Now that China officially has the largest economy in the world it’s a good time to examine how to attract investments from that country’s growing investor community. There is a lot of capital available in China for outbound investment, but a labyrinth of regulatory and cultural issues mean that actually securing investment is not so straightforward.
Here are a few points to pay attention to when attempting to raise funds from Chinese investors:
1. Make sure your company takes a ‘stake’ in China
Chinese investors can help you break into the Chinese market, period. This is probably the reason you want to establish a presence there in the first place, because it’s a huge market. But what Chinese investors are interested in above all else is a company with some sort of a stake in China.
Are you going to produce in China? Are you going to develop a product overseas but issue a license for its distribution in China? Are you going to develop the technology in China?
Chinese investors are a conservative bunch who tend not to invest in ventures overseas just to make a quick buck. They prefer to see their investment bear fruit locally and enjoy the exit when the time comes, if not now then 2 or 3 years down the road.
2. Show traction!
Many investment pitches to Chinese investors fail because the project in question is too early-stage. As I mentioned before, Chinese investors are conservative and cautious by nature, and prefer to wait and invest later at a larger valuation with lower risk. Many of the companies I worked reported that deals fell through because investors claimed ‘It’s too early’.
Even if you have a business up and running in China with paying clients, investors will wait patiently until they’re convinced you have secured solid traction in the market.
3. Be very, very patient
People talk about this a lot, and for the most part it’s true. Dealflow in China is slow, drawn-out affair and requires vast patience on the part of foreign companies. This is part local mentality, aimed at developing business relationships slowly over time, and part negotiation tactic.
4. China wants you to invest in it, too
If you have decided that China is your target country, invest in it. I meet companies that sell primarily to the West but want to raise funds in China. Don’t fall prey to short-term opportunism. If you’re a small company that doesn’t have the resources to invest in the Chinese market – don’t do it.
5. Assume that your product already exists – and differentiate
Take it for granted that your idea or product or service already exists on the Chinese market – and not necessarily because it was stolen. It might be of lower quality to yours or have less features or goofy graphics, but it’s very hard to come up with something entirely new. Entrepreneurship has exploded in China in recent years with a rate of development to match. But remember, it’s a humongous market and there is likely room for multiple players in your space and opportunities to team up with bigger players to help you leverage your competitive advantages vs. local competitors.
6. Make sure your investor has a USD fund (as well)
Most of the investors in China I’ve spoken with have a USD fund, but not necessarily. Companies with RMB-only funds find it more difficult to invest out of China, and the investment would probably be in a joint venture company in China. In addition, investors with USD funds tend to be more Westernised and therefore are easier to work with.
Now over to you
Have you ever thought of attracting investments from China? Is China a target market for you? Share it at the comments.
Also, I found China Global Investment Tracker Map which is an interesting interactive resources showing China’s investments breakdown by country. Enjoy!
Image credit by Sarnil Prasad