Lessons Learned Raising Capital in China

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Shanghai financial center. Several investors have offices in this area.

As we recently announced Bluesmart‘s newest round of funding led by Tsing Capital – one of China’s largest venture firms – I have been asked by several entrepreneurs for advice on how to  raise capital in China. I am writing  this blog post to share some of my lessons learned with the hope that it will help other founders navigate the process. A growing number of cross-border deals have been announced recently, and I think it’s something that is just getting started.

I’d like to start by sharing that our round was actually a syndicate of a group of investors from almost every region of the world, which I find fascinating. While a Chinese firm led the round, it was followed by funds from Brazil (Monashees), Silicon Valley (XG Ventures and Endeavor Catalyst), Mexico and Switzerland (Nazca/Mountain) among other places. This comes to show that we are finally truly living in a global startup world where investors from different regions of the planet will come together to fund an idea if they see global potential.

In order to raise this round, I did a roadshow in both Silicon Valley and China. It’s been really interesting to watch these two worlds in parallel, how they differ, and where they converge. While Silicon Valley has historically been the epicenter of risk-friendly capital, Chinese investors have demonstrated that they are willing to play the venture capital game with their own style and thinking, sometimes making Silicon Valley look risk-averse. Silicon Valley is still much more efficient as it has standardized all agreements and terms for startup investing, but Chinese investors are learning quickly and increasingly accepting the “Silicon Valley” standards. While Silicon Valley investors are more connected in the US and can provide mentoring on how to build a US-centric company, Chinese investors provide connections to Asia and are developing knowledge on how to enter the attractive Chinese market.

Below are some practical tips for fundraising in China based on our particular and somewhat limited experience. If you have additional tips, please leave them in the comments.

1- Almost everything is done via WeChat

If you want to fundraise (or do any business) in China, download right now WeChat and learn how to use it. Introductions to investors are done through WeChat, which has challenges and opportunities. One challenge is that it makes it very hard to do your research on the person you’ve been introduced to. In the US, you can use rapportive to get the Linkedin profile of the investor or just search the name on Linkedin or Google. On WeChat, you can’t even “copy” names, which generally are comprised of Chinese characters, and profiles are generally blank. On the other hand, you have a direct mobile messaging route with the potential investor and can communicate more quickly and less formally than via email. From the introduction on, the entire relationship with the investors will be done via WeChat, except for document-sharing, which you still will do via email. But get ready to coordinate calendars, have conference calls, respond to due diligence questions, and even negotiate your term sheet via WeChat.

2- There are several strong hubs for venture investors

In the US, the Bay Area is THE hub for venture investors. (I know, I know, there are several great VCs in NY, Boston and other cities, but the concentration in the Bay is undeniable). In China on the other hand, there are several strong hubs. In my roadshow, I visited Hong Kong, Shenzhen, HangZhou, Shanghai and Beijing. While you can find investors with broad focus across all these cities, each one has a particular focus. In Hong Kong you can find more investors interested in FinTech, Media and Commerce. In Shenzhen, the focus is Hardware (btw, if you are interested, watch this documentary: Shenzhen: The Silicon Valley of Hardware). HangZhou is where Alibaba was born and is headquartered and therefore there are several investors from the “Alibaba Mafia” with interest in ecommerce, payments and mobile. Shanghai and Beijing seem to be very generalist and you can find investors for any kind of venture. If you are serious about raising capital in China, you should plan to spend at least a full week in each city as coordinating agendas might be complicated (Chinese investors travel a lot!).

3- There is a more diverse pool of investors and LPs

In the US there are clear categories of funds for each stage of a startup: Angels, Seed Funds, Early Stage Funds, Late Stage Funds, Private Equity Funds. The LPs are generally “Funds of Funds”, Endowments, and Pension Funds. In China, these categories are more fuzzy, and, in addition to the typical investors you would encounter in the US, it’s very common for large companies (such as JD, Tencent, Alibaba) and mid-size companies (including factories, law firms and even malls) to invest in startups or in funds. The Chinese government is also often an LP or direct investor through different agencies. Finally there are a lot of wealthy individuals that invest in funds, in syndicates or directly into startups. Some investors have separate funds, in dollars and in RMBs. When fundraising in China you will meet with a more diverse set of investors who might often not be the right fit for you. Make sure you ask questions to understand the structure of the investors you speak with so that you can understand their incentives.

4- You need to have a “Chinese” story

While Chinese investors are increasingly opening to investing in global companies from the US and elsewhere, they will still ask you why you are looking to raise money in China. In our case, the answer was pretty clear: we manufacture our products in Shenzhen, have an engineering and logistics team in Hong Kong, and are starting to sell our products to the huge Chinese market. This is mostly true for most hardware startups. You will need to have a sensible story about why a Chinese investor can help you and why you could be strategic to them.

5- You need a “Western” story too

Why would they invest in you and not in a Chinese competitor, which would be easier from a cultural, geographic and logistical perspective? You will have to show that you have some of the unique skills that westerners can bring to the table in a global company. One of these areas for example is branding: American brands still have more global cultural gravitas, and westerners have a better understanding of how how to build global brands. Silicon Valley is also still considered top in the world at software and AI. Show why you are the best team in the world to build the company that you are trying to build.

6- Learn some basic cultural norms

As with any international business situation, it’s helpful to learn some basic cultural norms in order to reduce the inevitable cultural friction that will surface. I’m definitely not an expert in Chinese culture but had to very quickly pick up some basic cultural norms. Business relationships in China (and Asia in general) are much more formal than in the US. You need to show respect in the way you enter the room, greet, exchange cards (always with the two hands) and conduct your presentation and Q&A. Hierarchies have more weight – they will want to know who is “the boss” and will make clear who “the boss” is on their side. Generally, before going directly to business, they will want to have a warming general conversation over tea. Make sure that you allow for that space to happen. Personal relationships – “guanxi” – are very important so if you have people they might personally know who can endorse you, you should let that be known, as well as name brand recognition investors or advisors. In terms of language, you will do just fine with English – most investors speak it and those who don’t have someone on their teams who can be interpreters.

7- A lot of things are almost the same

While set and settings might be different than in Sand Hill Road, there are a lot of things that work almost the same as in Silicon Valley. The way to get access to investors is through warm introductions, and therefore you need to network with Chinese entrepreneurs and connectors. Firms have partners, principals and associates (who actually do source deals which get closed). Investors care about large addressable markets, strong teams, defensible technology, strong traction and all the other criteria that are important to investors in the west. They are familiar with Delaware corporate law and preferred stocks agreements (although they generally ask for more aggressive downside protection terms). Their due diligence processes are quite deep both in the legal and financial fronts but the data requests are standard. In terms of valuation levels it’s similar to the US in that it depends on the sector and the “mood” of the market. At the end of the day though, investors in China are pragmatic businessmen who follow their reason as much as their intuition, focus on building long term relationships based on trust and look for the common success of the venture.

I hope these tips come handy to those interested in exploring fundraising in China. I think that we will see more and more Chinese investors participating in western and global companies, which I think is very exciting. Despite backwards nationalistic rhetoric from populist politicians, we are in a super exciting time of global cooperation, where each region of the world can offer their unique contribution to collectively bring innovative solutions to our common global challenges. I hope to see more global startups unite the world through entrepreneurship and innovation.

Thanks Brian Chen for reading a draft of this post

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