Doing Business in China in the Eyes of a Foreign Entrepreneur
I first came to Shenzhen, China in August 2014 — which makes this 2 years now. It has been an incredible journey, thought more than I intended. The plan at the beginning was very simple: I came to Shenzhen to study and learn as much as I can. At the same time, I wanted to grow my trading business that I founded with my friend from college when we were still finishing our undergraduate degrees.
It didn’t take long before I switched the gears a little bit, sold my share in the company and started focusing on something more exciting — startups.
As head of Startup Grind in APAC, I get a chance to work with some of the best foreign startup founders in China, like Whoolala.
Whoolala is an example of a foreign-founded startup focusing on the cross-border e-commerce market. Both founders speak fluent Mandarin and have lived in China for many years. Until now they managed to find a local investor and get their business close to profitability. Yet, the journey is still full of unexpected challenges.
As Florian Garrigues, another foreign entrepreneur in China puts it:
“Entrepreneurship is hard by itself, but even more so in China where language barrier, different culture, and many other factors come into play.”
I did an interview with Florian about his Chinese startup adventures a few weeks ago. Florian and his team are building a cross-border e-commerce platform that helps Chinese consumers discover and buy high-quality F&B products from Europe. We talked about what it is like doing business in China as a foreigner. We covered the variety of topics ranging from the company formation, logistics, to hiring and fundraising. You can read the article and listen to the podcast HERE.
What one of the most interesting lessons from the interview was on Chinese venture capital funds in general. Let’s dive in.
Venture Capital Denominations in China
One of the first discoveries which may be useful for all the founders seeking Chinese investor is that there two main types the funds (investors) in China.
USD venture capital funds and funds that only invest in RMB. Then there is also some combination of these two aforementioned fund types.
USD Funds
Let’s start with the funds that hold and invest USD as they should be your top priority in case you are a foreign entrepreneur in China.
Most likely, when you come to China to do business you will want to have a full ownership of your company, which is possible thanks to new policies and emerging free trade zones (FTZ) being implemented and formed as China is opening up and government wants to attract more foreign direct investments (FDI) and talent.
Check out this article on Forbes discussing cash subsidies for foreign academics and professionals who want to move to Shenzhen (sometimes also called the “Silicon Valley of China”). Note, however, that these subsidies are not for everyone. Only those who can bring appropriate value can succeed (i.e. renowned scientist or to executives with many years of experience).
These funds can and invest in companies all around the world as well as in China. If your company is wholly foreign-owned enterprise (WFOE), you are not entitled to accept local RMB investment as it is in contradiction with WFOE legal fundaments. USD funds will usually invest in your business through special purpose vehicle in Hong Kong or other offshore location.
Moreover, as a foreign founder in China you should seek out these funds and investment companies not only because of the money itself — although it is a big part of it — but also because of the global mindset and experience these funds can bring to your startup — namely, smart money.
Some of the examples of USD funds in China are GGV Capital, IDG Capital Partners and Gobi Partners.
RMB Funds
RMB funds hold RMB (Chinese Yuan) currency and invest predominantly in Chinese startups. These funds are often government-backed, and so the bureaucracy, administrative processes, and overall communication will be more complicated and time-consuming. “Predominantly” because it is still possible for foreign founders to get an investment from these entities as well as receive money from the government.
Just recently, one of our friends in Shenzhen, Hugo Garcia Cotte from Cypheme, received a “generous” grant — as he puts it — from the Shenzhen government. However, keep in mind that a change in your company’s legal structure may be necessary for closing such a deal.
Most 2nd- and 3rd-tier venture capital funds in China are denominated in RMB. Even though raising capital from these funds may be easier compared to the 1st-tier international VC funds, to make it happen you will probably have to consider the following options:
A) Setting up a domestic Chinese company and pass the ownership to a Chinese person you trust.
B) Setting up joint venture company with a Chinese partner. This option may have certain limits if the foreign party is not co-investing together with the Chinese investor — which is the case of most foreign startups.
Some of the examples of RMB funds in China are Shenzhen Capital Group and New Margin Ventures.
If you want to get an insight into a government-backed venture capital industry in China, read this article on Bloomberg.
“Hybrid” Funds
To keep things simple, these are funds that invest both USD (globally) and RMB (locally, in China). Truth to be told, most of the major venture capital companies in China (even those mentioned in the USD funds section) manage both types of funds to be able to do business anywhere in the world without limitations.
Some of the examples of these funds in China include SAIF Partners and KPCB China/TDF Capital.
A big thank you goes to Lukas Hlavac especially for his insights about how RMB funds work in China.
If you have any questions, get in touch with me on Twitter or comment bellow.
