The Grand China Plan
Part 2 on how we fundraised US$45M in South East Asia and China, lost it all, killed the round and became profitable in 50 days.
Skip down for lessons learned. See Part 1 on the Ordeal of Fundraising.
I then managed to cold call a big Chinese entrepreneur and investor, known for starting big companies, big rounds and big exits. In the next 24 months alone, he had 4 IPOs scheduled. He expressed an interest and the next morning we met.
Overnight, he somehow had his team put together a full breakdown of our Chinese competitors: their metrics, cash in bank, their strategy and expansion plans, and the status of their funding rounds. The level of insight was impressive and discomforting, a sign of just how cut-throat business is in China.
We clicked personally. The first meeting he listened to our vision and our plans. He got a measure of us as a team and what we were capable of. He then shared his thoughts on how we could conquer China, and how he could help us.
By coincidence, it was early October and the National Golden Week holiday in China. He was not due to travel to China for about 10 days. We agreed to aim for a signed a deal before his departure. We spoke almost daily and had as many meetings as his schedule allowed, starting at 9pm and sometimes finishing at 5am. The process was incredibly intense but invaluable. We developed a mutual respect for each other.
The plan looked something like this:
● One of his portfolio companies, was a premium kindergarten group with several hundred schools. The schools had hundreds of thousands of kids from affluent parents across China. Each school had its own kitchen to cater a wholesome diet. The business was going to IPO soon.
● Clubvivre could bring in international chefs to enrich the curriculum and kids diet with Western food. Parents would be delighted and it would help the schools justify their upcoming increase in tuition fees. And the Group could sell that in their IPO prospect.
● In return, we would inherit all the kitchen assets, sign a long-term vendor contract with the schools and get access to the parents to market our on-demand chef model. It would instantly make us profitable. We would own the entire O2O value chain and would be able to fully control the customer experience. We would localize the Clubvivre brand to target a Chinese market.
● The initial investment included US$5M cash, with substantial money of his own, and an estimated US$40–60M in assets. This would require an independent due diligence process and a lock-step plan to transfer the assets so we could absorb the new resources. We would retain control of the company and agreed on an international roadmap after China, with Singapore as flagship.
● The deal involved a great deal of secrecy. We didn’t want to alert the competition about our plans before we were ready. We had witnessed first-hand how quickly competitive insight could leak in China.
It was a bold plan.
It was a bold plan with aggressive timelines. After two marathon negotiations, we eventually signed a Series A term sheet for US$45M. We were ecstatic.
There was a ton of execution and people risk.
I had experience doing business in China. I set up a strategy consultancy office in Shanghai for my former employer and run the company for the first year. But this was an order of magnitude bigger. We would be 200 staff from Day 1 and expected to grow to 600 people within 9 months. Then there was the due diligence problem. We would parachute into an existing operation and had to build rapport with the Chinese investor syndicate. And we didn’t speak Mandarin.. whoops.
Everything was hot. We were opportunistic and had 3 months to launch, to capture Lunar New Year. Our first trip to China was planned 20 days later. Marc and his developer team of 4 had to deliver the impossible in 2 weeks, a beta version of the Chinese app. We had to figure out the operation, in Singapore and in China. And in the meantime, we were running out of money by end of the month. The downpayment was expected to take about 2–3 weeks depending on paperwork. To be safe, I had to restructure payments to suppliers and to the team. Not ideal while we were asking people to do overtimes!
We also had to get our existing shareholders onboard. We brought them pro-rata in the deal, but the sheer size was unexpected. In the words of one of our shareholders, the deal was ‘fanciful’ and incredulous. They had every reason to be skeptical. Unlike other investor negotiations, we did not actively consult them. This was a mistake and raised unnecessary concerns. With the fundraising dragging on, fatigue had set in with our investors and we choose to only update them when we had something tangible. Like an adolescent, waiting to introduce his new love interest until the relation gets serious.
But the most time consuming was recruiting. We needed feet on the ground, people we could trust. Over the last decade, Maria and I had developed a solid network, in our startup and corporate life. Our strongest network though came from AIESEC, an incredible organization with amazing alumni talent: bold leaders with integrity and passion. We managed to line up two dozen people interested to join us: trusted advisors, a Chinese lawyer, a CFO; and experienced China operators to get our marketing, engineering and industrial catering team started locally.
And then, our investor had a heart attack.
This happened about a week before the downpayment and our trip to China. Luckily, he made it. And yes, he had it.
All the risks of the deal came crashing down on us.
His doctor and his family required him to cut out all work for an indefinite time. Our Chinese syndicate froze their assets. Without his involvement in the critical first 6 months as lead investor, they were not ready to honor their commitments. We tweaked the plan overnight and tried persuading them we could phase it and still achieve the key milestones to meet their IPO targets.
It didn’t work. The Chinese syndicate shelved the deal. We knew that the deal was dead in its current form. The momentum was gone. And legal action on a term sheet would be a waste of time and resources.
We had to kill the round and face reality. Continue part 3: 50 days to profitability.
Lessons Learned: the Grand China Plan
● Entrepreneurship is about incremental steps.
With each step, you expand your comfort zone, upskill and learn to think bigger. This was such a step, an incredibly concentrated experience. It broadened our horizon and gave us a bigger appetite as entrepreneurs. Bring it on.
● Win or lose.
Breakthrough deals can hang by a thread. Life isn’t fair so you better build resilience. It reminds me of this story, of how Kenya had a nationwide blackout caused by a rogue monkey.
● Step up to the challenge.
As a management team, we delivered some of our most inspired work in that period. We worked as a team and were in a flow. We knew the odds were high that we would fail. But we weren’t discouraged, odds are just odds and you have to believe you can beat them.
● Until the money is in, the deal isn’t closed.
Protect yourself and don’t give away valuable IP. Regardless of our enthusiasm we always ensured we didn’t release any IP.
See Part 1 and Part 3 on how we fundraised US$45M in South East Asia and China, lost it all, killed the round and became profitable in 50 days.
