In seeking startup funding, many entrepreneurs are now being actively pursued by Chinese investors and VCs who are eager to put their capital into U.S. companies. In 2014, it was announced that Misfit, a wearable device maker, received $40 million in capital that included Xiaomi, the Chinese smart phone company.
Other recent startups that have received Chinese capital to the tune of $2.3 billion in total include Peel, Tango, Ark and Quixey. In May 2015, Haiyan Capital announced its third disbursement of $50 million into U.S. tech startups.
In fact, when it involved companies like Peel, Chinese company, Alibaba, went from an offer of $1 million to $5 million just 48 hours later, that convinced the founders to take the Chinese capital. With the money right there on the table for the taking, it seems like a good idea. As I recently wrote it is hard to raise funding.
However, there are other things to consider that may help you decide if your startup should work with Chinese investors.
A Dip in the Talent Pool
The Chinese investors often are linked to the most innovative companies at home, which offer a way to find additional talent that can assist as part of an outsourced relationship to build out products and develop new ones to produce sustainable revenue. There are many innovations and great ideas coming from the talent in China, so this relationship provides a way to get a prime-mover advantage over other startups. The cost to dip into this talent pool also tends to be more competitive than other areas of the world for similar development staffing.
Access to Manufacturing Capabilities
One of the challenges with a startup is locating and covering the manufacturing capabilities necessary to scale up a product, especially when the interest grows for that product. Without the ability to start manufacturing more of the product when that demand hits, your startup can miss out on revenue and may be passed over for a competitor that does have access to that manufacturing capability.
Since China is considered an engine of manufacturing with the factories, staffing, and experience necessary, your startup could use this type of competitive advantage. More Chinese manufacturers are also exploring modular production processes for smaller batches that appeal to startups while keeping costs low and efficiency high. Without the partnership of the Chinese investor, you might not otherwise be able to forge a relationship with these Chinese manufacturers.
Entrance into the Middle Kingdom Market
Chinese investors most likely already have an open door for you to enter the Asian market when you are ready to expand. This Middle Kingdom market is full of consumers, clamoring for new technology and products. Misfit found wearable technology is already taking off in China, with a third of its sales coming from that market. Having a Chinese investor on board can help facilitate the introductions and negotiations necessary to bring a product to this market.
Beyond just assisting with gaining a foothold in the Chinese market, a Chinese investor can help a startup better understand what this market wants and how to craft the most engaging marketing strategy.
A Minority Stake
Another benefit is that the majority of Chinese investors are looking for a minority stake and do not want a controlling interest in these tech startups. For you, that means you can retain control while benefitting from the additional capital and the connections.
Part of the Silicon Valley Fabric
Chinese investors are becoming part of the fabric of Silicon Valley, including opening up incubators and accelerators as well as joining the ranks of groups like the Silicon Dragons. In this way, it sends the message that Chinese capital is mainstream and accepted by one of the biggest startup producers in the world.
- Ensure the Chinese investor has some connections and experience in your market segment. They need to understand and appreciate the value of what you are doing rather than having to explain it to them. Plus, their connections are extremely valuable so they have to be in your area of business.
- Do your due diligence on the Chinese investor or VC to learn about how their other investments have turned out. You want to make sure you are linked to a successful investor.
- Find out what type of role they want to play in your startup and how and when they would want to exit. While many have taken a minority stake, you still need to clarify their terms and expectations before deciding if it is a good fit.
- Attend events geared toward the partnership with Chinese investors, including those produced by Silicon Dragon.
- Sit down and have a discussion to determine if you share values and philosophies as well as have the potential rapport to make this partnership work. It's kind of a "try me, buy me" process that can help you get the feeling of whether it is worth accepting the Chinese capital or not.
- Get it in all in writing and have an attorney review all term sheets and agreements to make sure everything is in order.