The Venture Investor’s Guide to China
Seven steps to succeed in the world’s largest market
The flow of venture capital into China is on the rise. Despite challenges and regulatory uncertainty, venture capital and private equity firms are finding opportunities, according to the latest report by Deloitte Research, “Seven Disciplines for Venturing In China.” With this initial investment come some early lessons on to proceed and profit in this growing economy.
“Venture capital and private equity firms are transforming Chinese enterprises by helping them to tap into innovative practices, global, commercial, and capital markets,” says Ajit Kambil, firm director in Deloitte Services. “In addition to creating companies with modern corporate practices and high value jobs, venture capital and private equity also create a new guanxi by connecting the world economy to opportunities for growth in China. But unlike investing in developed markets, investing in China is substantially different in all aspects of the deal, from sourcing to management through exit.”
Seven strategies for success:
* Develop guanxi of social capital networks to access information and to establish and maintain business relationships. Guanxi is a highly personalized Chinese system of social capital enabling mutual, preferential favors based upon trust or mutual benefit. It is a widespread practice.
* Implement corporate governance and shareholder rights initiatives. One key role of the investor may be to educate the Chinese entrepreneur on the differences in opportunities with each form of capital, governance requirements, and the rights of shareholders.
* Manage intellectual property. Protecting intellectual property can involve a change of thinking for some Chinese entrepreneurs. Culturally, copying is not always a crime, but sometimes is homage to past masters.
* Adapt foreign business models to local Chinese contexts. For example, many Chinese do not have credit cards or if they do, prefer not to use them in online commerce. To adapt, some companies allow Chinese customers to buy online, but pay over the phone or by cash on delivery.
* Understand the value added. More than just financial investments, a venture investor can add value in other ways, including screening and recruiting management team members and installing and maintaining financial controls.
* Establish a clear exit pathway. Look to innovative legal and financial constructs that are a mix of Chinese and Western practices.
* Create opportunity from regulations. The political and regulatory climate in China is constantly changing. Instead of viewing this as a barrier, look for ways to leverage regulatory hurdles. Licensing requirements, for example, can create barriers to entry for competitors.