for the Chinese government. And a couple of the tech companies got a little bit rambunctious. You look on the data side with Didi. You look at the edtech side with New Oriental.

In the short term, stocks are going to be down and there's going to be some tears. But I think longer term, these companies are not stupid. They're going to say, what are the new rules? How do we operate within the new rules? And how can we add value while still helping the government achieve its goals?


Where do you see future growth coming from in the Chinese startup ecosystem?

Chris Pu: I joined Telstra Ventures in 2015 from Intel Capital and I've been investing in China for over the last 10 years. We expect enterprise tech to emerge as a trend following the consumer tech trend. In the past, you could hire a bunch of people to help you to do the job. Now, the Chinese population has started to peak and salaries for employees are no longer super low. So you have to increase the efficiency. Obviously, enterprise tech is the way to do that.


You've worked through a number of investment cycles in Chinese tech. Does this time feel different?

Chris Pu: I would probably say it's not a cycle. The Chinese government decided to set the rules a little bit to add order to an exuberant world. Famous names like Alibaba and Tencent have been dominant in tech. You call these consumer services "tech," but in the government's consideration, it's all "light tech." Enterprise tech, that's a little bit deeper, or more complicated. And therefore I think that's where there's potential for the tech economy to go to the next level.

Part of the government's consideration is to drive the technology another layer deeper so that it can deliver benefits for the broader population.

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