Venture capital and angel investment in China
China’s role in the global economy has grown in prominence over the past decade. As a result, foreign companies have been clamoring to enter the Chinese market and stake their claim on the potential goldmine that is China’s consumer base of 1.3 billion people.
The country quickly evolved from a labyrinth of manufacturing to the new frontier of international trade. With consumers in China spending more, foreign companies have not been the only ones to get the nod from consumers.
Rich in resources and an increasingly educated population, China has turned into a hotbed of innovation and entrepreneurial activity. Although the Chinese market has been notoriously difficult to crack for many foreign companies, foreign investors have turned to partnering with Chinese firms in the hopes of making meaningful connections with consumers. However for investors who do not want to start and run their own business in China, the next option is venture capitalism and angel investing.
Venture capitalism and angel investing in China is on the rise as China’s prowess in business has pushed it to catch up with the West. However, unlike the West where capitalism has made it easier for start-ups to find funding, Chinese entrepreneurs have struggled to find funding until recently.
Chinese banks rarely fund start-ups and few Chinese companies invest in start-ups, new businesses have had to rely on “guanxi funding”. The Chinese principle “guanxi” loosely explained means “how far you get ahead, depends on who you know.” Essentially, it means the stronger your connections and ties, the more likely you are to succeed and receive more funding.
Enter foreign investors. Due to the economies of scale for businesses in China, abounding in labor and production costs, Chinese start-ups are attractive because they demand less funding in terms of foreign currency. The dynamic nature of Chinese markets also means drastically shortened lead times between the planting and fruition of business efforts, making it possible reap rewards faster. Bigger players on the international funding scene have taken note and in the past decade, over half a trillion dollars of foreign investment has been pumped into China. Notable companies that have added funds to venture capitalist firms include Disney, Sierra ventures, IBM and McGraw-Hill.
Technology start-ups are leading the pack when it comes to pulling in investors, especially those geared towards producing mobile internet applications for the 517 million cellphone users in the Chinese market. Manufacturing comes in second. The large push coming from computer companies sourcing more affordable components to build their products.
Keys to success in China as a venture capitalist or an angel investor
Due diligence: This can be handled for you by a consulting company such as Daxue Consulting. A venture into the Chinese market on one’s own is never advised as foreign investors are unfamiliar with Chinese consumers’ behaviors.
Guanxi: When you are appraising companies to invest in, try guanxi for yourself and check in your own network of acquaintances to find possible Chinese connections.
Visit China: Once you have shortlisted potential companies, take the time and effort to go to China and visit those companies. Visiting potential firms will help you get a better feel of the market, management as well and environment of the company with which you are investing.
- The Chinese government’s economic policy, is very protective (which in general is a good thing). However, because it is only recently began opening up China for more transactions with the world at large, it might not yet be flexible enough to deal with the impact of the fluctuations it will experience from integrating its economy with the rest of the volatile world.
- Hype: The Chinese rise to prominence onto the global economic stage might make investors overly confident on investments that still carry high-risk. Despite the high consumer spending and increasing value of equity, investing in China and doing business there is not as easy as it seems.
Of course, while the opportunities to invest in Chinese start-ups seem to be endless, it is still considered a leap into the unknown by many investors. The language barrier and lack of familiarity with the market makes many investors reluctant to reach into China, but for those who dare to invest can receive incredibly high returns.