Understanding Venture Capital in China
One of my ongoing interests has been doing business in China. In that connection, I visited China in February and made some comments about that trip in this blog. Last Sunday, I attended and spoke at a "conference" sponsored by NECINA at which a group of Chinese VCs attended and also spoke. It occurs to me that there is a significant culture clash between U.S venture investing and Chinese venture investing. This clash can be found in the level of specialization of investors, the goals of investing, the sources of investment money for the VC funds, and the regulatory climate in which the investors operate.
One Chinese venture investor’s card states that he is interested in making investments in high-tech, real estate and new agriculture. When I ask Chinese VCs what they are interested in investing in, they the answers are so broad (at least in terms of industry) that it is actually hard to imagine who I could introduce them to. Compare this to a more familiar experience in the U.S. Here the VCs are highly specialized. VC funds are often, if not always, specialized in a few industry verticals. Many of their web sites say they invest in IT or clean tech or something else, but few, certainly none that I know of, say they invest is anything. Once you get below the fund level, each individual VC is likely to have an area or two that are of interest and to make investments more or less exclusively in those areas. How often do you hear VCs say that they are interested in small molecules or data storage or solar energy. At some level, this high degree of specialization reflects the fact that the venture industry in the U.S. is more developed and more mature than the venture industry in China, but it also reflects different aims of investing in the two countries.
It goes without saying that the goal of venture investing in the U.S. is to make profits. A secondary goal might be to create enduring companies, but profit is first and foremost. Creating enduring great companies is arguably a by product of the profit motive and, possibly, the best way to make money, but it is not the end. I am not certain of what I am about to write, but I believe that the motive for Chinese venture investment is to create business in China that employ people. The population of China is vast, 1.4 billion. While a portion of the population live in relatively good circumstances (the ones that live and work in Beijing, Shanghai, and a few other industrial centers being perhaps 50 million) the rest live in rural poverty (more like the third world than the first or second world). The government needs to find ways to pull these people forward and good jobs is it. If they government fails, considerable political instability could arise. The government is less concerned with profit than with employment.
Remember China is a communist country. The vast amounts of venture money they have does not come from private investors (although there is some of that); it comes from the government. In addition, it is controlled by the government. The government controls who can own equity in Chinese companies, when and how money can come into the country and, most importantly, when and how money can leave the country. It also controls the exchange rate, which it sets at 7 RMB for one dollar (way too low). All these policies support one goal – employment. By way of an obvious example, by keeping the exchange rate way low, they keep down the cost of labor and make it attractive to locate manufacturing in China. Another example, is keeping money in China. If you can’t get investment capital out, then in stays in the Chinese economy. One could argue that this particular policy is counter productive since it discourages investment (if you can’t get your capital out why put it in?), but it is hard to argue what policy is being followed.
China is still a great market (eventually it will be the biggest market in the world). It is the current best place to make money – after all in this global recession; they grew at a whopping 6 percent. Somehow, to make cross border investment work, some of these conflicts in style, purpose and regulation will have to be bridged. Ultimatley, I think they can be because their goals and U.S. goals are not mutually exclusive, but adjustments are going to have to be made on both sides. The beginning will be to understand the differences.