China has long been an investor in America, as everyone who points towards the country’s significant holdings of US Treasuries, is eager to make clear. China’s investment in Treasuries is, however, something of a necessity given the country’s currency exchange mechanism and the role of Treasuries as a fiat currency in their own right. The much bigger opportunity is for American companies to raise capital in China for projects that will be rolled out in the United States. To see America become an even more important destination for outbound investment from Chinese companies (whether SOEs or privately owned) would send a clear message to both Beijing and Washington DC about globalization by further connecting our two economies.
During our meetings last week, we had the opportunity to see what it means to raise capital in China from at least two of the absolute best venture capital funds operating in the CleanTech space within China, Chyrsalix and Tsing Capital. CleanTech in China is such a pressing priority because the country’s energy demands cannot be met through conventional means without further damaging the environment (if, in point of fact, it would even be possible to meet China’s voracious energy demands through conventional sources of power). Consequently, China has aligned its national strategies and local implementation around the concerted desire to become the world’s easiest place to scale up new CleanTech operations. Capital is more plentiful, deal flow much stronger, regulatory barriers much lower, and incentives to get to scale much greater in China than anywhere else in the world. As China’s CleanTech market inches towards what I suspect is a global critical mass where the country becomes the unquestioned leader in this realm, several entrepreneurs on our trip pointed out that China will also become more interested in CleanTech investments outside its borders.
Other companies, eager to find new sources of capital, may have to actually come to China in order to raise funds. In other words, while some Chinese capital may be willing to be put to work outside their borders, for today, most is going to want a degree of oversight only possible if the investment takes place in China. This forces the question of how to manage the risks of taking your business to China, in particular in a field where proprietary technology is at play. The solutions we heard about last week were very innovative and ranged from what pharma is doing as they export drug discovery to lower cost Chinese contract R&D companies (compartmentalize one part of the drug molecule to one contractor, another to a second one, etc., etc., then bring the research together state-side), to the insight one venture fund partner offered last week that successful capital raises in China will require you to “become a Chinese company.”
What did he mean by that? As he put it, the best way to protect your investment when you come to China is to become as thoroughly intertwined with the local culture, government and research institutions as is possible. To him, this meant finding the right Chinese advisers and getting them either on the board or otherwise invested in seeing your technology be protected and further invested in; the right funders and partners who have the right relationship with the best pinch points in the Chinese government. This is admittedly an uncomfortable piece of advice because at some level it acknowledges the calculus in China is you leverage relationships where laws, regulations and enforcement remain ambiguous means of protecting your business. However, as American companies seek out new capital partners in China, they have little choice but to embrace the tangible and intangible challenges of becoming Chinese.