3 lessons learned about raising venture capital in China
China is a trade superpower and its investors are wooing new foreign startups. Yet, the mix of language, cultural, and business differences creates an unstable cocktail. If not handled well, entrepreneurs could walk away feeling rather dizzy.
The fact of the matter is that Chinese venture capital has recently undergone a significant paradigm shift with its investors showing major interest in foreign startups: In October 2018, venture investment in China reached $93.8 billion, $2.2 billion more than in the US In fact, it seems the investment conditions for foreigners have never been this favorable.
I took my chance in October 2018 and set off to spend a week in China, marking my first time raising venture capital there. The investment process took about four months to finalize and led to the acquisition of $1.5 million venture capital. Experiencing the Chinese investment ecosystem first-hand, I found it very different from those in Western nations. This is what I’ve learned:
Relationships are everything
China is a collectivist, high-context culture. It is not what is said but rather what is implied, with body language, voice tone or even a person’s status holding a much greater significance than their words. In line with Confucian teaching, being thoughtful is the preferred option to saying “no” directly. This can lead to some confusion in the world of business. The avoidance of “no” translates into contextual cues which then need to be deciphered.
It didn’t take me long to grasp that a term that every foreign entrepreneur in China should quickly add to their vernacular: Guanxi. This term gives insight into the way the Chinese make trade deals, referencing a system of powerful social networks and influential connections that open doors for business. This puts networking and relationship-building at the epicentre.
Showing respect and adapting to Chinese culture goes a long way. Something which highlighted my cultural awareness was the knowledge that red packets were a traditional gift during the Chinese New Year and other special occasions. For my investor, I made sure that the coins I put inside corresponded with the Chinese lucky number system (6’s, 8’s and 9’s are considered lucky). It’s a small gesture, but something I could tell impressed my investor.
Chinese people are extremely hospitable. It’s common to get invited to Chinese investors’ homes to have dinner and try traditional food. An outsider may be surprised by the informal setting as investors tend to discuss personal issues. The reason is that they’re genuinely trying to get to know you, as many Chinese investors like to not only build your business, but you as a person.
The line between personal and professional often gets blurred. It took me some practice getting used to it: at times, I would get investors sending me photos of themselves posing on the beach and asking me things about my day or complimenting my hair. While it may be difficult to differentiate between work and pleasure, these types of interactions are perfectly normal and still lead to fruitful business relationships.
Many of these communications happen on the social application WeChat, which is just as embedded into personal life as it’s in professional life, meaning that WeChat QR codes are a necessity at the end of any startup pitch.
Chinese subsidiary and team members
The investment environment in China is complex and difficult to grasp, but foreign startups shouldn’t just rely on their niche ideas to stand out. Instead, they must take proactive steps.
For me, having a Chinese subsidiary was a game-changer. Venture capitalists not only see this as a clear signal of dedication, but it also circumvents various license restrictions that aren’t possible to acquire as a non-Chinese entity.
As most smaller Chinese VC investment firms don’t have the infrastructure to invest in non-domestic companies, it becomes mandatory to have a Chinese subsidiary for startups to receive investment from companies other than the big four: Alibaba, Fosun, Baidu and Tencent. Doing so also allows you to set up a Chinese bank account, host a server in China, and create business accounts on apps like WeChat.
Likewise, it’s extremely valuable to have a team member who is fluent in Chinese. While the nationality of startup members is not determinative for VCs, if you want to develop a product in China, it’s essential to understand the market. Inversely, look for English-speaking VCs.
If they’re going to invest in your company and they can’t communicate with the CEO or upper management, things can get slowed down and get lost in translation.
One of my friends with 10 years of experience working with multi-lingual boards of directors once experienced a curious situation. Things went south and investors got angry about a deal, but his translator would filter out the swear words. However, he asked him, “Please don’t do that — I want to know how angry they are.”
Ways of doing business
While not a dealbreaker, some investors like to see your product anchored in the Chinese market. This may depend on the type of company. For example, mobile app startups find it almost impossible to get traction in China without investment or a subsidiary company, because they have a fragmented proprietary app market and strict regulations on data storage.
That’s why I believe that especially in the angel or seed stage, global market traction is more important than on the Chinese market.
Now let’s imagine that most things are figured out: You’ve got a Chinese partner company, team members, and your relationship with potential investors are flourishing. Yet, nothing is happening for weeks. At this stage, entrepreneurs need to be patient. In China, there are no rules governing the steps VCs will follow. For an outsider, this unpredictability can produce certain frustration.
Sometimes investors take weeks or even months because they want to get to know the entrepreneur. Daily conversations and follow-ups are common during this “courting” process. Sealing the deal itself can seem a little ambiguous. When I was hopeful that things would move forward, I only received a non-disclosure agreement. Being used to the way of business in the UK, I was expecting to receive a term sheet. However, only later did I found that the symbolic value of these two is equivalent.
For many foreign startups, China seems like a wonderland for raising venture capital. Despite its cultural differences from the Western world, the local people embrace other nationalities — so sincerity is your biggest weapon.