What should we learn from China’s Topnotch Venture Capitalists
In the past twenty years, China’s Venture Capital industry has gone through what Chinese call “The five waves”: from Internet to Search Engines; from Social Media to E-commerce and finally to Mobile Internet.
Strictly linked to China Entrepreneurship with its up and down, success and failure, VCs represent “Chinese real entrepreneur spirit” trough time.
The Chinese “Harvard Business Review” interviewed six of the most representative and experienced Chinese VCs (names below) asking them about the real meaning of“Entrepreneurship with Chinese Characteristics”
1- How do VCs choose where to invest?
In current China, what kind of person and what kind of business is most likely to achieve entrepreneurial success?
Liu Erhai (JunLian “Legend Capital”former GM)
“Drive Model and Value Model”
JunLian Legend Capital developed, through years of practice, a set of summary judgment and behavioral rules: the so called DRIVE model + VALUE model ( models which include driving power, comparative analysis, value chain analysis, environmental and alternative investment analysis, exit considerations, risk assessment and team evaluation etc etc).
When it comes to the Choice, everybody looks for the most important factor, but essentially it has become increasingly difficult to find that single important factor, mostly because when a business is successful, it is often a result of various and equally important factors. Moreover, different situations call for different priorities; for example in the Startup environment the role of the CEO is extremely important, especially in the ones starting from zero.
More to the point:
we will first seek a very good business with a large market capacity and a healthy competitive environment.
It is important to find the right business and only after, inside that business, find the right person.
Deng Feng (Northern Light Venture Capital founder and managing director):
“CEO comprehensive skills are worth more than technical skills.”
Compared with IQ, EQ is way more important.
I personally value founders emotional intelligence and learning abilities.
In China, CEO are not only asked to be technical but mostly to handle situations in a practical way.
When we find out that founders are not suitable to act as CEO we hardly replace them. This is mostly because China lacks a united and defined professional managers group; secondly, the link between Commercial Value and Ethic is still something China should learn better from western countries. This gap often leads to trust and confidence crisis within the Company.
Very often we hear people complaining about the founders absolute control of the company, a problem that cannot be simply solved by decentralizing the company. Decentralize a Company command structure means in fact loosing the control of the company itself, which often leads to even more serious problems. This is China’s commercial reality until now.
Therefore, considering China’s particular situation, CEO’s practical skills are valued way more than their technical skills.
CEO’s abilities should include business sense, being able to analyze the market with proper marketing and management skills, having the ability to communicate with the government, understand the financial system, as well as being able of correctly communicate with customers and suppliers.
Chinese market requires CEO to have a very high QE and ability to practically solve problems.
However if we consider very early stage companies, CEO technical skills should be consider as important as the other.
Hu Bin (former Qiming Venture Partner):
“Find experienced people inside a big potential market”
I agree with the general idea of finding the right person in the right market by individuating a competitive and promising market first.
We should find an Industry big enough for our purpose: for example, the wireless Internet industry is a huge market, and if we go specific to the SNS on mobile phones, we do need further analysis in order to assert the volume of the industry segment. To find the right people in the right market segment is essential.
Talking about the right person to look for: a very important criteria is to consider whether he/she had working experiences in successful companies; integrity and ethic are both important; the third is surely entrepreneurship motivation while the fourth criteria is team spirit ( having team skills is fundamental).
Li Fukai ( Innovation Works Chairman and CEO):
“Enthusiasm, Execution and Leadership.”
China and Silicon Valley VCs have some common traits in the choosing model, but are also very different in others. If we want to list the 10 most important factors it might look the same for both countries. There is however a difference in the top 4 in which Silicon Valley ranks personal abilities, deep understanding of the industry, innovation and teamwork as first 4.
China, on the other side, has a different order: personal abilities, deep understanding of the industry, execution and leadership.
Obviously we all consider predominant the first two factors:
Passion for the product : the entrepreneur really wants to do what he’s doing, with grit and passion, acting as an expert with deep knowledge of the industry and not only as a spectator, hoping to achieve something more than money.
Deep understanding of the product and the industry: the Entrepreneur needs to have a very deep insight on what is China’s market situation, competitors behavior and trends, what the user needs, what product features the user wants to use, how to improve products and features based on users’ feedbacks etc.
2- Venture Relationships
“about six big VCs lies , one recent article of HBR China, mentioned that in the USA, VCs don’t often give entrepreneurs advices or mentorship services.
Chinese VCs are completely different, they are somehow always involved in their business projects.
“We are partners and cheerleaders.”
VCs do intervene into a project only when there is no other choice. In fact, VCs main job is not to teach but to choose.
I think VCs shouldn’t be considered like mentors or bosses but instead like partners. I do contribute to the company with resources, with people and my experiences but I can’t take decision in lieu of the entrepreneur. We shouldn’t let the entrepreneur feel like he’s working for VCs instead of himself. Sharing and encouraging each other is a method that very often feels like cheerleading.
