Venture Capital: A Required Course for Enterprises
It is my privilege to be invited to address you again on the Topic of Private Equity Funding. I thank Ambassador Qiu - The Asian Capital Forum and the city of Jieyang for their kind invitation.
When I last spoke with you in Shenzhen I expressed the need for China to develop a home grown Venture Capital source of funding for entrepreneurial companies - that are too small and too early stage for the typical large international private equity fund to finance - only in this way can China truly move from "imitator" to "innovator". The talent pool was here but the early stage funds were lacking. I am happy to say that this is happening with great speed.
In the first 10 months of 2006, January to November, Venture Capital - both local VC and International - Many in partnerships together - have invested $1.6B in entrepreneurial ventures - a 60% increase over the entire year of 2005.
Private equity for more established companies also continued its bullish advance - with $11.8B from November to December - funding 111 companies - which is also a record high.
Foreign funds provided capital for 80% of the transaction - but the 20% shows a great progress for the local firms and great future for the Chinese R&D and Innovation.
Let me focus a little on the development of the local VC because I find it very interesting and I hope you will too.
First it is being lead by the retired leaders of China's most successful tech companies that we now see listed on NASDAQ: Founder of CTrip - Sequoia Capital; COO Sina.com - DCM; President SOHU.com - set up VC fund - "Search Fund"; Driving force of ChinaNetcom - Set up a China broadband fund. The point is it is being driven by the best of China's leasers in tech.
The major Chinese tech companies such as Legend are taking the lead following the model of Intel and IDG both which have long established VC funds and which also have strong roots in China. Corporate VCs are well equipped to provide a combination of capital with technical and business expertise to the young tech company and access to markets partners out of reach to the young company.
And there is a great development of partnering of the Western VC firms with the Local Chinese VC's giving much greater sources of capital and both sharing their deep expertise. Legend Capital partners with DCM and raises $290 Million in record time oversubscribed; IDG with long history in China with Accel Partners.
And what is really the BEST News - this partnering has also reached to the grass roots level for VC firms founded by a few smart Chinese teams in each firm now joining with a major International venture funds. QIMING VC added a director from Intel Capital and partners with Ignition Partners from US - with Ignition directing $200M to China VC (Ignition was formed by a group of former execs from Microsoft). GSR (Gold Sands River) Ventures founded by 3 Chinese partners joined with Mayfield Fund from US. Northern Light Venture Capital - 2 Chinese partners founded, partners with New Enterprise Associates and Greylock both established US VC funds.
These are thresholds events for China to point to a new industry of VC grown in China supported by the expertise and invested capital of established international VC's. This is just the beginning and it points to tremendous positive access to value creation capital for the fledging Chinese R&D and innovative entrepreneurial companies.
It still has a way to go but with its success as demonstrated by more listed companies on NASDAQ and other exchanges including Shanghai and Shenzhen and Hong Kong - more of the savings capital in China will transfer to investment capital. Then you can only imagine what China can do with this capital and VC expertise guiding and fueling its innovative companies in all areas from information, medical, environmental technologies.
Now there still are impediments to many companies being able to attract and close a funding with a VC or a Private equity firm. This is particularly in the area of lack of preparedness and willingness to provide the detailed information on the business - the market - the competition and what I have found most lacking is the financial information - both historical financial accounts according to an international standard and budget and projections.
This type of information is essential for the VC or PE to understand the business - assess the management and the viability of the business. It is also essential for the VC/PE to comply with their required fiduciary duty of the investors.
My experience over the years since 1995 shows this road to be quite bumpy and it still continues - with many breakdowns in the information - coming sometimes right in the beginning - sometimes in the middle and sometimes, unhappy surprises in the end. These breakdowns usually relate to the lack of thoroughness and quality and transparency of the financial information - good detailed accounts and records are needed to be kept according to international standards - that is a starting point - and should be kept from the formation of the business.
The second difficulty lies in ability to budget and realistically project the business from a financial model driven by business assumptions. VC's will test and watch a company's progress to their business model. If a company projects a year end figure and claims 99% assurance of a year end result and then hardly makes 50%, that tells the VC that the CEO is unrealistic and they may well take a pass on this investment unless the event was completely beyond the CEO's control or possible vision.
