Courses & Events

Inside Advice from a Venture Capitalist in China – April 30, 2013

Tuesday, Apr 30, 2013

04:15 pm - 05:30 pm

---

By Riva Gold, M.A. Candidate, Department of Communications at Stanford University

Why did venture capital investment in mainland China drop over 40 percent in 2012?  Kevin Fong, Special Advisor to GSR Ventures, a venture capital fund that invests in China-based tech companies, spoke at Stanford about what this figure means for new companies — and how venture capital is doing in China today.

In Fong’s view, 2012 will be the bottom of the ‘U curve’ of Chinese VC investment. “If you look at 2011, there was a big bubble. Everything in China was go-go-go,” he recalls.  Amid the flurry of investment, many American investors became concerned about transparency and accounting issues surrounding Chinese IPOs. “China went through this before,” Fong said. “It’s now sort of stabilized, and expectations are meeting reality. “ Rather than see 2012 as a sharp drop, Fong sees it as “a more normal level.”

Despite this trend, Fong sees reason to be optimistic about the potential for new technology companies in China. “China has come to its fore in terms of being able to create large internet companies,” he said. In 2012, three Chinese businesses made the list of the top 10 internet companies worldwide. “Recent Chinese tech IPO’s show better investment,” Fong concluded.

Fong also believes it is cheaper and easier to do business in China than in the United States. “It has to do with the environment, government and general population,” he said, comparing it to Silicon Valley prior to the bubble burst. Fong sees the general population in China as more willing to take chances on innovations in personal technology and smartphones.  With rising disposable income, he has seen rising demand for exciting new products.

At the same time, Fong outlined a series of challenges associated with entrepreneurship in China as opposed to Silicon Valley.  In China, it can be harder to find the right networks of people and experienced managers, CEOs, CFOs, engineering managers, and key technical workers. General “tribal knowledge,” or generally accepted knowledge in the population, is not the same. “Palo Alto, and Silicon Valley, is a weird, different place,” he says. “I remember speaking at Gunn high school in Palo Alto, and some kid asked me about preferred stock versus common stock.”

Along those lines, China lacks the Valley’s support infrastructure in terms of startup lawyers, accountants, landlords, developers, manufacturing services and consultants.  There are fewer experienced venture capitalists, and many of them lack operating backgrounds. Instead, most have experience primarily as investors.

The biggest challenge, though, in Fong’s view, is the ability to change a company’s management personnel in China. “In Silicon Valley, you change it if it isn’t working right. It’s a very Darwinian system here,” he says. In China, a variety of factors including allegiances to teams, a history of family and government-run business, a lack of talent, and cultural norms make it harder to switch up top executives.  “In the US, leadership has a large stake in company but does not own all of the company enough to control it as well. That check and balance system is very real,” he cautions.

For those who want to become venture capitalists in China, Fong says the most important thing is to “be good at investing and make money.” To generate great returns, venture capitalists need strong networks and relationships as well as a wealth of expertise. “Most partners have substantial prior working experience in the industry, as entrepreneurs, executive management, research analysts,” he said. Ultimately, in Fong’s view, it’s a lot harder than it looks. “You see the successes; you don’t see all the failures.”

To review this blog in Japanese, kindly click on the following link.