How to Raise Money from China
Whether you are a startup or a fund trying to get overseas money, most likely it will be from China. China is producing the largest middle the class the world has yet to see. The Yuan is a tightly controlled currency that could be in danger of devaluating in the coming years. In August 2015, the stock exchange took a dive causing many retail investors to be impacted. Looking for something less risky, overseas investing looked and continues to look quite appealing.
Knowing that China will be and is a power player, it is never too early to start to learn how to navigate through Chinese waters. Here are some tips to help it “easier”.
Remember “easier” is relative.
It’s always good to start with a warm intro.
China is a highly relational society, meaning things can get done easier, faster, efficiently and more effectively if you know the right people. I know this is true of raising money in the Silicon Valley, but it is even more so in China. I hear a lot of conflicting stories about the current fundraising climate, and it is because you hear that the few that are able to raise money easily is mainly through a personal connection.
If you do not know someone in China it is best to partner. There are many firms that work in deal making and can help. But if you choose a partner be sure to find one that has experience as well as reference check. Reference check by talking to their past clients. Make sure the clients are similar background to yours as well as had experience working with Western (or more than likely American companies). They will be able to help you navigate through legal policies and structures when dealing with international monies.
If the partner is a result of a close intro and you want to reference check, do so carefully. If you reference check via a group of mutual friends, know that this may get back to the partner. In fact know that any reference checking will get back to the partner so be sensitive to make sure it is not like you are digging dirt and heap praise on both parties even though you may very well be doing a reference check.
Also it is customary for the person introducing to be rewarded in the form of a finder’s fee. Most fees will be charged at 3% of the introduction or for services rendered. Do not be surprised and realize it is just the cost of doing business.
Take a haircut from the numbers, and everything else.
When someone says they can get you into a deal or they can get you XX amount in funding take about a 30% haircut and you may only slightly be disappointed.
Or do the triangulation method and take the number they are repping and ask another person how much they think they can get, the real number is somewhere in between.
The reason is that documentation does not serve as an audit trail or as a third party verification system (a la media systems in the US), therefore everyone produces their own numbers which always come with their own motivation. Therefore, it’s best to take a haircut from the numbers in your head and then triangulate.
Choose one: valuation or terms.
You set the price, I’ll set the terms.
In most deals that I see from China, the fund/company sets the price and China sets the terms. This means they are willing to pay extra money to set terms that enable them to have more control in the deal or operation. To the Westerner, it will seem strange what they care about or even ludicrous what they ask for. But, you will have to try to educate the Chinese investor around how things are done in Silicon Valley and find some way to meet in the middle.
Sometimes it will feel like explaining to my grandfather (who was born in 1918 in China) why Safeway does not allow you to bargain the price on a head of lettuce — it just is not set up for such customized pricing.
I have seen investors ask for a hurdle rate to be met on VC funds, investors ask for money returned before another round is raised. Sometimes the investor will be insistent and put in their terms as contingency of their money. And they have money to be able to do this.
It’s good to be king.
Most of the time the Chinese investor will be optimizing around control. If they had a choice between rich (and very little control, but a lot bigger pie) or king (not as much money but a lot of control), the king scenario appeals to many Chinese investors — especially if the source of money is from an individual or family entity.
Even most Chinese funds and entities are ran like a family business, where decisions are made by one person and no one moves until that person — most likely the boss’s son — approves of the deal. When the de jure culture is optimized around the boss’s son, decisions are focused around control.
This also means that the investor my come in later with expectations for you to follow through with their suggestions and advice. It is important to figure out the best way to work with them not just before the deal is signed but even after. Oftentimes, the deal works fine, but the integration is problematic. I’ve seen situations where the investor or buyer would say yes to everything before the deal was done, and then nickel and dime all the smaller, but important pieces in the integration phase, afterwards.
Cash is king, so it is not over until the money is in the bank.
It is still a cash-based society. Even though China has gone over to mobile payments it is still connected to a debit card. This means that their thinking of returns tends to be around cash. As a company or fund, you should think about how their money can be locked up for the shorter period of time. And as protection, some parties will hold money in escrow until a milestone is reached or they will call down a larger percentage of the commitment earlier on — being sensitive to the cash based society. This also means for the company or fund — it isn’t over until money is in the bank.
Bonus: Communication is faster over Wechat than email, and fastest face to face.
Silicon Valley sometimes treats email like an instant messenger; however, China actually has an instant messenger that is used like an instant messenger — it’s called WeChat. One thing to note is that business and personal communication (and social networking/media) is done over Wechat.
Within our Beijing Office there will be days where people do not check their email (our company is on Google which is blocked in China and needs a VPN), but they will check Wechat several times a day. Therefore we have had to make important announcements over WeChat.
This means if you are looking for a faster response from your Chinese counterparts, it may be best to go over to Wechat. And if they are slow to respond on email, it may be because they do not check it several times a day like we do in Silicon Valley.
☞ Follow me on Twitter Holly Liu
I am the co-founder and Chief Development Officer of Kabam, living in Beijing, China for over a year. Kabam raised $120MM USD from Alibaba, and sold their first generation mobile games to Chinese mobile publisher, Gaea. These perspectives are my own and do not necessarily represent Kabam.