AAMA Panel on “Silicon Valley-Style” Startups in China: The Next Wave

On 4/29 I attended a Asia American MultiTechnology Association dinner called “Silicon Valley-Style” Startups in China: The Next Wave. The panel was moderated by Evan Ng, of Dorsey & Whitney, a Silicon Valley law firm. Flickr photo set for the event is here.

Panelists were:

• Dr. Min Cui | Investment Professional, Bay City Capital
• Eric Chen | Partner, WI Harper Group
• Michael Chin | Partner, Dorsey & Whitney (Shanghai)
• Dr. Winnie H. Wan | Serial Entrepreneur and former CEO, ForteBio

The panel was pitched at Chinese (either from mainland China or Taiwan) in Silicon Valley considering going to China to startup their next company. Much of the advice given would probably feel basic to people with 6 months or more experience in China. Here are some highlights (and doesn’t do complete justice to the entire discission):

Q: What are the perceptions of returnees going back to China?

• In summary, the ideal businesses for returnees to pursue are (a) attacking global markets, like semiconductors, (b) have high technology component where Silicon Valley best-practices provide an advantage.
• If the target market is primarily domestic, and the business doesn’t require high technology, and the key success factor is “run fast” execution, then many investors prefer teams lead by a domestic entrepreneur who has not recently left the country.
• Some VCs, like Min Cui of Bay City Capital, are more comfortable making an investment in a returnee led team because of shared Western business context. Min was making an investment in a healthcare play pursuing a global market.
• Eric Chen shared that WI Harper raised funds in 2004 and said strategy in China was to explicitly target local, domestic entrepreneurs. WI Harper had network of repeat, local entrepreneurs and wanted to leverage that reputation. An example of who WI Harper backed was Jason Jiang of Focus Media. In their model, WI Harper has historically only backed domestic entrepreneurs.
• Winnie Wan shared that prospective returnees need to be prepared to understand that China is complex and different, especially if you have worked in the US for a long time.
• According to Winnie, prospective returnees need right mindset to learn new things and like change and challenge. China is daunting (Elliott: she meant “not a good fit”) for those who “think they know best.”

Q: What advice do you have for prospective returnees:

• Eric Chen had some pointed advice for returnees: “Make sure that there are not 20 guys from Tsinghua doing the same thing at potentially 1/10 the cost structure of what you have…In the span of a few years the guys over there have caught up faster than you would ever have thought”
• Eric Chen: “The entrepreneurs in China are really tough and resourceful, smart, hungry and work their butt off.”
• Be prepared to build an organization chart that looks like a “toothpick on top of a comb” because there is not really good VP or Director level management available. As a result, WI Harper “prefers to back a CEO that is really dominant and can will a company into being successful.” They can always complement him with talent that happens to be Chinese returnees.
• According to Eric, the problem with returnees is the “have a different level of expectation” in terms of financial spend. “As an investor, we’re guarding the cash…A bunch of Harvard MBA McKinsey trained guys in a Chinese startups really mess up the culture.”
• Winnie: “networking capabilities developed in Silicon Valley can be helpful. If you are resourceful and willing to reach out, you’ll be amazed that people would be willing to help out”
• Min: returnees need to realize that “You’re road is going to be tough…have to be prepared and fully committed and cannot do it by commuting.” He emphasized the need to consider the family dimension of returning to China.

Q: How do you get started?

• Michael Chin: Getting started can be easy. You can create a special purpose vehicle in BVI or Cayman Island for no more than a few thousand dollars. Its a cost-effective way to get started. Then do your fundraising. Its easy to start with a representative office in China. Can be fast and easy.
• Michael: If you are on a shoestring budget, you can just set up a cheap offshore structure to do preliminary activity. There is no need to set up a Wholly Foreign-Owned Enterprise (WFOE). Don’t let people tell you that it costs $80k to set up a WFOE, you should be able to set it up for about $25k. Should be comparable to setting up a business here in Silicon Valley. There is also a registered Capital requirement of at least RMB100,000.

Q: What about the government? Opportunity or risk?

• Min Cui: Local governments compete for business and will be supportive of foreign investment. If you go to the northern part of China you need to be prepared to drink a lot.
• Eric Chen: There really are two schools of thought. The first school is to avoid, and stay under the radar screen of the government. For some areas, like internet and wireless, you can start out small enough to fly under the radar. The second school is to use the government as a strategy to secure grants, land, financing, concessions. This makes more sense when there is larger capital to be raised, such as their deals in semiconductor fabrication, outsourced preclinical SRO (Elliott: don’t know what this is), and other healthcare plays.
• Cities are very capitalistic. Municipalities are trying to attract foreign direct investment and are measured on it. They are competitive with each other.

UPDATE: 5/12

Dan Harris of China Law Blog posted his thoughts on the advice given at this talk. In summary:

• Representative Offices do not confer legal rights to conduct many important aspects of business in China. Switching to a WOFE down the line is also costly.
• Increased enforcement by Chinese regulators of means that compliance is more important than before.
• Having a valid business entity is also helpful in getting a long-term stay visa. Detailed here.

Dan also warns companies not to go to China without an entity:

I also do not like the advice of going into China without a business entity. There are all sorts of reasons not to like this, but two spring quickly to mind. The first is that it will probably be illegal, which could lead to your business being shut down soon after it starts. My firm received a call from an American company just last week that had been ordered to shut down for not having registered. As everyone knows, China has really stepped up its law enforcement against foreigners in the last few months and now is not the time to be starting an illegal business. The second is that having a business entity has become nearly vital for securing a decent China visa. I agree that one should not be paying $80,000, but I also think one should not have to pay even as much as $25,000 either. It is somewhat misleading to say the minimum capital requirement is at least RMB 100,000. That is the written minimum for all of China, but in many of the most desirable cities like Beijing and Shanghai, it is virtually unheard of to get a WFOE going for anything less than USD$100,000 in capital.