Beijing Startonomics: Chinese VC Panel

Moderator:  David Wolf,   CEO    Wolf Group Asia

 Panel:

 

Q: How has the global financial crisis affected the VC climate in China?
A: Exactly the same as the US.  Not going to bother paraphrasing.

Q: What makes a Chinese Entrepreneur better / different?
A: US: decks are well structured, CEOs are polished and sharp.  CHINA: much younger, more grass-roots entrepreneurs.  
     US: ready, aim, fire   CHINA:  ready, fire – go see what you killed    US: still in the bunker figuring out what to shoot

Q: Advice to / opinions of expat entrepreneurs? 
A: Tend to only invest in experienced Chinese entrepreneurs. 
     Understanding of Chinese culture (to know your users) is a requirement 
     More attractive:  Chinese who leave, learn in US, come back
     IP + good approach to business model coming to China from another country  

Q: Post-Series-A, what does the cap structure look like between Founders / VC /  employees?
A: Chinese founders will typically own more than in US.  This is because of Chinese culture.  Talent/engineering cost is very low.  Angel round will get a company to 20-30 employees.  Also, companies need less cash so founders end up keeping more.  (lower cap-ex)

Q: What are the exit strategies here in China and what are the corresponding legal hurdles?
A: Shooting for overseas IPO or M&A.  Company will be owned by a holding company based off-shore.
     China working on a NASDAQ competitor starting Q1 2010 (Jimbot (sp?))
     Trading volume in China is already 4x Hong Kong’s
     PE ratios higher in China as well.  All of this should help more local IPOs
     Chinese consumers understand the concept of investing, also helpful     

Q: How are Chinese entrepreneurs connecting with VCs (is there an angel/incubator equivalent in China?)
A: Events & conferences, lots of demos in China.  Not many incubators yet.
     There are some angel groups in Shanghai – not making a lot of progress yet.  60 angels ~ 4 deals.  Each angel is committed to invest $5k/year = lots of startups. 

Notes:

  • 1-5mm fetching about 10-40% of a company normally here. (Softbank – backed by Cisco)
  • Funds are preserving so they can do follow-on investments for their portfolio companies
  • 15 person company buring 12k/mo in China – 2nd largest language learning company in the world
  • in RMB investments there is no concept of preferred / common stock
  • Must have an RMB fund on-shore to invest in China
  • There are constraints on equity ownership by foreign investors.  Forces investors to localize
  • There are still unclear tax issues after liquidity events in China
  • It’s about investing in people, just like in the US
  • Retaining people is key – much harded to do in China – competing with the big, stable companies.  An investment in a charismatic, likeable leader carries a lot of weight
  • “You’re ATM card is less secure than your online gaming account in China” – the gaming acct has a lot more value built in
  • Service-based innovation in the US tends to be based on core technology innovation in China.  Example:  Kindle developed in China, commercialized in US.
  • Orange:  in China to find business model innovations to bring back to Europe.  
  • Behavioral targeting on the Internet:  US you get in trouble (Beacon?) – in China it’s coming out of Government / University labs.
    – Chinese gov’t is motivated in tracking people and their habits whereas US gov’t is not.  
     
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