Finance & Venture Capital

The opportunity

Since the 1980s, venture capital in China has grown steadily alongside the robust national economy. The future is likely to offer even greater opportunities, as entrepreneurs are encouraged and property rights improve. Today, there are many good reasons to partner with Chinese VCs, including the extraordinary amount of capital they are making available for New Zealand investment; their willingness to partner to develop global growth opportunities for both countries; and their ability to help start-ups get past many of the common hurdles in expansion that hit a start-up, including scaling up manufacturing and valuation.

While many within these spaces are Chinese start-ups that want to expand into the Western world or entrepreneurs who want to invest in New Zealand, there is plenty of room to assist local start-ups or SMEs who want to do business in China.

Coming to a city near you are incubators and idea labs composed of Chinese investors who are interested in working directly with the company they are funding. For example, in Auckland, numerous opportunities exist to reach out to the venture capital investors from China who are behind some of these idea labs and incubators.

 

Challenges

Venture capital in China has many interesting differences from that in Western countries. The venture capital industry in every country is shaped by the institutional context and China is no exception to this.

However, the institutional context in China that produces these unique differences includes the lack of intellectual property protection and the fact that assets can be seized and held with little recourse to the owners. China, as in most emerging economies, also lacks active markets for corporate control and established public equity markets by which investors can exit their investments. This lack of property rights and (an enforceable) rule of law add to the complexity of the venture capital process. There will be a period of transition as the market continues to mature and as new legal structures and commercial arrangements emerge in China.

 

Solutions

Make sure your company takes a ‘stake’ in China

Chinese investors can help you break into the Chinese market. This is probably the reason you want to establish a presence there in the first place, because it’s a huge market. The thing that Chinese investors are interested in above all else is a company with some sort of a stake in China. Are you going to produce in China? Are you going to develop a product overseas but issue a license for its distribution in China? Are you going to develop the technology in China?

Chinese investors are a conservative bunch who tend not to invest in ventures overseas just to make a quick buck. They prefer to see their investment bear fruit locally and enjoy the exit when the time comes, if not now then two or three years down the road.

Show some traction

Many investment pitches to Chinese investors fail because the project in question is too early-stage. As we mentioned before, Chinese investors are conservative and cautious by nature, and prefer to wait and invest later at a larger valuation with lower risk. Many companies reported that deals fell through because investors claimed ‘it’s too early’.

Even if you have a business up and running in China with paying clients, investors will wait patiently until they’re convinced you have secured solid traction in the market.

Be very, very patient

People talk about this a lot and, for the most part, it’s true. Deal flow in China is a slow, drawn-out affair and requires patience on the part of foreign companies. This is part local mentality, aimed at developing business relationships slowly over time, and part negotiation tactic.

China wants you to invest in it, too

If you have decided that China is your target country, invest in it. We meet companies that sell primarily to the West but want to raise funds in China. Don’t fall prey to short-term opportunism. If you’re a small company that doesn’t have the resources, including products, services, time, and your personal commitment, to invest in the Chinese market – don’t do it.

Assume that your product already exists – and differentiate

Take it for granted that your idea or product or service already exists on the Chinese market – and not necessarily because it was stolen. It might be of lower quality to yours or have less features or goofy graphics, but it’s very hard to come up with something entirely new. Entrepreneurship has exploded in China in recent years with a rate of development to match. But remember, it’s a huge market. There is likely room for multiple players in your space and opportunities to team up with bigger players to help you leverage your competitive advantages vs. local competitors.

Make sure your investor has a USD fund (as well as RMB)

Most of the investors (funds) in China have a USD fund, but not necessarily all. Companies with RMB-only funds find it more difficult to invest out of China, and the investment would probably be in a joint venture company in China. In addition, investors with USD funds tend to be more westernised and therefore might be easier to work with.

 

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If you have an enquiry, please contact us for further information.

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