In early April, the partners at Silicon Valley venture firm Benchmark traveled to China for a week of schmoozing with top executives at the country's biggest technology companies, including e-retailer Alibaba, search engine Baidu, social networking site Renren and smartphone maker Xiaomi.The plan was to gain insight on new business models, technology innovation and the ways those companies are expanding in the U.S.
The one thing they would not be doing: investing.
Despite having 618 million Internet users at the end of 2013, or about one-fifth the worldwide total, and half a billion consumers accessing the Web via mobile devices, China is a notoriously tough nut to crack for U.S. venture capital firms.
Extensive government control, lax accounting standards and an environment that's proven hostile to foreign-backed companies, has meant that many ambitious firms have lost money in the past decade. Plus, the booming tech scene in the U.S. has made looking overseas less attractive for many.
Benchmark, like other U.S. firms, has a complicated relationship with China, but still most know they can't ignore the world's second-largest market.
On this last trip, the four Benchmark partners—Bill Gurley, Matt Cohler, Peter Fenton and Mitch Lasky—along with Rich Barton, an Internet entrepreneur and venture partner at the firm, visited 10 companies and a few investors in four cities.
Rather than trying to find the Chinese Snapchat or the local Uber, they were looking to see what makes services such as texting app WeChat (owned by Internet giant Tencent) so popular among locals, and how future partnerships could be formed.
"Having connections into these companies has proven increasingly important," said Gurley, who joined Benchmark 15 years ago. "Anyone that's curious can't watch what's going on in China and not want to roll around in it."
Studying China now is mostly about satisfying that curiosity, Gurley said. He chats with heads of the fastest-growing companies to see how they're finding engineers, marketing products locally and abroad and, in the case of Xiaomi, taking on Apple.
Benchmark already has deep ties with Tencent, largely because of the Chinese company's investments in U.S. firms. Tencent bought a majority stake three years ago in Riot Games and more recently invested in disappearing-photo app Snapchat. Both are Benchmark-backed start-ups.
Investing is a different game, Gurley said. "Early-stage venture is an artisan business that requires a lot of hand holding, and we can't imagine doing it across an ocean," Gurley said. (Benchmark's Cohler has investments in Germany and Brazil.)
Even though China was never a focus for Benchmark, for many of its rivals, China was too enticing to ignore, given the rapid adoption of gadgets there and thirst for all things Internet.
Greg Tarr, founder of CrossPacific Capital, remembers when China mania began—and the subsequent fallout.
Tarr, who was an equity analyst at Deutsche Bank in the late 1990s covering Asian technology companies, joined a 2004 bus tour sponsored by Silicon Valley Bank. Along with about 20 U.S. venture capitalists, including Facebook investor Jim Breyer, he met with representatives from leading Chinese tech and telecommunications companies.
At the time, Tarr was working in Beijing,Hong Kong and Tokyo for a start-up backed by Kleiner Perkins Caufield & Byers, and was asked by the venture firm to take meetings with China Mobile and China Unicom.
"That was the seminal event everyone talks about," said Tarr, who now lives in Silicon Valley, helping U.S. start-ups get connected in Asia. "You saw operations set up one to two years after that."
U.S. venture investing in China soared to a record $1.64 billion in 2007, from $635.3 million in 2004, according to data from Thomson Reuters. Sequoia Capital, Lightspeed Venture Partners and Redpoint Ventures opened up there in 2005, with Kleiner Perkins entering in 2007 and Matrix Partners a year later.
Then there was the shakeout. Meeting star entrepreneurs and getting hot deals proved difficult in a market that favored locals. With companies like Google and Facebook largely shut out of China, U.S. firms had few allies in the country to turn to for guidance. As of last year, investing in China had plunged 68 percent from its peak to $521.3 million. And the number of U.S. firms doing deals fell to 32 in 2013, from 82 six years earlier.
Another reason for the dropoff in Chinese investment: The U.S. start-up market has exploded with venture capitalists investing at levels not seen since the dot-com bubble more than a decade ago.
Benchmark has had plenty of domestic success of late thanks to early investments in Twitter, Uber and Snapchat as well as business software companies including Zendesk and New Relic.
Few U.S. firms have had such luck in China, but GGV Capital is among the rare exceptions. Founded in 2000 and with offices in Menlo Park, California, and Shanghai, GGV last month closed a $620 million fund to invest in both countries. Less-well known than some of its legendary counterparts on Menlo Park's Sand Hill Road, GGV has profited handsomely in China from early bets on Alibaba, travel site Qunar and video service Youku Tudou.
One reason for its success: GGV has seasoned, well-connected investors. Two of GGV's managing partners are based in China and each has more than a decade of experience working in Asia.
Jeff Richards, a managing partner at the firm's Silicon Valley office, says finding that kind of local talent is a challenge for U.S. firms, because China has its own established brands such as Legend Capital and Morningside Group.
"Entrepreneurs want to work with the top funds and the top partners at those funds, not someone they just met who doesn't really know the market," Richards said. "Most U.S. VCs recognize this—either from having been unsuccessful in China already or realizing others' mistakes and thus are sticking to areas and geographies they know well."
That's all fine with Rich Barton, the co-founder of real estate website Zillow and job-searching site Glassdoor who also works as a venture partner for Benchmark. Not aiming to find deals made the whirlwind trip in April that much more enjoyable for him. "I was like a kid in a candy store," he said.
So excited was Barton that he blasted out a 1,600-word email to his network of entrepreneurs and investors soon after returning. He raved about Alibaba's new headquarters in Hangzhou that "was like something out of 'Star Trek.'" He said Xiaomi isn't just challenging Apple, but may become the next Apple because of the attractiveness of the devices and their lower prices. He wrote glowingly of SouFun, the Zillow of China, calling founder Vincent Mo a "very sharp and funny guy."
And lest anyone fear that his dollars may start flowing to the Far East, he put those concerns to rest. "Benchmark has no interest in venture investing in China," he wrote. "This was a learning and diplomatic mission. It was fascinating."
—By CNBC's Ari Levy