First Question to Ask a Chinese Investor

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On February 28th, the first session of “Uprise Global Startup Forum: China” was held in Dongdaemun DDP to share the experiences of international startup experts. In this first session, the panelists include Woo Duk Han (Chief of China Research Section, JoongAng Daily), Kyu Hoon Cho (Head of Chinese Markets, SBI Venture Capital), Sun Il Kim (Director, WinnersLab), Sun Jang (Specialist on Chinese Crowdfunding, KOTRA), and Mi Kyung Lee (Director, Rehobot) to discuss the Chinese market and specific approaches to enter the market.

Why is China such an attractive market for startups?

Kyu Hoon Cho (Cho hereafter): “According to the scale of investment in 2015, China is number two in the world with $4.45 billion (50 trillion Won), following the U.S. ($7.12 billion). Moreover, compared to 126 venture capital firms in South Korea, there are over 10,000 in China. There is both a market and investors in China. Although the growth rate has begun to slow down, the Chinese market is still growing and that’s why the younger generation from around the world is accepting the challenge in China.

Mi Kyung Lee (Lee hereafter): “A company’s service or product is only meaningful when sold to consumers. In this light, the scale of the Chinese market certainly puts China as an obvious destination for many companies. One thing to keep in mind is to not view China as a single entity.”

Sun Il Kim (Kim hereafter): “I agree. China is not a single business district. The population is huge, and the Chinese market is a collection of several different business districts. Any single district in China would be bigger than the Korean market as a whole.”

What is a promising industry in China?

Sun Jang (Jang hereafter): “Many Chinese investors are interested in the fundamental technology industry, such as biotechnology or robotics. Recently, China has focused heavily on robotics and big data.”

The importance of local partnership is highlighted when entering China.

Kim: “Whether it is an exhibition or business matching event, you can find a good partner as long as you remain genuine and sincere. We often talk about Guanxi (Chinese term for network) in regards to the Chinese market, but there isn’t that much opportunity to utilize Guanxi in a large scale business. From my experience, it is crucial to win the trust of a local company through continuous communication before buckling down.”

How can one prepare for hardware startup in China?

Kim: “The most important thing is your attitude and the relationship with local experts. You have to be open-minded and accept China for what it is, instead of trying to fit it into your own frame of reference. Also, a reliable local expert is absolutely necessary. Through local partnerships, you can reduce a significant amount of trial and error period. Finally, it is also important to experience the Chinese market first hand, instead of relying on books or media information.”

In order for startups to survive, investments are needed at the right time. How do investments in startups work in China?

Cho: “O2O platform businesses kicked off around 2012 in China and reached its peak in 2014/2015. At the time, startups received funding as long as they had the business plan and certain level of traffic. However, investors in China soon realized the faults of that model and looked abroad. Given the proximity of location and innovative business ideas, many Chinese investors looked to Korean corporations around 2015. Until last year, there were several M&A activities between public Korean companies and Chinese investors. The most popular industry then were cosmetics, VFX, and e-commerce. The biggest strength of Korean companies was their contents. With THAAD (Terminal High Altitude Area Defence) issue since last year, however, such investment trend of Chinese investors funding Korean companies has ceased. Although it does not seem to be a long-term action, it is clear that investment activities have dwindled. In some cases, Chinese investors have requested us to invest on their behalf in the Korean companies they were reviewing.”

What should one be aware of when receiving investments from China?

Cho: When a Chinese investor expresses interest, you should first ask whether the investor has capital abroad. Due to domestic regulations, it is difficult to export foreign currency. Even apart from THAAD, it takes approximately six to seven months to send foreign currency abroad legally. Considering that timing is crucial for startups, it’s important to double check how fast the investor can send the money over.”

What’s the difference between Korean startup IR and Chinese startup IR?

Cho: “For Korean startups, there is usually a detailed report on the company profile, growth plan, anticipated revenue, profit plan, target market, market research, competitive analysis, etc. Companies with previous fundraising experience know what the investors want. On the other hand, Chinese startups’ investor relations reports tend to be relatively simple, but with clear business models. So, it’s easier for them to make an investment decision on a Korean company after reviewing its IR report.”

The dispute over THAAD has strained relationships with China. What is its effect on startups?

Woo Duk Han (Han hereafter): “That is a very difficult question. The two countries have lost trust on each other and diplomacy is minimal. Of course, the current condition would not last long-term, and I expect it to get better at some point in the future. Right now, we have to do our best to prepare for that time. The companies that can give what China wants will survive. Moreover, the bilateral relationship between Korea and China is expected to develop considerably after resolving the dispute over THAAD.”

How is FinTech looking in China and what are the regulations?

Han: “The economic structure is fundamentally different between Korea and china. The Chinese startup environment is more akin to the American one. The Chinese government encourages startups without being involved too much. In fact, you have more wiggle room as a business in China than in Korea. There is barely any regulations related to Fintech in China. The existing vested interests and government regulations make FinTech a tough industry to succeed in Korea.”

Cho: “From a financial perspective, it is difficult for individuals and companies to receive loans from banks. Accordingly, platform businesses, including FinTech, flourished to develop related infrastructure. In other words, it got too big before any regulations could step in. Furthermore, there aren’t that many credit card holders. Most general users use either WeChat or Alipay instead. In Korea, Kakao Pay received 230 billion Won investment from Ant Financial, a subsidiary of Alibaba. This can be seen as efforts to merge with Alipay down the line. In all regards, FinTech is just starting in Korea.”

Could you explain crowdfunding in China?

Jang: “Crowdfunding is certainly an option in China, if you have a product and want to go to China. Like Kickstarter and Indiegogo in the U.S., the biggest crowdfunding platform in China is Jingdong Crowdfunding(京东众筹) founded in 2014. Unlike the U.S., China requires a finished product to begin the funding process. Up until now, a drone product has received the greatest funding of 17 billion won. In order to join Jingdong, a verification of the product, a corporate branch in China, and Chinese account are needed. For those without the abovementioned requirements, KOTRA has helped with local partnerships to join Jingdong. Once the partnership is established, the local partners help with distribution, payment, online marketing, and even public relations. Currently, KOTRA and Center for Creative Economy and Innovation are collaborating to facilitate the process.”

Any advice for startups?

Cho: “The first comment on Korean startups in China is creativity. It would be difficult to start something related to fundamental technology in China, considering marketability and time. Instead, approaching the market with innovative contents would be your best bet.”

Kim: “The Chinese market is huge and diverse. Hence, it doesn’t mean much to view the market as a whole. As such, you need to focus on a specific target market. While Korean companies tend to try everything at once, Chinese firms tend to start small, though unstable, and work to continuously improve their business. Meeting a good partner and then steadily trying different things would bring good results.”

– Inspired by Platum

Joyce (Jung Min) is a senior at Georgetown University’s School of Foreign Service, majoring in Global Business. In her free time, she loves to drink coffee, listen to music and explore downtown DC. Joyce can be reached at jmyeo@techforkorea.com.

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