The Rise of China Venture Capital and Private Equity
By GPMIP Partner, Stefan Hofmeyer
Last week I had the honor of participating on US / China investment panel discussions in Chengdu and Xian sponsored by the Silicon Valley Innovation and Entrepreneurship Forum (SVIEF). Each visit to China surprises me, and this latest trip was no different. As a follow-up to my previous article My Story: Three Considerations for China Cross-Border Business, below are my most recent impressions on the rise China venture capital and private equity.
Government Backed PEs and VCs Show Promise
The Chinese government, down to the provincial and municipal level, is playing a more significant role in funding PEs and VCs and establishing an entrepreneurial atmosphere. Aligned with state strategy, this money is more easily approved to move out of China for international deals. In comparison to direct State Owned Enterprise (SOE) investments, PEs and VCs establish a buffer between the state and entrepreneurs, resulting in more innovation.
Finding the Right Fund Managers
With the influx of government and mainland Chinese backed PE and VC money for outbound investment, a challenge is finding qualified managers that have cultural awareness, credibility, and depth of investment experience. One such example is the VC firm Crossvine Capital Ventures led by Henry Fan, who I traveled with on last week’s trip. Originally from China and with academic and management credentials in the United States, Henry is well positioned to take advantage of this new Chinese investment climate. Other firms creating buzz include Silk Ventures, who announced $500 Million USD in funding at China’s One Belt, One Road (OBOR) event in Beijing this past week, and XIO Group, who last year acquired JD Power for $1.1 Billion USD in part with use of mainland Chinese funds.
The New Chinese Entrepreneurial Culture
For decades China economic zones have aspired to duplicate a Silicon Valley atmosphere. The focus was on a “build it and they will come” mentality with infrastructure development and financial incentives in high tech business parks.
However, entrepreneurs are more inclined to work out of a garage (think Apple and Google at startup) versus working in a structured government run environment. Organic entrepreneurialism is generated from an environment of skilled, risk taking, connected individuals– feeling the buzz of a location is much more attractive than infrastructure. This realization in China is changing the way Chinese state investors see their economic development and how they attract both investors and entrepreneurs.
Creating an Environment for Innovation
An innovative business culture in China is being driven by direct government funding, collaborative events, and resulting media attention. The last two trips I have taken to China made national news on CCTV and ended up in printed press — these same activities in the United States would be a minor side note, where we are consumed more by pop culture and the day’s more dramatic news events to drive ratings. By comparison, business dealmakers and entrepreneurs have attained quasi-celebrity status in China with their prominence in the news.
The new rise of Chinese funded private equity and venture capital firms may be the secret to China corporate development, innovation, and entrepreneurial success. By shifting investments from large business parks to PE/VC funds where emerging companies have more latitude to spend money both locally and on a global stage, the promise of innovation in China has never been greater.
References and Further Reading
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