Even with good companies who have good financial reporting, there is often difficulties in the exhausting requirements of the due diligence, the detailed questions, the always asking for more detail, sometimes an attitude of reluctance arises and a frustrations that the VC or PE is really not going to do the deal but only wasting the company's time - the CEO wants to get back to his business. This is understandable, but this is the process and the VC would not waste its time if it were not serious. There are many other deals to do.
An open attitude of transparency can not be stressed enough, as well friendly patience to manage through this difficult process - and this process can take 6 months or more of intense investigation of the business and much longer if the company is not properly prepared.
Surprisingly some companies quit in this process and often do not even know that it is THEY who are quitting. They become reluctant to provide data, answer questions, open their financial books, show their contracts, give access to their major customers and vendors. In their frustration they blame the VC/PE for not understanding their business and asking so many questions and decide the VC/PE was not going to invest anyway - this could not be farther from the truth. Unfortunately, I have seen companies walk away from 10's of millions of USD each because of this. And this is money they needed and could have done great things with. However, those that do make it through this process find that the new VC/PE partner is now their best friend and partner to build a mutual success.
Now why do I tell you this? You are not sitting here to raise funds. This will not be you in this position. I tell you this because this next stage of Chinese companies developing will require a real partnership of all of us working in our own ways to guide their success.
The Chinese entrepreneur and business owner needs our collective help and guidance to educate them on these rigorous requirements for accessing funding, it is not taught in school, you cannot learn it in big business, so with a new history new being created, a new education is the only guide.
Concise, direct education to prepare proper detailed historical financial and management accounts from the beginning of the company, changing habits of rushing to create them when the funding is needed. How to prepare good budgets and run the business to them and track and explain variations? How to model realistic financial and business expectations? How to assess the market and competition realistically? How to package information i.e. contracts, legal documents, licenses, IP so that an investor can easily review and assess? How to get through the process by understanding the process from the Investor's Standpoint? There are just a few of the needs of understanding for the entrepreneur. And it is so important to have this type of training so the entrepreneur can also judge properly good advice from bad advice. So in your fields of guidance I ask that whenever you can, pass the message to be transparent, prepared and patient when looking for funding.
And we are also here today looking at Jieyang and how Jieyang can economically develop in the future and still maintain its beauty and natural surroundings - and I suggest one field could be to create Jieyang as a corporate education center, a Mecca for it, just like we are all enjoying meeting in this wonderful facility with the wonderful clean air and nature around us, but sharing and learning so much from each other.
You can easily imagine a well designed motivational series of 3-5 day courses which can be given continually many on weekends, with golf tournaments and enjoyment integrated, to provide the necessary fundamentals for young companies to achieve great results. This is a need for all of china, and it is not a need that is best provided by universities, what is needed is direct "how to" courses on specific narrow business and management topics.
Jieyang can create itself as a BRAND identity for this education. It can be know in China as the resource center for the best of this kind of training. This brand also will attract larger companies to the area and this facility for annual meetings and company conferences. Specific company training programs can be designed and held by Jieyang Business Center Training superior leaders and motivational speakers, certificates of completion and awards given. Jieyang training center can be the standard of excellence. And this could lead to consulting firms and VC firms setting up their operations here too.
One thing we all know - people want to live and work where the environment is clean and fresh and beautiful. Jieyang has this and with Jieyang's new infrastructure, this conference and resort center and especially the building of the new airport, this is not a far fetched dream but I pose as a real possibility for Jieyang to consider. When you think of corporate training, education, conferences and consulting, it is Jieyang. When you think of a good company to fund and work with, it is Jieyang trained company.
My time has ended, I thank you all for your patience in listening to my personal thoughts and I am looking forward to serving the city of Jieyang on its discovery and development of its greatness in the next few years. I ask pardon from the city of Jieyang for boldly putting forth this idea, it is clearly only one possibility of many, but one I passionately feel is needed in China. Thank you.