SHANGHAI &

For entrepreneur Gary Wang, the next new thing in China is a place where the country's growing middle class, or "couch potatoes," can watch free videos to their hearts' content. His company's Web site, Tudou (Chinese for potato), has become insanely popular insanely fast &

more than 15 million users as of this month &

and Wang dreams of the day when the company will have an IPO.




Flush with $30 million in venture capital, Wang has hired 95 employees, engineered a slick Web site and leased thousands of computer servers across the country.




But there's one thing the company hasn't managed to do: make a profit.




Wang's company is typical of China's dot-com boom.




Over the past decade, start-ups have proliferated throughout China, thanks to an aggressive government campaign to attract private investment. Many of the new companies focus on Web sites, but there are also computer-chip and telecommunications equipment designers, biotech development labs and medical-device makers.




The state has created dozens of "new Silicon Valley" districts &

glittering high-tech zones and incubators as big as cities, with such incentives as no corporate income tax for the first three years. The largest is Beijing's Zhongguancun, home to 20,000 start-ups, most of them information-technology companies, with nearly 800,000 employees that together received more than half of the international venture capital invested in China last year.




The money flowing into China is transforming small towns into tech centers and a Third World economy &

based on churning out such products as cheap TVs and socks &

into a world player in innovation.




Some fund managers are wary of what lies ahead in the short term, however, and worry that China is creating a tech bubble similar to the one that burst in the United States at the start of the decade. But venture capitalists, entrepreneurs and competitors point out that Silicon Valley remains a prominent tech center, despite the bust. They say the tech sector in China, which has an estimated 162 million Internet users, will be a force to be reckoned with.




China's tech boom began in much the same way the one in the United States did, with venture capital from Silicon Valley. The frenzy of investments here began in early 2005, when venture capitalists were getting excited again about dot-coms after Google's eye-popping initial public offering a few months earlier.




David Su, a partner at KPCB China, a branch of Silicon Valley venture-capital powerhouse Kleiner Perkins Caufield ers, said that led to some irrational exuberance and too much money chasing too few quality ventures.




"A lot of people got excited, and way too much money went into making copies of the same thing &

there were 20 YouTubes, 50 MySpaces. Obviously most of the players are going to lose out," Su said.




Several top venture-capital and private-equity investors said that until this year they were making more money by financing entrepreneurial companies in China than in other parts of the world. Now some are beginning to scale back their investments.




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. 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.