VCs should not be the coaches or bosses, they should instead share their experiences and visions and encourage the entrepreneurs.
“We are collaborators and consultants.”
We are, in the end, just a person to talk to.
IDG didn’t have the financial strength nor manpower to be an incubator. If you control it too tight, it doesn’t mean you are controlling it well, moreover it may means that the CEO you chose does not have the appropriate skills.
Entrepreneurship means constant and never ending learning, otherwise you wont succeed.
If the founders lack of CEO skills, as VCs we should just acknowledge it, because replacing the CEO means that all your efforts and judgments made before were basically wrong. It also means changing your long-term goals.
A Company’s DNA comes from its founders, changing them means changing the entire Company. The suggestions above are usually right for early stage companies, while in more mature companies could be a good idea to introduce a CEO from outside.
Tian Suning (CBC Fund Chairman):
“We are farmers.”
There are two types of VC: one is the Hunter and the other one is the Farmer. According to my investment understanding, you act as a hunter if you want to find the greatest business inside the selected industry while you act as a farmer if you want to create the greatest business.
I recently invested in cloud computing, Internet, big data, hoping to become a new technology sower.
In this process, we need to respect entrepreneurs and not overstep them. Many investors will say “ I want to help you become a valuable entrepreneur” but this is not a easy road.
First you need to find the added value, and second you need to be very focused, because only when you are focused you will find the added value you were looking for.
In our team, the great part of us already had entrepreneur experiences. Furthermore my background is rather unique and helpful for entrepreneurs: I had experiences as investor in the private enterprise I create and in different state-owned enterprises.
3 — China’s Investment Environment
Why is so difficult for Chinese companies to scale up? at the same time why the great part of Chinese startups die competing each other in cruel price wars? What is the difference between China and USA investment environment? How entrepreneurs should grow and what should they learn in order to survive in China’s new entrepreneurial environment?
“China’s Entrepreneurs need to be more flexible.”
Disruptive innovation has, for the great part, happened only in Silicon Valley. From an investment point of view, Silicon Valley has its own standards, even Andreessen Horowitz has its own set of equations. But in the Chinese market, a lot of things follow logical thinking without any kind of fixed pattern or standard. Thats why we need entrepreneurs to be more flexible, which is associated also with a greater deal of risk. Moreover, China has a very complex relationship and network field, including government network. Cloud computing, for example, needs a lot of permission in order to be effective and efficient. We need to communicate and have a strong network inside the government if we want to know whether a business can be done successfully or else. In other words, what is really important in China is the high level human network you create yourself.
“Chinese entrepreneurs need to be faster learners if they want to survive.”
When I left SINA to start my own Company, I felt there were not a real understanding of the Internet was. But today’s young people, they have a knowledge of Internet which is way deeper than mine was at that time.
Today a lot of big Companies train and form Internet Manager Talents; I do believe that this class of professional managers has gradually matured. However, all facts considered it is very unlikely for China to develop a short term disruptive innovation.
“America innovates, China copies” is a situation that may not change so much in few years, but ten years from now we expect some very big and interesting changing.
“Chinese people’s concept of Innovation is full of wrong understandings.”
People say that China lacks of innovation.The truth is that we have a lot of misunderstanding of what the word “Innovation” actually means. First of all, why we look for Innovation? Innovation is for beating the competition. I have been accused of being “limited”, but it is the truth.
Innovation implies the possibility of failure, and this is the reason why the Government is unwilling to innovate, because once failed, it needs to take responsibilities.
Companies instead are willing to take the risk because they need to win over the other competitors.
If a little bit of innovation can solve the problem, why should we take more risks? After all, from a VC perspective, we have to control risk rather than create more risk. However in the current serious homogenization of such a competitive environment, in order to beat the competition, entrepreneurs need to innovate continuously.
“Chinese business model needs to be more robust.”
Silicon Valley is a big lab which incentives its personnel to take more risks, encourages them to fail bigger because every failure is called experience.
China and USA innovation power still have a gap:
Chinese people’s entrepreneurial advantage is not innovation, but skill and tenacity. China entire entrepreneurial environment is a huge arena: the few ones that make it through the struggles have already grown out with entrepreneurs and businesses stronger and better than the United States.
China’s business model will always be more complex than the United States. Americans are very direct: “I sell a product to you, you give me money, I sell the game, you play, you pay me.”as simple as that. But China’s case is very different: “I need first to satisfy all the users for free, and then digging out desires, rely on a smaller piece of market to get huge profits.”In this process, the product establishes autonomously very high barriers for the other competitors. The opponent can not compete on price, because I first gave it for free.
Whether is gaming or Taobao or 360, they are all businesses which came out from the most difficult environments, growing up a very particular and successful business model.
These kind of companies, I believe, are able to thrive in every corner of the World.
Tommaso Ferruccio Camponeschi