The Asian market is fertile ground for many entrepreneurs. In particular, the Chinese market’s breakneck speed of growth, Asia’s skyrocketing population, the region’s heavily capitalist economies, recent spike’s in large-scale infrastructure plans, and more innovative investments, are making many startups rethink their market and start their exodus to China.
When it comes to companies needing funding from investors, startups need to know that China is a jungle compared to the tranquility of the valley and other ecosystems.
In the beginning, everything seems to be sunshine and daisies when startups first move to the Asian giant: different opportunities arise, meetings take place left right and center, and entrepreneurs think that investors will line up to drop money into their pockets. However, in reality, things are not as easy as they might appear.
Below is the map to the jungle: a 6-step process of best practices for raising funds from a Chinese VC.
VCs are money driven. They want fast revenue and fast results. Whilst, VCs in other countries are worried about having strategic variety in their portfolio, in China, it’s all about the money.
As there is always a concern about the money, investors will consider the possible scalability of the project, the exit phase, and if possible, to make an IPO of the company in the future.
There is not a big difference between Chinese VCs and Western VCs.
The main difference is between the different VCs inside the Chinese investing firms. How they behave depends on their industry and on their goal; in China, there are no rules governing which steps they will follow or on the movements they will make.
The only thing that all Chinese VCs have in common is that they want to have as much control as possible inside the company and have power in the terms of the contract. In order to have more control they will often give you cash by the bucket loads so that they can be in charge of everything. So when it comes to Chinese VCs the age-old question is: What do you want? More money or more control?
If you’ve found a firm that you think is a good fit for your company, the best thing to do is to get in touch with someone with previous experience with that investment firm so they can assess you and tell you about the firm’s likely behavior.
Just like applying for a job, it is always better to have someone introduce you, either a Chinese partner with experience and previous contact, or an accelerator or incubator platform.
The best course of action is to work with platforms like accelerators or incubators that have contacts and resources and can get you in contact with different VCs and Angel Investors who exercise their powerful “guanxi” (interpersonal relations). Accelerators and incubators can assess what kind of investors you should contact according to your industry and product. They can also help organize your pitching and Demo days/events so you can just focus on your project.
Chinese VC's are always looking for excellence; you should present your project to investors when you have a well-developed idea that is strong and with a future-oriented perspective.
The best thing to do would be to wait for a specific time in the development of your project: for example, when creating a consumer base.
The main thing is to be ready to show them actual traction of the product in China.
Step Four: Creating the right pitch for Chinese VCs
VCs, of course, want to see that your project will work in the China market, and for that you need to show them results and use the right pitch to get on their good side. Even if they are small VCs, they will usually ask for results on traction in China.
There is a lot of competitiveness between VCs in China so for your startup to attract one of those firms, the main thing is to make them feel that if they don’t invest in your project, another VC firm will do it and they will have lost a huge business opportunity.
• The scalability of the project
• How the team operates in the early stages. In the eyes of a VC, if the team is influential from the beginning, they will likely influence their employees, and may be able to develop a good strategy to convince the customers that they need the product.
• The startups are solving a real problem in China.
• The length of the market: how much money could they make from this?
• Competitors. Other players. Can the market be tackled?
Investors can either have funds in RMB (Chinese Yuan), in USD, or another currency. It is very important to understand that:
RMB: If the funds are raised in RMB, Startups usually have to be registered as a Chinese company to get funds from Chinese VCs. This is because Chinese VCs always prefer to put money in domestic investment and also because it is always easier. However, if you are not registered as a Chinese company this will deliver tax implications and law difficulties.
USD/ Other: If the funds you are looking for are not Chinese you don’t need to be registered in China, but you may incur taxes and other government charges.
The average time it takes to get funding in China is very short. In China, the partner has a lot of power so once they decide to work with a startup funding can come in 2-3 weeks.
Final Step: Extra things to consider
Don’t worry if you are not a Chinese team or a team with all Chinese members. VCs don’t usually care about the nationality of the members, but it is essential if you want to develop a product in the Chinese market to really know the how the market works and have experience in it. China is a unique place to do business, so if you are not from around here be ready to flex your muscles in front of the investors and show that your team really knows how to run things in China.
Make sure that all contractual details are stated and clearly agreed on before the contract is signed; even the tiniest details are important. It is very common to have the investor agree on everything before signing any deal but afterwards want to discuss once more the small but essential details.