The Chinese Entrepreneur -- Funding a Start-up

In past articles that I have written for Business Life, I have focused on the challenges for California companies and entrepreneurs to set up an office in China.  I pointed out that there are significant bureaucratic procedures that must be conformed to and a significant fee arrangement is required that can be substantial to a small to medium sized company. 

Firstly, to set up an office in China, you must have the approval of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) or its affiliates at the provincial, autonomous region, or city level.   Representative offices may only engage in ‘non direct business activities and may on behalf of their enterprises, conduct business liaison activities, product introductions, market studies and technical exchanges, etc.”  A foreign company must also have the necessary financial and commercial credibility to set up in China; it must have a legal registration in the U.S. , have good commercial and financial credibility and have adequate marketing and informational materials which describe the company’s activities.

There are endless procedures such as a written application by the Chairman, President, and CEO outlining the purpose of the office, the scope of activities and the personnel involved.  It normally requires 30-60 days for approval of a rep office in China and the approval is for a three year period.  You can extend this period by applying 60 days in advance of the expiration of the agreement.

In this article, I would like to focus on how a Chinese entrepreneur raises capital to fund a start up business in China

The financial capital structure of start-up ventures in China is a critical factor regarding the success of these ventures, and the sources of start-up capital can play an important role in the success of the venture.  Chinese entrepreneurs often rely on informal investors for start-up capital.  These informal investors vary from “business angels” who invest in firms for themselves and in capital provided by family members.  These investors are typically informal and not organized as a business, specializing in financing ventures.  Family members have been widely recognized as playing a critical role in entrepreneurial startups.  Some recent research in over 30 Countries indicates that capital from close family members account for approximately 42% of informal capital, 29% comes from friends and neighbors.  So, regarding informal investors, the dominant group providing capital is family followed by friends.

In the overseas Chinese community, family is critical to the funding of entrepreneurial ventures and their growth.  However, there is some indication that this is not always the case.  For example, research by Zimmer and Aldrich found that 49% of Chinese entrepreneurs in England used funding from friends compared to only one-third of the Chinese raising capital from family.  Chinese entrepreneurs in Hong Kong and Shenzhen, have primarily used capital from friends and neighbors as compared to family. 

It is also interesting to note that Chinese entrepreneurs regard harmony over and above any other financial factor.  If their primary financing comes from family any possible conflict or stress among family members are diffused by relying on Confusion ethics.  Harmony is an element that is strongly emphasized in Chinese society more than any other culture.  Also it is important to emphasize that family members do not invest in entrepreneurial ventures out of complete generosity.  They expect a return on investment in family business just as they would in other investments.  However, the returns in family business sometimes are not measured just in financial return, but rather the importance of the family to monitor these investments.

It is important for southern California companies who are partnering with Chinese entrepreneurs in the Chinese market to recognize the investment strategy of the Chinese entrepreneur and the various sources he will turn to in launching a new business.