By Duy Nguyen, Junior Project Manager Innovation & Entrepreneurship
Venture capitalists in China are operating under a climate of increasing uncertainty, while startups have taken hits and are being scrutinized more rigorously than in the past. Significantly impacted by a series of factors such as the trade tension between China and the US and the slow-down of the Chinese economic growth rate, Chinese VCs are undergoing a shuffle and are changing their game. In the meantime, as China marches towards technological advancement, the dynamics of China's innovation landscape are changing as well. Furthermore, as with the situation all over the world, the unexpected outbreak of the COVID-19 coronavirus has shifted the established order of things, and startups are forced to look further afield for investment.
In this webinar, swissnex China has invited speakers with investment and accelerator management backgrounds to share tips on how Swiss startups should present themselves in meetings with Chinese investors.
Before the presentations from our three speakers, our moderator Jordi Montserrat, Co-Founder and Managing Partner at Venturelab, reminded the audience about how the COVID-19 pandemic is impacting Europe and that we are all looking at the same challenge: in particular, how startups have been affected, and how the investment landscape will evolve. He pointed out that relationships built over the past years between Switzerland and China, and opportunities for Swiss startups still remain despite the current evolving situation. Support from Swiss startup programs ranging from financing to international roadshows including training, supports and global scaling, has culminated in many success stories of Swiss startups funded by Chinese investors in the past, and this will continue in the future.
Hao Tang, Deputy General Manager of TusPark Jiangsu Development Co., Ltd. and the General Manager of TusPark Innovation Research Institute, presented an overview of support platforms and development ecosystem for startups in China.
He suggested that, before entering China, international startups face some challenges which can compromise their transition to a new market if they do not pay attention to some particular Chinese characteristics. Hao Tang gave us some prerequisites such as business knowledge, customer needs or law/regulation that have to be acknowledged beforehand. In addition, Chinese VCs expect the operations of the invested startup to take place in China. As a consequence, most of the foreign entities failed to achieve any fundraising due to the fact that they remain established abroad outside of China. In order to gain a foothold in China, it seems inevitable to dig into the Chinese landscape by adopting local business partners, using local customers' insights and adapting to the local market. To do so, he suggested leveraging the network of established local incubators and science parks which will benefit the startups to gain access to local companies, capital, and government’s incentives…
A personal and precious comment from his side was to not neglect the smaller towns (Tier 2 and Tier 3) where there is usually better policies in place for new startups when considering the place to start your business as there is less competition compared to the big cities such as Shanghai, Shenzhen or Beijing.
David Chang, Vice President of Shanghai Blockchain Association and CEO of Blocknology Digital Ventures, talked about the funding landscape for international startups.
Structured in three parts: the BAD, the GOOD and the GREAT, David mentioned that along with national priority, VCs are currently focusing on the digital economy, digital supply-chain and digital transformation. Both the healthcare and sustainable development industries are raising their importance due to the global pandemic, but are also encouraged by the Chinese government who attaches more focus and funding. There is a pivot of focus that can open some opportunities for startups from Switzerland, the leader in these two areas. Indeed, as David claimed, the China economy is currently accelerating.
However, in order to capture these opportunities, while private investors are now working closely with government programs, flexibility is the key in the form of a mixed pie of private and public funding. Moreover, another constraint is that investors in China will give priority to the domestic, consumers, and enterprise markets. Contrasting with the past, establishing and presenting a good market strategy in China to investors is a must to raise any funds in China. Last but not least, David Chang underlined the importance of exit strategies for investors. As China landscape presents two different ecosystems: from one side the private tech unicorns, and on the other side the larger tech SoE ecosystem, international startups need to define their position before stepping into the China market with a clear M&A strategy in order to be potentially acquired.
Looking back at China, the pandemic situation exposed some vulnerabilities in terms of digital infrastructures as the Chinese government is trying to rebuild the entire system. As a consequence, the local government is looking for local solutions which serve as an open call for global startups specialized in the domain of digital infrastructure.
Presentation slides of David Chang
Finally, the last speaker, Dr. Rajwinder Lehal, Chief Scientific Officer at Cellestia Biotech AG, shared his success story as a Swiss startup entrepreneur having raised about CHF 50 M from Asian and Chinese investors.
Firstly, he presented some numbers to introduce the background and the role of China in the area of Biotech. There is no doubt from his presentation that the healthcare industry is booming in China, a country with huge medical needs and a huge need for innovative drugs. Hence, Dr. Lehal gave advice to Swiss startups by recommending some strategic considerations. The main question remains for the startups to define their needs: access to the Chinese market or access to the Chinese capital? As China is becoming more and more integrated into global development for biopharmaceutical companies, Chinese market cannot simply be ignored. For instance, a soaring number of Chinese companies came to Basel Switzerland over the last two years looking for out-licensing opportunities.
Dr. Lehal also warned about the risk of joint ventures for the reasons of cultural or administrative differences. Furthermore, when considering raising funds from Chinese VC, it is important to raise the question of whether the Chinese VC possesses RMB funds only, or opts for a global focus with USD and EUR.
Last point, Dr. Lehal highlighted the difference in strategy of Chinese VC fund compared to a typical European fund or US-based fund. In fact, many Chinese VCs have a portfolio of companies. Therefore, there is a tendency for them to build synergies between portfolio companies by trying to out-license the product with one of the local companies. Regarding this strategy, he advised from his perspective that the equity investment should be kept separately from any joint-venture made on the road, as there is a lot of uncertainty over time.
During the Q&A session, when asked about the impacts of the current COVID-19 situation, all our speakers agreed on the fact that startups are currently suffering a lot from the loss of partners and postponement of contracts. From an investor's point of view, investments are conducted more cautiously with slower due diligence before any decision-making, while the terms for investment will be longer. But the Chinese government is providing immense support to incubators to deal with the current situation.
Another comment on the necessity of starting a joint-venture, Dr. Rajwinder Lehal insisted on the fact that it is not the perfect structure for his startup as it requires a share of resources and financial commitment which for a startup, cannot be affordable. On the other side, investors are always welcoming towards startups which can potentially be acquired by the tech ecosystem. This strategy benefits the startup by providing them with funding and market entry in exchange for a share of the technology and know-how.
Finally, regarding the best time to create IP in China, Hao Tang provided precious insights: It always depends on the industry or the current level of competition in the market. Are you competing with the speed or not? There are advantages of being the first entrants with a disruptive technology or new products such as in the healthcare industry. Otherwise, IP is a requirement if there is an intention of establishing a Chinese entity. But this option presents a huge cost for startups, which can be reduced with the support from the Chinese government pushing to find new IPs.
We would like to thank Hao Tang, David Chang and Dr. Rajwinder Lehal for their excellent presentations and Jordi Montserrat for his masterful moderation of the event. Last but not least, we would like to express our appreciation to our viewers for having participated in the event and for all the interesting questions during the Q&A session!
